What do Mark Zuckerberg, Martin Luther King, and Milton Friedman all have in common?

That’s right, they are all famous Americans whose names begin with the letter M.

Also, they are all proponents of some form of basic income.

A Universal Basic Introduction

The universal basic income (UBI)  [1] has become trendy.  It is the ultimate unconditional cash transfer. Each member of a society gets a cash payment. Since it’s given in cash, there are no restrictions on what this payment should be spent on, nor are there restrictions on who gets it. Rich and poor get the same amount, regardless of their income.

Sounds nice. It probably is. A basic income could alleviate poverty, reduce inequality, be more efficient than our current welfare system, and provided greater freedom and autonomy for recipients.

It also sounds expensive.

A Note:  UBI and the Minimum Income

Related to the basic income is the concept of a minimum income. A minimum income provides an income even if someone has no other source of income.  Unlike the universal basic income, it phases out as income increases, though never sharply enough so that it is not beneficial to have market income.

There are certain tax structures that, combined with a basic income, have equivalent redistribution impacts as a minimum income. For this post, I’ll be examining the universal basic income, trying to figure out how much it would cost, and how to pay for it.

$12,000

I’m going to assume that the basic income would give every American over eighteen $12,000 and those under eighteen $4000 a year. These are about the amounts that define the federal poverty line, and most of the examples of an American basic income I’ve seen use numbers around this. One nice feature of giving everyone an amount equal to the poverty line, is that the official poverty measure would go to 0%, which is a pretty nifty accomplishment[2] no matter how you look at it.

There are about 320 million people in the United States. About 73 million are under eighteen. If everyone under eighteen gets $4,000 and everyone over gets $12,0000, the amount given away is $3.4 Trillion.

No way around it, $3.4 Trillion is a massive amount of money. It’s about the GDP of Germany. In US terms it’s 16% of GDP, and just a bit less than all current federal spending.

Replacement

One of the attractions of a basic income, especially among the more libertarian minded, is that it could replace some, if not all, of the current social welfare programs. This might have efficiency gains, (one no longer needs to pay the bureaucrats to administer these programs, and they could go and collect UBI instead.)

A poverty line level basic income, using existing revenue, requires huge cuts to, well, pretty much everything.

Federal welfare spending (housing, food stamps, unemployment etc. is around $370 Billion[3]. All of this would be replaced by a basic income. Unfortunately, it only provides a tiny fraction of the amount needed.

If basic income is intended to replace Social Security as well, that would add just a bit under $1 Trillion. At this point we still aren’t halfway to the cost of the basic income, and have run out of obvious federal spending to replace.

So, on to non-obvious things..

The defense budget is far too big, and just encourages bad behavior, that’s another $600 billion, Veterans’ benefits, they can just get the basic income like everyone else, $160 Billion.

Medicare and Medicaid make up about a $1Trillion, but we probably should leave it. $12,000 isn’t going to go too far when covering medical bills. However, with current revenues, there is no way to get enough money for a basic income without taking all the money from Medicaid and Medicare.

Even if we assumed health spending, social security, all current federal welfare programs, veterans’ spending would all be replaced by the UBI, and we cut the defense budget to zero, it still doesn’t add up to $3.4 trillion.

Data From: National Priorities Project

Taxes

For the basic income to happen there need to be some tax increases.

The details on how the tax structure would be changed matter. Given how complicated the US tax system is, and the nearly infinite ways in which a tax system might be designed, it’s difficult to say exactly what the impact would be.

It is possible to say something about the scope of funds that would need to be raised. The tax increases to cover the basic income would need to be substantial.

A fully robust basic income, without other cuts, would bring government spending from around 40% of GDP to about 60%, which would be higher than any other OECD country. Even if $1.5 trillion can be offset by replacing social security[4] and current welfare programs, basic income adds about $2 trillion to spending, bringing total government spending bringing it to about 45% of GDP[5]. This would bring US government spending up to a level roughly equivalent to The Netherlands.

While the Dutch seem to do fine with their level of government spending, this increase in taxation would be monumental for the US and almost certainly politically impossible. Even for those comfortable with Dutch levels of government spending, it is not obvious to me that a Basic Income is the best use of this spending.

This might be especially important in terms of fighting poverty[6]. Reallocating welfare money to the Basic income would take money that is currently targeted only toward the poor (our current welfare system), and redistribute it upward, spreading it among all members of society. Many poor people are eligible for assistance or benefits that amount to more than they would receive under a UBI scheme.

Technology

One of the reasons people argue in favor of the UBI, is the idea that soon automation and technological improvements will make jobs obsolete. In the most extreme examples of this future, humans will be inferior to robots or algorithms at every job.

We should be so lucky.[7] But we aren’t there yet. Not even close.

While this topic is a bit much to really get into in this post, I’ll just note that the total number of people employed in the United States is the highest it’s ever been. Unemployment is low, productivity is growing slowly. All of which point to continued employment, at least for the present and near future.

