If San Francisco tech bro hipsters invented a carbon-free way to generate power 24/7, they would be hailed as saviors of the planet. Though they might yet come up with some use for a venti Matcha Green Tea Frappuccino, the energy technology in question predates them and even their retro clothes. In 1951 in Idaho, scientists for the first time used a nuclear reaction to generate electricity.  

Though 59 nuclear power plants generate about 55 percent of the non-carbon-emitting power in the United States, they are still opposed by environmental activists who came of age in the 1970s.

Some of those greens are celebrating 50 years of activism in New Hampshire this month. As they celebrate, there are signs that younger Democratic politicians and activists, fearing climate change more than nuclear meltdowns, are ignoring them and embracing the promise of carbon-free nuclear power. 

This spring, the Pilgrim nuclear plant in Plymouth, Mass., closed. It followed the retirement in 2014 of Vermont Yankee. The closings leave only two nuclear plants in New England: Seabrook Station in Portsmouth and Millstone in Connecticut. 

These closures have left New England more reliant on carbon-emitting fossil fuels. 

When Pilgrim closed, ISO New England, the region’s power grid operator, concluded that three new plants that burn natural gas or oil would more than make up for Pilgrim’s 680 megawatts. 

Vermont Yankee’s closure increased carbon emissions in New England as the 604 mw of nuclear power was replaced with natural gas, ISO New England confirmed. 

As the Springfield Republican reported at the time, “while replacing coal with a natural gas plant reduces carbon emissions, replacing a nuclear plant with natural gas-fired generation has the opposite effect.”

That’s why some politicians and activists on the left are questioning the wisdom of anti-nuke extremism.

Seabrook Station offers a cautionary tale. 

Scheduled to open in 1974, New Hampshire’s only nuclear power plant did not come online until 1990. In those 26 years, carbon-free power was replaced with carbon-emitting power. 

A planned second reactor at the site was scrapped after lengthy legal battles. The additional 1,150 mw of power that would have been generated by a second reactor were instead generated by fossil-fuel-burning plants. 

Coal-burning Merrimack Station and oil/gas-burning Newington have a joint capacity of 918 mw. Had the second reactor been finished, they might have been made redundant.  

In fact, instead of opening a nuclear plant in 1974, PSNH opened its oil-burning plant at Newington. The announcement of plans to build this plant came in 1969, shortly after activists formed the Seacoast Anti-Pollution League to fight the nuclear plant, according to Peter Evans Randall’s history of Hampton. 

To get an idea of how the anti-Seabrook movement led to unintended consequences, one need only look at NextEra Energy’s license renewal application for Seabrook. It estimated that replacing the nuclear plant with coal would create 9.5 million tons of carbon dioxide emissions per year and replacing it with natural gas would create 3.5 million tons. Those estimates were based on modern technologies, not the higher-emitting ones under which Merrimack Station and Newington operated for the 26 years before Seabrook opened. 

Environmental activists still claim the 26-year delay and the killing of the second reactor as wins for the environment. The ironically named Seacoast Anti-Pollution League, formed in 1969 to oppose Seabrook Station’s construction, is holding a 50th anniversary celebration next week. 

But this week’s CNN climate town hall showed that some Democratic politicians are not buying the anti-nuke nostalgia. 

Some presidential candidates, like Elizabeth Warren, remain steeped in the ‘70s.  

“The problem is it’s got a lot of risks associated with it, particularly the risks associated with the spent fuel rods,” she said on Wednesday. “In my administration we are not going to build any new nuclear power plants.”

Fears such as Warren’s are misguided, author Ben Rhodes documented for the Yale School of Forestry and Environmental Studies last year.  

Other candidates seem to have been swayed by more recent research such as Rhodes’. The Washington Post identified five remaining Democratic presidential candidates as open to nuclear power development. At the CNN town hall, Andrew Yang and Cory Booker embraced the promise of new nuclear technology.

