oftwominds-Charles Hugh Smith

A "Free Market" for Labor?

Astute reader Matthew N. had some very interesting comments on the labor market in reaction to the May 24 entry Health, Healthcare and Bankruptcy:


"Hey Charles, I was thinking about something related to your article. Lots of the downward pressure on wage growth and stagnant wages, as I see it, is from global competition. Heck I know there is someone in India that can do my job cheaper. I already compete with guys in China for what I do (architectural visualizations) ans can't really argue when a guy in China is doing my job for a couple bucks a day.

Anyways, I was reading a book by the founder of Nolo Press. He thinks some of the best jobs with good pay, are service jobs. The guys that do your lawn, clean carpets, plumbing, things that can't be produced overseas. For any service job, if you want the job done, the person hiring will have to pay local wages, wages which allow a person to live in the area of the service. He argues these jobs are on the rise.

It seems to me that many good jobs go to illegals. (I live in Southern California). The jobs that are left over are the 'jobs Americans want to do' --at least this is how it is sold. These jobs include informational jobs, where you use your mind more than your back. But those jobs are the jobs under pressure from global competition. In summary it seems the best jobs, at this time, are filled by people who get the best of both worlds. They get good cash for their work and they dont pay taxes, how does that sound? Sounds a lot better than my 'American job'. Maybe this is the 'grass is greener on the other side' syndrome, who knows."

Excellent points, Matt. I will start my comments with a chart, showing the rise of "imported labor" in states far from Texas and California.



What we see here is employers hiring immigrant labor at a furious clip. Note that this chart does not break out legal immigrants from illegal immigrants, so we have to be careful to differentiate between the two: the first are hired legally, and pay taxes. We should also note that statistics on "black market/cash" jobs and employment of illegal immigrants are unreliable.

As a Devil's Advocate observation: isn't buying illegal drugs and hiring illegal workers more or less the same thing? Both are illegal, yet the demand is high for both. In both cases, the government always tries to limit the supply rather than decrease the demand. If the poor wretched fools buying cocaine got a healthy life and stopped buying coke, then the supply (and the price) would both decrease. Yet our government has wasted approximately $100 billion of our taxes fruitlessly trying to limit the supply with essentially zero success--except to keep the street price artificially high. High fives, guys. You've accomplished nothing.

Trying to limit the supply of illegal (read cheap/profitable) workers is similarly spectacularly unsuccessful/a huge waste of money. You want to stop illegal workers? Then turn 100,000 special agents loose on the American landscape investigating employers, not their workers. Throw the employers in jail and fine them $1 million per worker per incident. You will quickly find the demand for illegal workers dries up.

Why won't this fly? Because employers are reaping immense profits paying workers $10/hour cash rather than $30/hour "total compensation" to legal workers (wages, taxes, FICA, workers comp, disability insurance, etc.) And who donates big bucks to the politicians ranting about illegal labor? The same people who are hiring the illegal workers and profiting from their black market "purchase" of "illegal labor."

Here's an example from real life--my own. Back in 1976, as a young carpenter, I was earning $7.50 an hour. According to the Bureau of Labor Statistics inflation calculator, this works out to $27.24 in today's dollars. Add in the overhead (workers comp, state disability, 7.5% FICA, etc.) and that's about $40/hour. A more experienced "lead" carpenter would be about $50/hour in total labor costs (this is without medical or retirement benefits).

The contractor's overhead and profit is on top of this, of course; thus in Northern California, contractors charge $55/hour for semi-experienced labor. This is not laborers or contractors getting rich--this is just keeping up with $7.50/hour 30 years ago and paying the overhead expenses.

Now I know semi-skilled illegal workers are paid as little as $10 - $12/hour locally--a mere 1/3 of a legitimately employed worker (immigrant or born-in-America). Do you reckon the contractor plugged his "actual cash costs" in his bid? Ha. That's the gravy, buddy--the pure profit raked in by the employer. Sure, maybe he underbid the legit employer by 5% to get the contract, but he certainly didn't price in illegal workers' actual pay scales on the bid. He put in $35/hour and pays $12/hour cash--a very sweet deal for the employer.

Consider, too, the regional differences in pay. Wages in high-cost areas of the country are, as Matt noted, higher because the worker actually has to live there. In areas of the U.S. with lower living costs, maybe the legal worker costs $15/hour and the illegal $10/hour--still a nice "discount" to the employer. But in high cost areas, then the illegal wage is maybe $12/hour, but it replaces a $30/hour wage: a much larger "discount."

How do illegal workers live in high-cost areas? they live in shabby enclosed garages, or six to a one-bedroom apartment (that rents for $1,000 or more in California). They do what they have to do to send money home to support their families. They are merely "free labor" moving through a "free market."

I expect some will argue that businesses can't survive if they paid legal wages. If this is true, then they should get their political act together and start making their realities known to the political classes. Yes, we all know running a small business in a high-tax state (on top of high federal taxes) is generally a thankless struggle. We (small business operators) pay lots of tax and get little recognition as the broad supporters of the tax base. (The corporations can flee to Delaware to Burmuda, but we're stuck here paying local taxes and fees.)

I understand this; I have been self-employed for 23 of the past 30 years. But as Matt suggests, paying cash/no taxes is a sweet deal for the employers, and a pretty good deal for the illegal workers, too, at least until it comes time to retire and they have no Social Security or Medicare benefits because they worked in the black market their entire lives. That is hardly fair or a "good deal" except for the employer who skipped out on paying the taxes.

There is one more pernicious result of employers being able to hire illegal workers freely: they lower the price of services below the operating cost of legitimate businesses. I am sorry, but I have no sympathy for employers claiming they can't afford to hire legal workers. If they stopped underbidding, then prices would rise to levels which support legit businesses.

For example: a few years ago I paid a legit tree-trimming contractor $1,200 to trim a couple of trees. It was a fair price for a legitimate contractor running a real business and paying the usual overhead and taxes. I could have found a black-market tree-trimmer for less, of course, but it was my decision to support guys like myself. That's every consumer's choice.

But should we allow black-market types to hire illegal labor for 1/3 the going price, and allow them to drive out all legitimate employers? That is what's happening. And guess what, "price-conscious" consumers-- there goes your local tax base. Now you're going to have to pay all the taxes for services yourselves, because you've destroyed the legit businesses and employers who used to pay all those taxes and fees without you even noticing it.