We may yet arrive at this world, but we haven’t yet, and when we do the robots will be better at designing policy than us anyway.

When?

If my chief objection to the UBI is its cost, the obvious question is how much would it need to cost to be worthwhile. I don’t have a perfect answer for this. The most expensive government program, Social Security, is about 5% of GDP. A basic income that cost about this much would provide each person with a couple of thousand dollars a year. Not enough to live on, but a meaningful amount for many people. At this level, we would almost certainly need to maintain most current federal services (although some of them such as SNAP could be converted into cash transfers).

Maybe we could afford it at 10% of GDP. To provide $12,000/year to every adult without spending more than 10% of GDP requires a GDP of $34 trillion, a little less than twice what we have now. At a growth rate in real GDP of 2% per year and a population growth rate of 0.5% per year, we would get there a bit after 2050[8].

A Cheaper Basic Income

There two ways of making basic income cheaper. One is reducing the amount that gets paid out, but if it really is supposed to be an amount that someone can survive on, anything under the amounts mentioned above is probably not going to cut it.

The other way is make it not universal. This would be akin to a minimum income, or negative income tax. This is similar to the basic income in that it establishes a cash floor for recipients, but fundamentally different in that it is means tested and not universal.

Can We Afford a Universal Basic Income?

A universal basic income would require both substantial tax increases and for the basic income to replace current government. While I am sympathetic to the promises of a basic income, I have a hard time justifying the expense.

At least for now.

RELEVANT POSTS FROM PARTYSHEEPHATS:

What are some alternatives to the Universal Basic Income?

When is the Minimum Wage too High?

Can the gains from trade be redistributed?

Is Global Inequality Increasing?

[1] There are a few other names for this such as “citizen’s income” which sounds massively more badass.

[2] But perhaps a misleading one, as most poverty measures do not count government benefits.

[3] There is no exact definition for what constitutes welfare spending, so estimates can range widely, depending on whatever point the author is making.

[4] Seems like this would either be a wash or a detriment for social security recipients.

[5] Including state and local

[6] I refer to poverty in the US. For fighting extreme poverty in lower income countries, the math might work out differently.

[7] Example: Imagine how much better this blog would be if it were written by an algorithm. Do androids dream of electric partysheephats?

[8] This is a super rough estimate. You can fiddle with the assumptions here.

References, Sources, and Further Reading:

Forbes.com of course we can afford a universal basic income do we want one though

Futurism.com universal basic income costs less than you might think

www.dailyjournal.net consider universal basic income with an open mind

Cato: universal basic income disease or cure

Freakonomics

How to reform welfare and taxes to provide every american citizen with a basic income

Futurism.com Here’s why experts think universal basic income will never work

World Economic Forum can universal basic income actually work

Basicincome.org real cost universal basic income

Vox universal-basic-income-review

Usnews.com a-universal-basic-income-wouldnt-reduce-poverty

cbpp.org/universal-basic-income-may-sound-attractive-but-if-it-occurred

Currency markets are odd places. They are one of the few financial markets that are zero-sum. Politically, they can be odd as well, the good being exchanged is partially controlled by the government, some countries might want to keep the value of their currency high, others might want to keep it low.

These peculiarities aside, currency markets are fundamentally much like any other market. There are buyers, sellers, traders, and speculators. Like any market there is a single price which brings buyers and sellers together.

But not in Venezuela.

Caracas, Looking lovely.

The price of a currency is called the exchange rate. Most prices are expressed in terms of currency, for example the price of a cup of coffee is $2.00 per coffee or €2.00 per coffee or £2.00[1]. Currency is no different, a US Dollar expressed in euros would cost €0.87, expressed in pounds it might be £0.77.

I got those rates by going to the exchange rate tracking website, xe.com which offers exchange rates for any currency you care to name[2]. I can find out that an Azerbaijani New Manat is equal to 37.9 Indian rupees.  Which is information that is unlikely to come in handy in my immediate future.

I can also see how much the Venezuelan bolivar is worth. According to xe.com one dollar is worth about 10 bolivars.

There is a catch. The catch comes, like so many do, in the form of some red text. Following the link that the red text masks brings me here:

Here, there is more red text. This red text is obviously serious, because it is preceded by the word “Notice”. There are three odd things about this, the first is that the official name of the currency is The “Bolivar Fuerte[3]” which means “Strong Bolivar”. Currencies are valuable because people believe them to be valuable, but it’s kind of unseemly to point that out in the title.

The next odd part is the “two”. If an exchange rate is like a price, this would be like having two prices for the exact same thing. This just isn’t done[4] if there were two prices for the same thing all the buyers would want to buy at the cheap prices and all the sellers would want to sell at the expensive price, it just wouldn’t work.