“Right now nuclear is more than 50 percent of our non-carbon causing energy,” Booker said, accurately. “So people who think that we can get there without nuclear being part of the blend just aren’t looking at the facts.”

“We can actually go to the kind of innovations that make nuclear safer or safe,” he said.

That one word — “innovation” — marks the change in mindset. 

For generations, environmental activism has been guided by a fixation on government control. Protesters believed that the only path to Eden led backwards into the past, formed by state suppression of disfavored technologies. 

New nuclear technology is showing the old greens to be wrong. MIT Technology Review reported in February that nuclear power is critical for reducing global carbon emissions, a fact being recognized even by some environmental groups: 

“If the current situation continues, more nuclear power plants will likely close and be replaced primarily by natural gas, causing emissions to rise,” argued the Union of Concerned Scientists—historically nuclear skeptics—in 2018. If all those plants shut down, estimates suggest, carbon emissions would increase by 6%.

At this point, the critical debate is not whether to support existing systems, says Edwin Lyman, acting director of the UCS’s nuclear safety project. “A more practical question is whether it is realistic that new nuclear plants can be deployed over the next several decades at the pace needed.”

The recognition that the path to Eden will be cleared by innovators, not regulators, is a huge insight. It hasn’t permeated the presidential field — or even Sen. Booker’s own environmental plan — yet. But the fact that some candidates and environmental organizations are embracing it at the risk of angering Prius-driving, Pete Seeger-listening Baby Boomers is encouraging. 

SUMMARY: Both the Democratic Legislature and Republican Gov. Chris Sununu included in their budgets an expansion of the state tobacco tax to electronic cigarettes. Bipartisan support for this policy is cause for concern because of its tax and health implications.

New Hampshire has no broad-based sales tax on goods, but it does have “sin” taxes on alcohol and tobacco. Legislators and the governor this year have proposed expanding the sin tax on tobacco to devices known as electronic cigarettes. 

This expansion is pitched not as a tax increase, but as a technical correction to an existing tax. But the measure is more complicated than that. For starters, the tobacco tax exists to discourage the “sin” of tobacco smoking. But e-cigarettes contain no tobacco. 

Current law (RSA 78:1) defines tobacco products as those that contain both tobacco and nicotine. E-cigarettes can discharge nicotine, a tobacco byproduct, but no e-cigarette burns tobacco. To get around that, the revision changes the “and” to “or.” The tobacco tax is thus changed to a tobacco or nicotine tax.

Nicotine is derived primarily from tobacco, but it does occur naturally in some other plants. It is habit-forming, like caffeine, but is not a carcinogen. It does not have the same health impacts as tobacco, and it is not always derived from tobacco. E-cigarette manufacturers are increasingly making their products with synthetic nicotine. 

This new version of the tobacco tax, therefore, applies this sin tax to products that contain no tobacco and increasingly contain nothing derived from tobacco either. 

An exemption that discourages kicking the habit 

Lawmakers recognized that this expansion would tax consumer goods that help smokers quit the habit. The proposed law supposedly avoids this negative effect by excluding from taxation “any product that has been approved by the United States Food and Drug Administration for sale as a tobacco cessation product and is being marketed and sold exclusively for such approved use.”

How many e-cigarettes does this exempt? None. No e-cigarette currently on the U.S. market fits into that tightly worded exclusion. 

Worse, the exclusion ignores studies that have shown electronic cigarettes in general to be effective at helping people quit smoking — more effective, even, than FDA-approved methods.

