Detour

Like many people who have an education that has focused on economics I am suspicious of the societal benefit that is created by minimum wage laws. I tend to think that minimum wage laws create market failures (on some level) and result in a black market for labor (i.e. Illegal/Undocumented Immigrants standing on street corners waiting for work at any negotiated wage level between the two parties) . My question has nothing to do with economics…

My question is this. If I ran an evil corporate entity, let’s call my company Walbucks, and I need to hire a person to clear brush near my back loading dock for $4 an hour, should I hire an American or an undocumented/illegal worker? If I hire an American citizen to clear brush near my back loading dock for $4 an hour all hell would come down on me. The minute I submit a W2 to the IRS and the state tax board…fines would roll on my head soo fast I would have wished I paid that employee $50 an hour, just to save money from the fines and negative press I would surely receive.

Now let’s assume that clearing the brush is only worth $4 an hour, not one penny more. What am I incentives to do? I could hire an American citizen under the table and hope they don’t report me…chances are the first time I do anything to offend that worker they will threaten to report me. Not a very appealing option. I could just ignore the problem…but I lose utility if I ignore the problem…it is worth $4 an hour to take care of the problem. Furthermore, there is a dis-utility multiplier that exponentially decreases my happiness when I am forbidden to eliminate this problem.

The solution…hire an undocumented/illegal worker. If there is no better work available that day, then $4 an hour is better then nothing. The worker is happy and I am happy. Societal utility is maximized, at least in a society with only me and the undocumented/illegal worker. Now let’s assume I get caught paying this worker below minimum wage. What are my penalties in today’s political climate? Probably none. The worker will not want to be part of a government investigation on wages and will drop off the face of the planet; he doesn’t want to risk deportation or anything else that will disturb his income generating days. With no complainant the case will go away with a slap on the wrist.

So in effect minimum wage laws create an environment that incentivizes me to hire illegal/undocumented workers. Apparently it is worst to hire an American at a low wage then it is to hire an illegal/undocumented worker, at least according to the current laws and the way they are enforced. The US government filed only 3 notices that it intended to fine companies in 2004, down from 417 notices in 1999, according to a report by the Government Accountability Office. In fiscal year 2005, more than 219,000 employees received a total of $134.2 million in minimum wage and overtime back wages as a result of Fair Labor Standards Act (FLSA) violations.

What do you think the chances are that we will enforce the new illegal immigrant laws that the US Congress is sure to pass. I have no faith that anything will change.

Update: Oh yeah, I forgot to mention that the American worker hired at $4 an hour would cost me close to $8 an hour after I pay FICA, Disability, employer paid taxes, workers comp, etc. The illegal/undocumented worker would only cost me $4 an hour. Even more incentive on the margin.

For the last four months my nights and weekends have been spent getting a software company started. A couple weeks ago we reached our first milestone where our email archive product was working from end to end. Up until now, my time has been spent designing, researching, developing and testing our new product. Now that our product is nearing completion I need to add marketing (as well as documentation, legal, and beta support) to my list of responsibilities.

So… I have a semi-original idea. Why not blog about the business, and the trials and tribulations of getting it functioning. It is not a totally original idea, but I felt if I dealt with real issues (instead of simply using it as a marketing device) I might be able to contribute some value to the blogging community. Additionally if I am able to develop a following we may be able to leverage it to the benefit of the business someday. In essence, I hope to do something along the lines of Joel Spolsky’s Project Aardvark… but without the cameramen or interns.

From time to time I’ll continue to post economic/political posts here, but my business related posts will be on weblog.cernos.com. I will not be sharing sensitive numbers, long term strategy, or technical information that may compromise our competitive advantage but I promise to post on real challenges we are facing and if I can, specific steps that we are taking to overcome those issues. Also, from time to time I’ll post about other web startups that I find interesting.

So if any of this interests you please check out my new blog.

This year I have a number of goals.

1. Buy a house. Its not an easy thing to do in San Francisco, especially if you are looking for a deal.
2. Start my business. My free time (when not looking for a house) is spent getting my business going. I’ll talk more about this later.
3. Have a Wedding. My wife and I want to have the real wedding we never had.

Of the three, the wedding is the most stressful. I find myself confronted with totally random questions about wedding details and all I want to ask is “how much does that cost” while my wife wants me to enthusiatically enjoy the planning process. I care about one thing, everyone should have a good time and enjoy everyone’s company. I really don’t care about the details and in my opinion we can all meet at In-N-Out burger for lunch and I would be happy as a clam.

Man… I’m glad my wife doesn’t read this blog.

Anyway, those details that I don’t care much about seem to be the very things that cost the most in weddings. Flowers, Venue, Photographer, DJ (have you ever enjoyed a DJ at a wedding?). This evening when I came home I went to the dilbert blog I laughed for several minutes after reading the following:

Still, I feel some inner need to keep the budget under control without appearing cheap. My current strategy is to frame all wedding decisions in terms of how many African villagers could be saved from starvation with the equivalent amount of money. For example:

Fiancee: “Do you think we should have a big cake or a little one?”

Scott: “Well, the difference in price seems to be…about twelve Rwandans. It’s up to you, honey.”

I suspect I could enhance this strategy by altering what I was saving from Rwandans, to starving Puppies. I’ll try it tonight and keep you posted on my success.