The last odd thing is the word “official”

“Official”

Roughly speaking, there are three ways to determine the value of a currency: floating, fixed, or somewhere in between. A floating exchange rate means that the government does not set an official rate of exchange, instead it allows market forces to determine what the rate should be. Most major currencies including the US dollar and the Euro have their exchange rate determined this way.

The second way is to have a fixed exchange rate[5], in this case the government picks another currency, often a major one such as the US dollar or the Euro, and declares a value relative to that.

The third way is to have a floating exchange rate, but to put a lot of effort into buying and selling the  currency, to adjust the price. This is called a pegged float. When people complain about China manipulating its currency, this is what they are talking about.

Multiple Exchange Rates

Once a country has a fixed exchange rate, it is possible, though uncommon, to have multiple exchange rates for different sorts of goods. This might be done for a special type of commodity that is particularly important to the nation. For example, if a government wants food to be cheap, they could set the price for the foreign currency, used to import foreign food, to be cheaper than it otherwise might be.

Multiple exchange rates, is a way to subsidize imports, but an awkward one.  It has all the drawbacks of traditional subsidies (subsidizing the wrong thing destroys value). In addition, it requires additional bureaucratic process and enforcement, multiple exchange rates provide an easy avenue for corruption and arbitrage.

Venezuela has at least two official exchange rates. There is the rate at 1 USD = 10 bolivar, reserved for food and other essentials, but not available for most people or organizations. Then there is a new rate at around 1 USD = 2000 bolivars[6]. The scarcity of foreign currency makes getting currency at either of these rates very difficult.

Defend the Peg

The tricky thing about having a fixed exchange rate is maintaining it. When a government sets an exchange rate it is obligating people to purchase and sell their currency at the price they set.

This system works fine, if the number of bolivars being bought, is about the same as the number of bolivars being sold. If more people want to exchange their bolivars for dollars, than want to exchange dollars for bolivars, the country risks running out of dollars.

There are a few things that can be done to prevent this.

The government can step in and buy their currency, or the currency they have pegged their currency to, to adjust the difference. This is fine, if the country has the resources to defend the peg. These resources typically come in the form of foreign reserves, which is the stock of foreign currencies that a nation keeps around.

Otherwise it could adjust the fixed rate, to make it more closely match up with what buyers and sellers think the currency is worth.

Lastly, a government can restrict access to the currency or simply make it illegal to sell a currency at any other price.

Or all the above.

Past

It wasn’t always like this. In the early 2000s Venezuela had the fastest growing economy in the Americas, fueled by high oil prices, it had a larger foreign reserve than Canada, and was expanding social welfare programs.

During a strike in 2003, Hugo Chavez introduced currency controls, in an effort to prop up the currency and increase foreign reserves. At this point a dollar could be bought for 1600[7] bolivars, and sold for a bit less.

The Venezuelan economy was (and still is) based almost entirely on oil exports. Oil makes up about 95% of Venezuelan exports, and about half of GDP.  During the boom, it was easier to import goods than to produce them at home, and Venezuela imported a lot. Even during the good times Venezuela imported half its food.

Thanks to the currency controls, to get the currency needed to purchase foreign goods, importers needed to go through the government. This was annoying, but not impossible, since oil is sold in dollars, the country had lots of dollars to spend.

Then two things happened: the oil price went down, and, with impeccable timing, Chavez died.

The fall in oil exports meant there was a lot less foreign currency available but Venezuela still needed to import most things, and to import these things people needed foreign currency.  When there is less of something, it usually gets more expensive. Yet under the official exchange rate(s) dollars remained very cheap.

This cheapness, meant that more people wanted to sell their bolivars for dollars, than wanted to sell dollars for bolivars. This made it difficult for everyone who needed it to get forign currency. Because it was difficult to get foreign currency through the official channels, a black-market emerged. The black market did not need to follow the governments set exchange rates. Nor did it. The black market rate and the official rate, began to diverge.

By ZiaLater – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=38659253

Present

It is illegal to publish the black-market (aka parallel) exchange rate inside Venezuela. Thanks to a Venezuelan anti-government activist working at an Alabama Home Depot it is possible to get data on the black market rate.  The website dolartoday.com publishes a rate, based on reported exchanges in the Colombian city of Cucuta, just across the border from Venezuela. At the time of writing, that rate was a US dollar was equal to 8,493 bolivars.

While uncertain, that is the best measure of the actual value of the bolivar.  It shows that the currency has lost nearly all its value over the last few years. Even though the government no longer publishes inflation figures, Venezuela has officially achieved hyperinflation, with the u­­sual absurdities.

There is a certain tragicomedy in watching currency collapses from afar, but there is nothing amusing about the economic disaster underway in Venezuela. Food shortages, Medicine shortages, skyrocketing crime, unrest, helicopter attacks, are just some of the outcomes from the catastrophic policies that Chavez and Maduro have undertaken.

Danny, don’t buy bolivars.

—

Thanks to @DJK_Proclaims for this question.

Have a question that doesn’t require an informed answer?

Tweet or email it!