  • A study published in the New England Journal of Medicine in February found that “e-cigarettes were more effective for smoking cessation than nicotine-replacement therapy, when both products were accompanied by behavioral support.” In that study, e-cigarettes were almost twice as effective than alternatives. The abstinence rate after one year was 18% for people who switched to e-cigarettes and 9.9% for people who chose a different nicotine-replacement product.
  • A study published in 2016 in the British Medical Journal found that “(a)mong those making a quit attempt, use of e-cigarettes as a cessation aid surpassed that of FDA-approved pharmacotherapy.” Long-term e-cigarette users had a 42.4% cessation rate vs. 14.2% for short-term e-cigarette users and 15.6% for those who didn’t use e-cigarettes. The report’s understated conclusion was that “long-term use of e-cigarettes was associated with a higher rate of quitting smoking.”
  • A 2015 study by Public Health England, a government agency similar to our FDA, found that “e-cigarettes are around 95% less harmful than smoking” and “there is no evidence so far that e-cigarettes are acting as a route into smoking for children or non-smokers.” 

Lawmakers acknowledge the value of excluding from taxation products that help people quit smoking. Yet they define those exempted products not by their actual effectiveness, but by their endurance of a lengthy and costly federal regulatory process. (The average FDA approval time for medical devices is seven years and costs millions of dollars, a 2016 review found.) 

With studies showing that e-cigarettes can be more effective than FDA-approved smoking cessation products, this proposed law would encourage smokers to use less-effective smoking-cessation products while discouraging them from using more effective ones. 

E-cigarettes are not actually cigarettes 

This tobacco tax expansion also is based on misclassifying e-cigarettes as cigarettes. 

Under existing state law, an e-cigarette is not a cigarette. To be a cigarette, it must contain tobacco. E-cigarettes are tobacco-free alternatives to cigarettes. Manufacturers market these devices as “cigarettes” because the term is familiar and because the devices can deliver the nicotine fix smokers crave. But they are not tobacco products. 

Changing the definition of “tobacco product” to cover products that contain no tobacco is bad policy and bad precedent. In this case it also would discourage people from transitioning from real cigarettes to much healthier, tobacco-free e-cigarettes. 

Impact on the New Hampshire Advantage

Finally, there is a potentially large impact on small businesses, particularly convenience stores in border towns. 

On July 1, Vermont’s 92% tax on e-cigarettes took effect. Maine’s governor this month signed a law taxing e-cigarettes at 43% of the wholesale price. Massachusetts is considering a 75% vaping excise tax. 

As our neighbors attempt to squeeze revenue out of products proven to help smokers quit, New Hampshire would be wise to remain an island of sanity and sound policy. New Hampshire’s lack of a tax on these products would encourage cross-border sales and further entrench the New Hampshire Advantage. Following our neighbors in adopting a poorly reasoned tax that comes with negative health effects would be a mistake. 

Download a pdf version of this report: JBC 20-21 E-cigarette Tax Brief.

The Legislature’s final budget spends $497.3 million more than Gov. Chris Sununu’s budget in General and Education Trust Fund appropriations in the 2019 and 2020-21 fiscal years.

In this report, we examine the three major differences between these competing budget visions: total General and Education Trust Fund appropriations, business tax rates, and disposition of the current-year surplus.

Read the full report here: Budget Visions Legislature vs Governor Final.

SUMMARY: To promote taxpayer funding of a quarter-billion dollar commuter rail project, supporters last week touted a single poll question, without context, that appeared to show strong public support for commuter rail. It’s a tactic rail enthusiasts have repeated for years. Journalists, lawmakers and the public should be skeptical of such PR campaigns. This brief run through the complex commuter rail issue shows how misleading such PR boosterism can be. 

Context

First, everyone should be wary of any poll that purports to show broad support for an expensive public policy without mentioning costs or alternatives. In some cases, it’s useful to know whether people favor or disfavor an abstract concept. But when a specific policy with known costs is being polled, it’s helpful to ask whether people are willing to pay for the nice idea in question.  

The New Hampshire Legislature votes on bills, not concepts. Casino gambling is a good example. Despite the concept frequently drawing broad support from the public and members of the House, no specific bill has been able to pass the Legislature once the details are laid out. Every issue involves tradeoffs, which abstract poll questions often miss.   

