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How can public sector employers afford a $15 minimum wage?

Having passed the harmful $15 minimum wage law in Minneapolis, activists are now targeting St Paul’s labor market.

On Tuesday, it was reported that

Dozens of St. Paul Public Schools Nutrition Services workers took their fight for a new contract to Tuesday night’s school board meeting, chanting as they marched inside the administration building.

The previous contract expired on June 30. The workers tell Fox 9 the latest offer includes no raises for many of the lowest-paid workers after years of only minimal bumps in pay.

“What it means for our members is they are unable to keep up with the cost of living,” said Brian Aldes, Secretary/Treasurer for Teamsters Local 320. “We want to create a better economic environment not just for the members we represent, but for the communities they live in as well.”

Aldes said the union is seeking a $15 minimum wage in the contract, similar to what was negotiated for teaching assistants just months ago.

The economics of wages in the private sector

Imagine a worker whose efforts generate $10 an hour of revenue for their employer. If the employer can hire that worker for $7 an hour they will make $3 an hour profit. After all, revenues – costs = profit. In this case, $10 – $7 = $3.

Now, imagine that some politician decrees that the employer must pay that worker $15 an hour. The math now looks like this: $10 – $15 = -$5. In other words, the employer is now losing $5 an hour on the hire.

So, what happens to a business that adds more to its costs than its revenues? It suffers losses and, eventually, goes out of business. That is why a private sector worker will not be paid more than the employer thinks they add to revenues. Whatever the politicians might decree, if the employer thinks they will lose money on a hire, it won’t happen. You can call that the real Iron Law of Wages.

The economics of wages in the public sector

Things are different in the public sector.

For starters, much of what is produced in the public sector isn’t traded on the market. The pupils who attend government schools, for example, do not pay fees. This makes it harder for employers gauge employee productivity. This is made worse by a lack of data. The Bureau of Labor Statistics used to run the Federal Productivity Measurement Program, but it stopped this back in 1996.

But there is another reason. In the private sector, an employer who adds more to costs than to revenues will run out of money and go bust. If they face a shortfall of funds, they have to come up with a way of producing a good or service people will willingly pay them for. In the public sector, by contrast, the employer simply pushes legislators for more revenue. They can add to their wage bill and pass the cost via the government onto the taxpayer. There is no bottom line to worry about because they can always reach down to the bottom of the taxpayers pocket.

All this helps to explain why St Paul’s teaching assistants have been some of the first workers in the city to secure a $15 minimum wage. It helps to explain why activists are targeting public sector employees next. And it helps to explain the Congressional Budget Office‘s finding that, on average, Federal employees earn slightly more than private sector workers with similar educational backgrounds.

As the campaign for the $15 minimum wage spreads, its a safe bet that the public sector will be a prime target.

John Phelan is an economist at Center of the American Experiment. 

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