Relevant PARTYSHEEPHATS Posts

Should we get rid of the $100 Bill?

Is global inequality increasing?

Are low gas prices hurting the economy? 

[1] Something, something, purchasing power parity, law of one price…

[2] I like it because it’s easy to remember the URL.

[3] Unless otherwise noted, when I say “bolivar” I am referring to Bolivar Fuerte.

[4] Price discrimination notwithstanding.

[5] Sometimes also called a pegged exchange rate.

[6] This had since dropped to 2,600

[7] When the Bolivar Fuertes was introduced in 2008 one Bolivar Fuertes equaled 1000 bolivars. So this would be 1 USD = 1.6 current bolivars.

Sources, References, and Further Reading

https://www.venezuelaecon.com/

https://www.pri.org/stories/2016-12-01/venezuelas-currency-value-depends-largely-one-guy-alabama-home-depot

https://qz.com/715230/these-are-the-brutal-emergency-measures-it-would-take-to-pull-venezuela-back-from-total-collapse-right-now/

http://www.npr.org/templates/transcript/transcript.php?storyId=498867764

http://www.aljazeera.com/programmes/countingthecost/2016/05/venezuela-looming-collapse-160528081007472.html

http://www.valuewalk.com/2016/01/venezuela-exchange-rates/

https://mises.org/library/venezuelas-bizarre-system-exchange-rates

http://www.nationalreview.com/article/435522/socialism-venezuela-hugo-chavez-nicolas-maduro-bernie-sanders-millennials

http://www.nytimes.com/2003/02/06/business/worldbusiness/venezuela-imposes-currency-controls-to-shore-up.html?mcubz=2

https://www.nytimes.com/interactive/2016/12/30/world/americas/venezuela-hyperinflation-100-bolivar-maduro.html?mcubz=2

http://www.investopedia.com/articles/forex/022415/impact-venezuelas-bolivar-exchange-rates.asp

https://venezuelanalysis.com/news/11206

http://foreignpolicy.com/2017/05/02/the-maduro-regime-is-heading-for-a-soviet-style-collapse-venezuela/

The city of Seattle has recently become the epicenter of the minimum wage debate. In January 2016, the city raised its minimum wage to $13 per hour, as part of a policy that has increased it to $15 per hour. Proponents of the policy claimed, as minimum wage advocates always do, that it would raise wages for low wage workers, while opponents of the policy claimed, like minimum wage opponents always do, that it would cost jobs.

Seattle, looking lovely

Last month, researchers at the University of Washington published a paper evaluating the increase in Seattle’s minimum wage. The paper suggested that the increase of the minimum wage to $13 per hour had harmed low wage workers. Minimum wage advocates sharpened their hatchets and went about trying to hack the paper to bits, while minimum wage opponents waved it about gleefully.

They can’t both be right.

Price Floors

Anyone who has ever walked into a store with the intention of buying something, seen the price, and walked out of the store without buying it, is familiar with the idea that when things get more expensive people buy less of them. Those deciding to hire people are no different, all else equal, an increase in wages should result in fewer people hired.

One doesn’t have to venture very far into minimum wage comment threads[1] before someone starts talking about the econ 101 price floor model. Which goes something like this:

A Graph with no Numbers

Pretend that people are buying and selling corn[2] at a price of $2 per corn. Then the government comes along and decides that since corn farmers deserve more money, all corn can only be sold for $3 each. Some people buying corn are not bothered by this, they like corn enough that even at the increased price they are happy to keep buying it. Other people decide that $3 is too much for corn and they decide not to buy it. Corn farmers love this policy, and they decide that since their corn is now going for more, they will try to harvest even more of it. Farmers turn more of their fields to growing corn, Uber drivers taking up corn farming as their side hustle. The result of this is that as less corn is bought, more corn is available for sale. This gap results in a surplus of corn, which just sits around, unbought and lonely. Aside from the farmers who manage to sell their higher priced corn this is annoying for nearly everyone. Corn buyers are mad because they must pay more for their corn. The government is mad because the country is now clogged with unused corn. Corn storage facilities are stoked.

Perhaps the same model can be applied to labor. Pretend there are a bunch of people willing to work for $10 an hour at fast food restaurants, and that fast food restaurants are happy to hire these people at $10 an hour. Then the government, feeling that $10 an hour is not enough money for people to live on, comes in and sets a minimum wage at $15 an hour. At $15 an hour many people are willing to work in fast food restaurants. However, the restaurants are not so keen to hire people for $15 an hour, so they decide to hire fewer of them: they might cut back on hours worked, decide not to hire new people, lay off current employees, they might even try to automate certain jobs.  This gap between the amount of labor supplied, and the amount demanded, is unemployment.

This is fine, but a bit theoretical. Why trust a graph with no numbers, plus some simplistic assumptions, when we have actual real-world examples of real-world minimum wage increases and data on employment.