This particular commuter rail poll question did not inform respondents of the cost of the project. Nor did it tell them anything about rail’s impact on traffic, zoning regulations, population density, decreased funding for other public works projects, or other quality-of-life issues. Respondents also were not asked whether they would favor a state-run or private option. Without such details, we don’t really know whether the public supports the actual commuter rail projects under consideration.  

The St. Anselm College poll question asked, simply:

“Would you support or oppose commuter rail connecting Manchester or Nashua with Boston?”

Unsurprisingly, three-fourths of respondents (75.5 percent) were in favor. This is similar to 2015 poll that found 74 percent support for commuter rail in the abstract, with no cost mentioned. The 2015 poll was promoted by the New Hampshire Rail Transit Authority, the second by N.H. Business for Rail Expansion.  Advocacy groups are using abstract poll questions to promote a specific project, the taxpayer-funded, state-developed Capitol Corridor Rail Expansion Project. But the public is not being asked about any details of this project.

Before accepting these poll results at face value, journalists and lawmakers should consider whether they would publish a story or cast a vote after asking only a single, generic question. Commuter rail is a complex issue. Asking whether people would prefer commuter rail in the abstract is like asking if people would prefer to eat ice cream every day. Of course they would. But their answers will change if asked to weigh the tradeoffs. 

Regarding commuter rail, unless the topics listed in this briefing paper are covered, people have not been asked to make an informed choice between competing options. They have merely been asked whether they would like to see ice cream on the menu.  

Read the full paper in pdf form here: Skeptic’s Guide To Commuter Rail Brief.

After the U.S. Supreme Court ruled last June in South Dakota v. Wayfair that states could collect sales taxes from out-of-state remote sellers, New Hampshire lawmakers chose not to act. Other states did not make the same mistake. 

Eleven months after the Wayfair decision, the number of states with laws requiring out-of-state businesses to collect and remit sales taxes has more than doubled to 33, a Bloomberg Tax survey shows. 

The number of laws New Hampshire has passed to protect its businesses from these collections remains the same as last year — zero. 

Understanding the need for urgency, Gov. Chris Sununu called a special legislative session last July so lawmakers could quickly put some blocking legislation on the books. A majority of legislators opted to wait. A commonly heard reassurance was that we had plenty of time to act because states would respond gradually to the Wayfair decision. 

In fact, several states had passed laws authorizing cross-border tax collections before Wayfair, anticipating the ruling. Others wasted no time capitalizing on it, as the Josiah Bartlett Center warned. Why would a state wait a moment longer than necessary to expand its taxing power over people who cannot vote for any of its elected officials?  

Now, less than a year after the ruling, two-thirds of the states require businesses to collect and remit sales taxes if they do a specified amount of business in the state. 

And that isn’t the only Wayfair-related bad news. 

The Suffolk Superior Court in Massachusetts this week dismissed a lawsuit filed by six online retailers challenging that state’s effort to collect taxes on online sales retroactively. 

The day before that, the U.S. Supreme Court ruled in Franchise Tax Board of California v. Hyatt that states “retain their sovereign immunity from private suits brought in courts of other States.”

The ruling shields states from suit by private parties in other states. So a New Hampshire seller cannot sue another state in New Hampshire courts to protect itself against a cross-border sales tax collection. 

The Hyatt case was brought by a Nevada resident who had fled California’s hight taxes and was pursued by his former state’s tax collector. The Multistate Tax Commission, which promotes and facilitates cross-border tax collections, filed an amicus brief on behalf of the Franchise Tax Board of California. It had previously filed a brief supporting South Dakota’s pursuit of Wayfair. This week’s ruling is generally considered favorable to states that hope to reach into other sovereign states to collect taxes. 

As The Wall Street Journal wrote in January, a win for California’s Franchise Tax Board would mean that “governments could bully, extort and defraud residents of other states with legal impunity and no political accountability.”

This is now the law of the land, meaning New Hampshire retailers are increasingly at the mercy of foreign tax collectors. 

What has the New Hampshire Legislature done to protect Granite State businesses?

