‘Grand Bargain’ Is Bay State’s Grand Disaster

[This post was co-authored by D.J. Deeb.]

With much unintended irony, Massachusetts Governor Charlie Baker signed legislation in June that the state legislature and the press heralded as a “Grand Bargain.” This new law increases the state minimum wage, creates a paid family and medical leave program, implements an annual two-day sales tax holiday, and eliminates the requirement that retailers pay time-and-a half to workers on Sundays and holidays. Unfortunately, it will only drive businesses away from Massachusetts and hurt the very workers that it aims to benefit.

The so-called grand bargain was made in order to get rid of a number of ballot initiatives in November’s election. Labor unions supported a ballot initiative to raise the minimum wage from $11 to $15 an hour in a series of increases over four years. The grand bargain instead phases this same increase in over five years.

Unions supported a ballot initiative for paid family and medical leave. The grand bargain gives it to them. It creates a program that permits almost all employees to take up to 12 weeks of paid family leave and up to 20 weeks of paid medical leave while returning to their same or similar position with the same employee pay and benefits.  It’s funded with a 0.63 percent payroll tax paid by employers and workers that will average around $4.50 weekly per employee.

Both of these programs will destroy Massachusetts jobs. Seattle passed a minimum wage law in 2014, that like Massachusetts’ new law, raised the minimum wage in a series of steps up to an eventual $15 per hour.  Last year economists at the University of Washington published a study on the effect of the first two jumps on the way up to $15.

They found that the second jump, which increased the minimum wage to $13 in 2016, raised legal wages by 3 percent but resulted in hourly employees working 9 percent fewer hours. The result of the increased wage was a 6 percent decrease in earnings, or about $125 less per month per employee. They also found that the wage increase was responsible for about 5,000 fewer jobs in Seattle.

Massachusetts is larger than Seattle, but it’s still a small state sharing a border with New Hampshire, which imposes no minimum wage above the $7.25 per hour federal minimum.  As Massachusetts phases in its new minimum wage, we can expect job loss and hour reductions just like Seattle experienced, and we can anticipate that it will help New Hampshire continue to thrive.

Similarly, the family and medical leave mandate raises the cost of doing business in Massachusetts relative to other states. Even the bill’s sponsor, Sen. Jason Lewis (D-Winchester), estimates that the program will cost between $750 million and $800 million annually.  To the extent that businesses in Massachusetts must pay the tab, this policy will drive some of them out of state.

Part of the burden of funding the mandated leave will fall on workers. Employers care about the total cost of compensation, not its mix. So, if most workers in a firm wanted paid leave, they are already free to negotiate for it, in exchange for lower wages, and employers would readily agree. The fact that employees don’t do this indicates that most would prefer higher pay without leave. This bill is a handout to a minority of employees at the expense of the well-being of the majority who will bear some of the burden of funding a program they won’t use.

What did Gov. Baker get in return for this “compromise”? Businesses will be able to phase out time-and-a-half pay for employees on Sundays and holidays and a two-day sales tax holiday. Big deal. Many businesses aren’t even open on Sundays and holidays, and only retailers benefit from the tax holiday. These changes will do little to undermine the negative economic consequences of the minimum wage increase and the mandated paid leave.

Chris Carlozzi, State Director of the National Federation of Independent Businesses in Massachusetts, wrote, “This so-called bargain was nothing more than caving to ‘big labor’ demands.” He’s right.

Big labor likes it because it will increase the cost of non-union labor that competes with them. But most workers in the Commonwealth will be worse off as a result. Voters should demand ballot initiatives to undo this compromise the first chance they get.

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D.J. Deeb is an Adjunct Professor of History/Government at Bunker Hill Community College and Adjunct Political Science Instructor at the University of Massachusetts Lowell.

Benjamin Powell is a Senior Fellow at the Independent Institute, Director of the Free Market Institute, and Professor of Economics at Texas Tech University. Among other books, he is the editor of The Economics of Immigration: Market-Based Approaches, Social Science, and Public Policy.