Empirics

One reason might be that it’s not easy to figure out the impact of the minimum wage on employment. A good counterfactual is hard to find. Seattle’s strong labor market does not mean that the increase in the minimum wage has not had a detrimental impact. Without the minimum wage increase, it might be stronger still.

A simple analysis would be to compare places that have raised the minimum wage with those which have not. This problem with this is that places that raise the minimum wage are likely to be different from places have not in myriad different ways. They are likely to be wealthier, more urban, and have other progressive policies, any of these things may influence employment.

It is also tempting to look at the changes before and after a new minimum wage is introduced, here the complications persist.  For example, the minimum wage might be increased because the economy is particularly strong, which might make it difficult to determine if the observed impact on employment is due to changes in the policy or underlying economic trends.

To really know what impact an increase in the minimum wage had on employment, it would be necessary to have one place that increased its minimum wage and other place that is exactly like the first place in all respects, except for a lower minimum wage. This will never happen, but it might be possible to get close.

Card and Kruger

Enter David Card and Alan Kruger, a couple of economists who wrote what is probably the seminal empirical paper about the minimum wage. Card and Kruger looked at an increase in New Jersey’s minimum wage up to $5.05 an hour. They examined the change in the number of people employed in fast food restaurants[3] in New Jersey compared to eastern Pennsylvania, which had not raised its minimum wage. New Jersey and Pennsylvania share a border and, at least near the border, things are likely to be similar with respect to things like underlying economic conditions.

In addition, to control for differences between the two states, they looked at differences between restaurants in New Jersey that had, before the new law, paid higher than $5.05, since these places were not impacted by the new law, they could serve as a control group.

They found no increase in unemployment.

More studies followed, and Card and Kruger weren’t the only ones finding this. As an oversimplification, empirical studies have shown that the minimum wage does not make unemployment increase.

Magnitude

Plenty of reasons have been advanced for why this might be the case, one of the most compelling is that minimum wage studies in the past have focused on relatively small changes in the minimum wage.  Especially if employers have market power, they may be able to shrug off small increases in the minimum wage. If the minimum wage were increased by a penny, it is unlikely that it would make any noticeable differences to anyone. Alternatively, if the minimum wage were increased by $100/hr few people doubt there would be significant employment impacts. Presumably, there is a point where the minimum wage becomes harmful to low wage workers. The current question is where that point is, and what determines it.

Seattle 

 From here

 Seattle has been increasing its minimum wage in steps for the last few years. The rate varies on employer size and if workers are offered health insurance. When Seattle increased its minimum wage to $11, the researchers watching, found there was little impact on employment, and what employment loss there was had been, was compensated by the increase in wages.

The study on the jump from $11 to $13, has gotten a lot of attention, although it has yet to undergo peer review.  It is unusually interesting, the researchers had access to an exceptionally rich dataset that included not only wages but hours worked for employees across Washington. This is better than other studies that lacked data on individual jobs and had to use proxies for minimum wage employment such as restaurant employment or teenage employment.

Results

The primary finding is a nearly 10% reduction in the number of hours worked at low wage jobs. This was sufficiently extensive to counteract the increased wages that were being paid, resulting in the average low wage worker making $125 less than they otherwise might. There was also a noticeable drop in the number of low wage jobs. There was no clear indication of a decline in employment (among all workers) in the restaurant industry.

The lack of impact in restaurant employment and relatively small impact in overall employment are in line with other studies. What is not in line with other studies, perhaps because they don’t have the data to measure them, was the reduction in hours and the consequential reduction in total earnings.

If the conclusion is to be believed, it implies that the the minimum wage was harmful to low wage workers, and this is likely to manifest as a reduction of hours rather than a reduction in overall employment.

Single State

There is debate about how seriously to take this study.  One of the concerns is the rich dataset that the study authors used. While exceptional in that it provides hourly data, this data is only available for the state of Washington.  Since Seattle is in many ways unique in Washington-it is vastly larger than any other city in the state-this forces the authors to use other areas of the state as a control group[4], a process which may not have worked.

Multiple location

The dataset used only classifies companies by one address, this means that it is impossible to determine where job losses occurred for companies that contain multiple establishments.  Since there was no way of distinguishing between job losses in Seattle vs. other regions, the authors felt compelled to exclude companies that had multiple outlets.

This is a problem for the results of the study if one believes that companies with multiple establishments are less likely to reduce employment following a rise in the minimum wage[5].

Still, it’s suspect, many companies that employ minimum wage workers have multiple establishments (fast food restaurants are the obvious example). Even if this nullifies the application of the results for businesses in general, they remain valid for the subset of single location-businesses.

The other study

Near when the Seattle minimum wage study was published, another study came out arguing that the increase in the minimum wage had not impacted employment in the restaurant industry. The two studies were often presented as being at odds with each other (an example), even though there were few explicit contradictions (for example, neither showed a decline in employment in the restaurant industry).

What to do with empirical studies?