The House Ways and Means Committee retained three bills written to protect business from foreign sales tax collections, refusing to pass them. The Senate did pass Sen. Jeb Bradley’s Senate Bill 242, which is very similar to the bill killed in special session last year. It remains in the House Ways and Means Committee, where it has sat since February 25.     

On Thursday, Gov. Chris Sununu vetoed a Democratic bill to impose a $168 million wage tax on New Hampshire employees for the purpose of limiting their benefit choices and forcing them to accept a state-run paid family leave program. Here are five reasons why a veto was the only responsible action for the governor to take. 

  • The tax to fund a mandatory, state-run paid family and medical leave program was entirely unnecessary. The governor had proposed an alternative program that would allow businesses to opt in. With a voluntary option on the table, there was zero need to create a state-run program funded by a $168 million annual tax on workers’ wages, and which cost $6 million a year to run.  
  • The mandatory program in Senate Bill 1 limited employee and employer choices. By forcing employers to offer this one particular benefit, SB 1 would have prevented many employers from affording other benefits that their employees might prefer. As we have reported before, national polls show that employees tend to prefer many other benefits, such as more flexible schedules and more robust health care benefits, to paid family leave. The bill also forbade businesses from offering a smaller paid leave benefit in combination with other benefits employees might prefer.
  • Because SB 1 potentially overpromised benefits, it allowed a commissioner to raise taxes. Were the bill to become law, employees would expect 12 weeks of paid leave at 60 percent of their pay. But the bill acknowledges that these benefits might exceed program revenues. It authorizes the Employment Security commissioner to reduce benefits or raise the wage tax. It also authorizes the commissioner to reduce the tax or increase benefits if the program generates a huge surplus. A huge surplus would indicate that the tax rate is set too high. The bill in that case should authorize only a tax cut, not a benefit increase.   
  • SB 1 imposed a political preference on businesses and employees that in the long run could make New Hampshire less economically competitive. Paid leave is politically trendy, but trends change. Future employees may demand a different benefit. Passing a law compelling employers to offer this benefit freezes resources that could be used to respond to changing market conditions. This makes employers less nimble and less competitive. 
  • Even if Granite Staters overwhelmingly preferred paid family leave over other compensation options, SB 1’s approach would be economically foolish. But there remains no evidence that Granite Staters demand this benefit over others. Supporters of the bill have cited several University of New Hampshire surveys to claim that Granite Staters support paid family leave. But none of the surveys, including one released on the day of the House vote last week, gives respondents the option of choosing other benefits or higher pay. Nor do they inform respondents that a paid family leave program could mean lower pay raises or reduced benefit options in the future. It’s disappointing that these surveys continue to leave out important information that is regularly included in national surveys of employees’ benefit preferences. 

House Democrats insisted on incorporating a mandatory paid leave program — and its $168 million wage tax — into the state budget, knowing that this could trigger a veto by Gov. Chris Sununu. It’s a strange hill upon which to die, considering that there’s no evidence Granite Staters are demanding this specific workplace perk. 

This month the UNH Carsey Center for Public Policy released a report asserting that Granite Staters support guaranteed job protection for paid family and medical leave programs and a 60 percent wage rate while on leave. 

This is about as useful to lawmakers as a ping pong table is to the Night’s Watch. It’s nice to have, but when the real work starts its minimal utility quickly becomes apparent.  

Nowhere did the survey ask whether respondents would prefer paid leave to other benefits such as flexible schedules, more health coverage or higher pay. Nowhere did it ask whether employees would prefer paid leave if it led to lower pay raises or reduced benefits in the future. Nowhere did it ask how much employees would be willing to pay for such a benefit. 

The 2016 UNH poll that purported to show broad support for paid family leave in New Hampshire also left out crucial questions. It did not give respondents the option of choosing from a list of other possible workplace benefits. The only cost it included was $5 per week, which is on the low end of the cost scale for various paid leave programs.

