Social science helps us understand economy

Intuitively, it makes sense to me that if our country wants to make housing more affordable we should impose rent limits, that if we want to help the poor we should increase the minimum wage or if we want to help the disabled we should regulate how they are treated at work. As a social scientist, though, I know that we need to scientifically test our intuitions. In each case above, my intuition is wrong. The reason is that in the social sciences, there are often unintended consequences, or “second-order” consequences. A law such as rent control does limit the amount of rent someone has to pay. That’s the obvious, intended consequence. Take a moment to think about the unintended or second-order consequences. Can you see that no one has an incentive to build new housing that will be subject to rent control? If you are the landlord and your expenses go up year after year but your income does not, can you afford to properly maintain the property? The ultimate consequence of rent control laws is that they have reduced the stock of low-cost housing and have largely disappeared in the United States.

Studies of minimum wage laws have routinely found that employers will simply eliminate jobs that don’t pay for themselves. In other words, if you are an employer and an employee’s labor adds $12 an hour to your revenue, but you must pay the employee $15 and hour, you will not be able to sustain that situation and will ultimately terminate the job and find some other way of getting the work done, often by employing technology, such as having self-checkout registers. A study last month by the Employment Policies Institute found that recent minimum wage increases in Washington, D.C., resulted in nearly half of the employers terminating jobs or reducing the number of hours worked by an employee.

Last month, the U.S. Labor Department put new overtime regulations into effect by raising the threshold by which people are entitled to overtime pay to $47,476, up from $23,660. What could sound better? Millions of people who were previously not eligible for overtime now qualify for time-and-a-half pay for more than 40 hours in a week. Now that you are an expert on unintended consequences, what do you think will happen?

Social science studies are far more difficult to conduct than natural sciences because we don’t have a laboratory where we can control one variable at a time, leaving all other variables constant. The world doesn’t work that way. Valid, objective social science requires making an apples-to-apples comparison, or at least as close to that as possible. Such comparisons are not easy to find.

In this case, we do have a very similar situation we can compare with to determine what is likely to happen. Several years ago, in response to a class-action lawsuit, IBM Corporation reclassified jobs making up to $77,000 so that the positions were eligible for overtime pay. What were the results? First, over time, base pay was reduced. Think about it. If a job was paying $44,000 a year and the employee typically worked 44 hours a week, that overtime pay was factored into the base pay. Over time, this job became a $40,000 position, not a $44,000 position (In fact, IBM cut base pay by 15 percent). Also, if you are the manager, what are the chances that it helps your customers and organization if someone making $22 an hour must be paid $33 an hour for overtime?

Overtime requests are almost never approved under these circumstances. Think even more deeply about consequences. Because salaried employees are paid to do a job, not by the hour, they have more flexibility to leave work for a few hours to see a child in a school play, making up for the work later in the evening. These employees will generally lose that flexibility. The penalties for violating labor laws are so severe that employers do everything they can to avoid them, taking almost no risks. This will result in far fewer telecommuting requests being approved. So, employees who formally had great flexibility about when and where they worked will now be required to work in the office for a set schedule each week.

Our intuitions are wonderful tools that guide us in life, but we need to make sure we are constantly updating our intuition with what evidence-based science shows to be true.

P.S.: The American with Disabilities Act of 1992, led to a sharp drop in the employment of disabled workers because it dramatically increased the cost of employing a disabled person.

Eric Dent is a business professor at Fayetteville State University who lives in Lumberton.

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