I was upset with the reaction to this paper. Minimum wage proponents were so quick to dismiss it offhand, while minimum wage opponents held it up as proof of something that didn’t need any proof. Both of these responses are silly.

Empirical research should inform policy decisions. The alternatives are theory, guessing, or making stuff up[6]. In the real world though, empirical studies only ever answer questions in bits. Data limitations, methodological decisions, and the fundamental complications of an interconnected society, make it impossible for a single study to ever concretely answer a research question.

Relying on empirical studies to inform our policy is going to be messy. For contentious and heavily studied policy issues-like the minimum wage-there will be papers that support either side of an argument. It will be possible for anyone to cherry pick valid, yet imperfect, studies that support their argument, regardless of which side they are on.

This doesn’t mean all studies are automatically equally valid, or equally important. Nor does it mean every study should be taken at face value. It is necessary to debate the flaws and inconsistencies of any political or academic work.

What is dangerous is doing this selectively, slashing to ribbons everything you disagree with while giving favored conclusions studies a clean pass. The reason this piece is so awful is not that it’s critique is unfounded, but it calls for people to ignore a study, without even giving it a chance.

When is the minimum wage too high?

As more minimum wages rise there will be more empirical studies, and hopefully quantity will bring consensus, or at least, a more nuanced understanding. In general, the empirical evidence on the minimum wage has not shown large reductions in employment, this study does not reverse these findings, nor do those findings invalidate this study. When is the minimum wage too high? is an empirical question, but an unanswered one.

Relevent PARTYSHEEPHATS posts

How much Consumer Surplus does Uber generate?

Is Global Inequality Increasing?

Will Vancouver’s anti foreigner tax work?

Sources, References, and Further Reading

Card and Kruger

Berkeley Paper (summary)

Berkeley Paper

National Review

Washington Post

Fortune

Civic Skunk Works

Chris Auld

Forbes

Bloomberg[1]

bloomberg[2]

Bloomberg[3]

fivethirtyeight

[1] Don’t do this.

[2] Agricultural goods have often had a price floor.

[3] Fast food restaurants are often used to study minimum wage, because they employ a lot of minimum wage workers, tend to follow these sorts of laws, and their workers tend not to get tips.

[4] Technically they use methods called Synthetic control and interactive fixed effects. I am not sufficiently familiar with these techniques to judge their efficacy or appropriateness. From my understanding, both techniques weigh different regions in ways that their trends prior to the changes in the minimum wage, would be the same. The assumption is that without the impact of the minimum wage laws, the weighted combination of regions offers an appropriate control.

[5] Hard to tell off hand if this is true, multi-site firms might be more able to absorb higher costs, but they might have an easier time moving workers out of the area with the wage increase.

[6] See “theory”.

Decisions

In the center of the immigration debate there is this fundamental idea that doesn’t get explicitly talked about much. Maybe it’s too central, too obvious, too inherent. As a country that millions of people want to move to-we get to pick who comes here.

The debate is usually couched in terms of being for immigration or against it, but all countries and most people support some limit on the number of immigrants.  As long as there is a cap, there will always be more people who would like to come, but can’t.  In 2015 the US issued about a million green cards. 50,000 of those were under the diversity lottery, a program that gives green cards to migrants from countries which typically don’t send many immigrants to the US. The number of qualified applications for the 50,000 slots, was 9.3 million.

Which means that there must be a way to decide who gets to come in and who doesn’t.

Motivation

This is not easy. People migrate for all sorts of reasons: economic opportunity, family ties, escaping war and oppression. Governments also have all sorts of reasons to encourage immigration: population growth, attracting workers, supporting refugees, encouraging multiculturalism and a diverse society. The ‘who to prioritize’ question is a deep question because it says something about what the society thinks is important.

There are lots of countries that have to make this decision, and they have different ways of doing so. For skilled workers, Canada has a points based system, and those who score highly (younger people, those with more education, strong skills in English or French, and more ties to Canada) are prioritized.

The US basically breaks down its permanent residency visas (green cards) into four categories: those joining family members, those coming to work, refugees, and a fourth category that is designed to attract migrants from countries that typically see low amounts of US migration.

Most of these categories are broken down into subcategories. In most of instances there are caps on the number of people admitted to both the subcategories and the larger categories. There is no cap to the number of immediate relatives (children, spouses, and parents) of US citizens that can enter each year. The second largest category, which includes the extended family of US citizens, plus the family of permanent residents, is capped at 226,000. The cap on employment based green cards is 140,000.

Waiting

An applicant might have an easy time or a hard time depending on where they are from and which visa category they qualify for. The variation is partially caused by a cap on migrants from each country. A maximum of 7% of employment and family visas are issued to immigrants from any given country. This cap is not adjusted for either the population, nor the number applicants, of the country. As a result there are long wait times for those coming from countries with a lot of applicants.