Other polls have asked such questions, and their results do not support the theory that paid leave is so critically important for employees that the state must guarantee it via a mandate and wage tax.

  • A 2017 Pew poll found paid leave statistically tied with more flexible work schedules as the most preferred new benefit, with 28 percent preferring schedule flexibility and 27 percent preferring paid leave. (That poll also found, by the way, that most Americans were satisfied with their workplace benefits and thought their employers cared about them and their well-being.) 
  • A 2017 study by data research firm FRACTL found that employees ranked paid parental leave 8th among a list of 17 benefit options. More popular were better health benefits, more flexible hours, more vacation time, work from home options, unlimited vacation, student loan assistance and tuition assistance.
  • A 2017 survey by payroll and benefits firm JustWorks found that flexible schedules and remote work options were far more popular among employees than unlimited paid time off or parental leave. Fewer than half of employees said unlimited paid time off or paid parental leave were important. 
  • A Cato Institute poll last December found that support for paid leave crashes when people are given the option of considering the costs. In the abstract, 74 percent of Americans support paid leave. But 60 percent oppose paid leave if it would lead to lower future pay raises. 

Paid leave is being pushed on Granite Staters as if it is universally acknowledged as the holy grail of workplace benefits. It isn’t. National polling shows that most employees prefer other benefits to paid leave. And even if it were the most popular benefit, that wouldn’t make it the right benefit for every employee or every employer. 

When employers are forced to offer this particular benefit over all others, employees are then forced to accept this particular benefit instead of others employers might have chosen. There is no compelling case for forcing this choice on all New Hampshire employees. Creating a budget showdown over an entirely unwarranted mandatory benefit would only compound the mistake.  

A new briefing paper from the Josiah Bartlett Center for Public Policy shows that the House’s 2020-2021 budget proposal spends $382.4 million more in state funds than Gov. Chris Sununu’s proposed budget and includes $417.7 million in new taxes and fees. 

The paper shows that the divergence in governing philosophies between the Republican governor and the Democratic House majority could hardly be more stark. 

Sununu’s budget would increase fiscal year 2021 general fund spending by 5.4 percent over fiscal year 2018. The House budget increases spending over the same time period by 14.8 percent.

The tax increases show an equally sharp philosophical divergence. 

Gov. Sununu’s proposed budget contains one expanded tax (extending the tobacco tax to cover electronic cigarettes) and a new fee (a charge on newly allowed sports betting). The House budget also expands the tobacco tax and includes the sports betting fee but also includes hundreds of millions of dollars in new taxes to cover the budget’s spending increases.

The House budget includes a sales tax on marijuana transactions ($4 million), business tax increases ($94.1 million), a new capital gains tax ($150 million), and a new wage tax (payroll tax) to fund a compulsory paid family and medical leave program ($168.6 million). 

Without those new taxes, the House budget does not balance. In fact, it also doesn’t balance without the surplus built up over the last two years.

Both Gov. Sununu and the House spend the current state budget surplus. But the governor treats the surplus as one-time revenue attributable primarily to the immediate stimulatory effects of the federal Tax Cuts and Jobs Act of 2017. He therefore dedicates the money to one-time appropriations rather than recurring spending. 

By contrast, the House treats the money as ongoing revenue and uses it to increase baseline state appropriations. Spending it this way requires future tax increases to sustain the higher level of spending, something the governor sought to avoid. 

The House budget would turn state taxation and spending sharply upward and put it on a rising trajectory into the foreseeable future.  

(A previous post in this space failed to account for a relocation of lottery revenues in the governor’s budget. That failure inaccurately put the House spending figure $584 million above the governor’s.)

A copy of the full report in pdf form is here: Budget Visions 2020-21-4.

 

New Hampshire’s Education Tax Credit Program is under fire from legislators who want to kill the program or reduce its funding. Unfortunately, much of the rhetoric accompanying these attacks is factually incorrect. Inaccurate and misleading statements have been used in testimony at legislative hearings, in public debate, and on social media in an attempt to discredit the program. This briefing paper corrects many of those misstatements and explains what the program is, who is eligible, and what little financial impact it has. 