For those applying in a category with more applicants than spots there is a waitlist. The waiting time can vary massively, from no wait at all, to years. For Mexican adult children applying to join their citizen parents, the wait time is over 20 years. For Indian workers without a graduate degree it is over ten. Alternatively, anyone who meets the requirements of the most exclusive employment category, priority workers, can come right in.

Citizens of countries that typically see fewer migrants, are eligible for the Diversity Visa program which gives out 50,000 green cards each fiscal year, via a lottery.  It only takes the equivalent of a high school education or two years of work experience to qualify, but a tremendous amount of luck to get a visa. In 2015 nearly 10 million people applied for the 50,000 spots.

Employment Based Immigration

As in most countries, one goal of US immigration policy is to encourage workers to come to the US and engage in work that will benefit both US employers and the US economy in general. In nearly all cases, employment visas require sponsorship from an employer. Among other things, this means that, at least for non-temporary workers, an employer must first prove they cannot hire an American for the role in question (a process called Labor Certification).

The core of this table is here. Final Action Date, is the most recent application date that is available for Visas. India was chosen due to its long wait lists for EB visas.

Applicants for employment based green cards apply in one of five categories (with the first three being the most prevalent and shown above).

The first category, EB-1 includes persons of extraordinary ability[1] such as those who have won Olympic Medals, been awarded Oscars, or are otherwise notable in their field. Unlike most employment visas, these people do not need labor certification. Also eligible for EB-1 are prominent professors and business executives although these people do require labor certification.

The second preference is for those with substantial work experience, advanced degrees or other high qualifications. The third preference is for those with Bachelor’s degrees, skilled, and unskilled workers. Even though the category for skilled workers (EB-3) is much broader than the other two, the same number of visas 40,000, are reserved for each subgroup. This is the primary way the US prioritizes which workers it will allow to become permanent residents.

There is a similar system for temporary workers, in which workers are categorized and a certain number[2] from each category are accepted. There are separate categories for skilled and unskilled workers. These have some quirks, the skilled worker (H-1B) category, also includes fashion models “of distinguished merit and ability”, along with other skilled occupations. Workers with master’s degrees have a better chance at a visa than those that do not. There are separate visa categories for occupations like artists and athletes.

Luck and Haste

Foreign workers face a more awkward hiring process than other workers. After the traditional job search process is done and the company finds a worker who they would like to hire, they submit the paperwork sponsoring the worker to US Customs and Immigration.

If there are more applicants in the visa category than there are available visas, and there probably are, there is additional uncertainty. While there is a waitlist for green card applications, there isn’t one for temporary work permits. Depending on the number of applicants and the type of visa, there may be a lottery or visas may be awarded on a first come, first serve basis.  Contingent on their luck or haste the worker might or might not get in.

This is all rather crude. If the company would like to employ multiple foreign workers, some of them might get in, some might not. The company has no mechanism to express which workers are more important to them, and within the category there are only limited mechanisms (such as visas reserved for workers with master’s degrees) for differentiating between workers.

Highest Bidder

[I first came across this idea from Giovanni Peri, in this planet money show. He has also written about it here and here.]

The right to employ a foreign worker is a resource that has been made scarce by imposed caps and limitations. Most scarce resources are allocated by markets. Market allocation works better for some things (say toasters) than others (say healthcare), but for foreign workers it would almost certainly work better than the current system.

Visas would be auctioned each year to those companies who wished to hire a foreign worker.  At least initially this would involve two separate auctions that would take the place of the current distribution system of H1B (skilled) and H2 (unskilled) temporary work permits.

The proposal allows for companies to submit a sealed bid with the amount they would be willing to pay for the right to hire a foreign worker. If a bid was selected, the worker would get a temporary work permit, which would allow them to work in the US for three years[3], and employers would receive a permit allowing them to hire a foreign worker. The foreign workers would not be obligated to remain with the employer who had paid for their permit, but would be allowed to work for any company that had the appropriate permit to hire foreign works.

It would almost certainly be a more efficient system than the current one.  The chief advantage is providing a mechanism that allows differentiating among potential workers, depending on how much their skills are valued by employers.

There would be other benefits as well. The most obvious one is revenue, this program could bring in around a billion dollars[4] in revenue each year. Auctions would provide information on where foreign workers were most valued, and where the US workforce was lacking. If nearly all the visas went to software developers and economics bloggers, it would be obvious that there was a deficiency in these professions. Since there was a price attached to this discrepancy it would be possible to see the magnitude of this gap, as well as how it changed over time.

Not for everyone

Of all the reasons a country might wish to attract immigrants, hiring foreign workers, especially temporarily, is probably the most selfish and mercantile.  Unlike the immigration of refugees and the family of current residents, which are linked to ideals of helping and togetherness, importing foreign workers is much more like importing anything else we need but don’t have domestically.

To be certain, a lot of the benefit goes to the workers themselves in the form of huge wage increases relative to what they would make elsewhere. The company that employs the worker, also benefits, as they now have a productive worker they couldn’t otherwise have.