Read or download the full report (pdf) here: The Education Tax Credit Program: Fact vs. Fiction.

 

Bartlett Brief:

Minimum wage increases hurt the lowest-skilled workers

Legislators on Thursday are preparing to vote on bills to mandate that employers raise wages to levels some politicians find morally appealing. These mandates will hurt the lowest-skilled workers. They also have the potential to raise costs for consumers and taxpayers.

  • House Bill 186 would raise the minimum wage by $2 to $9.50 an hour immediately, then to $10.75 in 2021 and $12 in 2022. Teens younger than 17 could be paid $1 per hour less than the statutory minimum. 
  • Senate Bill 271 would mandate that contractors on state public works projects pay all their workers the prevailing federal wage for the particular construction project. The federal prevailing wage for construction projects in New Hampshire is $10.60 an hour. 

Though intended to benefit low-wage workers, these bills together are likely to harm Granite Staters who are trying to grab that first rung of the economic ladder.

Minimum wage

  • A 2015 Federal Reserve Bank of San Francisco review of minimum wage studies confirmed that “the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.” 
  • The authors of Seattle’s famous minimum wage study reported last fall that the city’s wage hike raised pay for the most experienced workers but produced a significant reduction in employment among the lowest-skilled workers. “The entirety of these gains accrued to workers with above-median experience at baseline; less-experienced workers saw no significant change to weekly pay.”
  • A recent follow-up to the Seattle study found that the higher minimum wage raised the price of day care. “Providers’ most commonly responded to higher labor costs by raising tuition and reducing staff hours or headcount—strategies that may negatively impact low-income families and staff.” 
  • This podcast interview with University of Washington professor Jacob Vigdor provides a great analysis of the negative effects the wage increase had on Seattle’s lowest-skilled restaurant workers and those trying to enter the job market for the first time.  
  • A 2013 study for the National Bureau of Economic Research showed how minimum wage increases harm lower-skilled workers by eliminating many job opportunities for them. It found that “the minimum wage reduces net job growth, primarily through its effect on job creation by expanding establishments.” Businesses hire fewer people in the long run after governments mandate that they pay low-skilled employees an artificially high wage. 

Prevailing wage

Prevailing wage laws mandate that construction companies pay higher hourly wages to low-skilled employees than they otherwise would. Research on the effects of these laws on total construction costs are mixed. But much of the research is consistent with minimum-wage research showing that the mandates lead to a preference for higher-skilled employees. 

  • Some studies find increased costs for public works projects, as did a recent University of Kentucky study on West Virginia’s repeal of its prevailing wage law and a 2005 study of low-income housing construction costs in California.
  • Other studies, however, show that contractors adjust to mandated labor cost increases by hiring more high-skill, high-productivity employees and using capital to reduce the need for lower-skilled workers. Similar findings have been produced in minimum wage studies of specific industries. Many businesses respond to mandatory labor cost increases by hiring more productive workers and finding ways to reduce their need for the lowest-skilled labor. 
  • As automation takes off in the construction industry, government-mandated higher wages could increase the incentives for contractors to replace lower-skilled workers with machines. A study last year suggested that automation could replace 49 percent of America’s blue collar construction workforce. Self-driving graders and brick-laying robots are among the technologies already making their way onto construction sites.  

Summary 

By artificially inflating the price of low-skilled human labor, prevailing wage and minimum wage laws have the unintended effect of reducing employment opportunities for the lowest-skilled workers while artificially raising pay for people who have had the good fortune to have greater workforce experience. 

Though these wage mandates are intended to be a forced wealth transfer from businesses to low-income employees, they wind up creating a forced wealth transfer from the lowest-skilled workers to higher-skilled competitors. 

A pdf version of this brief can be downloaded here: JBC – Minimum Wage Warning.