While it would undoubtedly be a mistake to conduct all immigration via the highest bidder, for temporary workers (and maybe employment based green cards?) it seems absolutely appropriate.

Let the wealthy in?

It is not obvious exactly what sorts of workers would be prioritized under this system, but they would probably be the most well-paid of the current crop of applicants. Prioritizing the most highly paid forign workers might seem antithetical to the spirit of opportunity that is associated with immigration.  However, merely by having a relatively small cap on the number of legal immigrants and temporary workers, the United States already prioritizes immigrants who already have significant skills and opportunities. We just do it crudely.

If the goal is to provide immigration opportunities to a diverse pool of applicants, the best way to do this is not through the skilled worker program, but to increase the overall number of legal immigrants, modify the country caps, and expand programs like the diversity lottery. If one is concerned about giving away immigration status to the wealthy, a better target is the EB-5 Program which offers permanent residency to those who invest $1,000,000 in a US business.

No line to wait in

No country allows unrestricted immigration. Countries that cap immigration will always be forced to prioritize the admission of some immigrants over others. How to best do this will always be a complicated question, impacting who migrates through both official and unofficial channels.

The US does get to decide who gets to come legally, but it doesn’t always get to decide who comes in. Currently, a Mexican worker with no family in the United States and a high school education, has basically no way to legally migrate to the United States. It is not even a matter of enduring a long waitlist, there just isn’t a category to wait in.

In a time of wall construction and travel bans, it might seem like there are more important immigration topics than a couple year-old, wonky, tweak to a part of the immigration system that impacts a relatively small percentage of immigrants, and there probably are. I find the idea of selling work permits interesting not so much because it will solve all our immigration issues, although I think it would be an improvement, but because it makes me think explicitly about how we go about deciding who to let in and who we don’t. Any serious conversation on immigration should start there.

Sources, References, and Further Reading

US Customs and Immigration Services

https://www.uscis.gov/working-united-states/permanent-workers

https://www.uscis.gov/working-united-states/permanent-workers/approval-and-denial-statistics-i-140-immigrant-petition-alien-workers

Visa Categories, wait lists, and caps

https://www.americanimmigrationcouncil.org/research/employment-based-visa-categories-united-states

https://travel.state.gov/content/dam/visas/Statistics/Immigrant-Statistics/WaitingListItem.pdf

https://www.quora.com/Is-the-waiting-list-for-U-S-Green-Cards-7-years

https://travel.state.gov/content/visas/en/employment/temporary.html

https://travel.state.gov/content/visas/en/law-and-policy/bulletin/2017/visa-bulletin-for-april-2017.html

Employment Certification Form

H1B Occupations

News and Media

https://www.nytimes.com/2017/03/01/us/politics/immigration-trump.html?smid=tw-nytimes&smtyp=cur&_r=0

http://www.economist.com/blogs/democracyinamerica/2011/05/immigration

http://www.npr.org/sections/money/2017/02/08/514152963/episode-436-if-economists-controlled-the-borders

https://www.bloomberg.com/view/articles/2017-03-24/immigrants-are-making-the-u-s-economy-stronger

http://www.pewresearch.org/fact-tank/2015/10/05/todays-newly-arrived-immigrants-are-the-best-educated-ever/

http://news.nationalgeographic.com/news/2013/06/130630-immigration-reform-world-refugees-asylum-canada-japan-australia-sweden-denmark-united-kingdom-undocumented-immigrants/

 Selling Work Permits

http://economics.ucdavis.edu/people/gperi/

http://www.slate.com/articles/business/moneybox/2012/02/auctioning_residency_permits_could_raise_a_lot_of_money_and_solve_the_illegal_immigration_problem_.html

http://www.npr.org/sections/money/2017/02/08/514152963/episode-436-if-economists-controlled-the-borders

Brookings

http://www.scpr.org/blogs/multiamerican/2012/05/17/8262/work-permits-and-auctions-a-look-at-two-new-propos/

Hoover

Statistics and Data

http://www.ncsl.org/research/immigration/us-immigration-snapshot-2011.aspx

https://www.dhs.gov/immigration-statistics/yearbook/2015

http://www.npr.org/templates/story/story.php?storyId=5404217

FOOTNOTES

[1] There are categories for both persons of extraordinary ability which is a subcategory of EB-1 and persons of exceptional ability which is a subcategory of EB-2. Persons of extraordinary ability is the better one to be in. Obviously.

[2] There are some uncapped categories such as temporary agricultural workers.

[3] one year for those receiving the equivalent of H-2 visas.

[4] Or, measured another way, about 1/20 of the cost of the proposed border wall.

Relevant PARTYSHEEPHATS posts

Where should you move if you want to qualify for the Olympics, but aren’t good enough?

Not Relevant PARTYSHEEPHATS posts

Why are airfares so volatile?

Should we get rid of the $100 Bill?