Would Killing the Minimum Wage Help?

By Antoine Gara

Republican Presidential candidate Michele Bachmann has soft-pedaled her opposition to the minimum wage law considerably since 2005, when she was quoted as saying, at a Minnesota State Senate hearing, “Literally, if we took away the minimum wage—if conceivably it was gone—we could potentially virtually wipe out unemployment completely because we would be able to offer jobs at whatever level.” Appearing on CBS’s Face the Nation on June 26, Bachmann would say only that eliminating the minimum wage is “something that obviously Congress would have to look at” as a solution to high unemployment.

Campaign trail positioning aside, would repealing the minimum wage really make a dent in the U.S. jobless rate, which was 9.1 percent in May? While economists don’t all agree, the bulk of research points to only small potential job gains—if any—from a suspension of the minimum wage. In a 2000 survey of 308 academic economists, just under half agreed fully that the minimum wage increases unemployment among “young and unskilled workers.” The rest agreed with that statement with provisos or not at all.

In a 2009 blog post, Bachmann, a Minnesota congresswoman, cited research by David Neumark, a University of California at Irvine economist, on the job-killing effects of the minimum wage for teens and young adults. In a June 27 interview with Bloomberg Businessweek, Neumark stood by those findings. He added, however, that “the link between the federal minimum wage and employment for the lion’s share of workers is irrelevant?… It’s not even in the top 10 list of how to recover from the Great Recession.” (The Bachmann campaign did not respond to an e-mail request for comment.)

For people earning well above the minimum wage, the law matters little. According to the Bureau of Labor Statistics, of 72.9 million hourly wage earners in 2010, only 6 percent worked at or below the minimum wage. (Some hourly workers, such as casual babysitters, workers on small farms, and fishermen, are not covered by the minimum wage.)

Even for workers at the bottom, the minimum wage’s effect is not obvious. In a study of fast-food workers in New Jersey and neighboring Pennsylvania, Alan Krueger of Princeton University and David Card of the University of California at Berkeley found no statistically significant effects on employment when New Jersey raised its state minimum wage in 1992 and Pennsylvania did not. Says Krueger, who served in the Obama Administration as Assistant Treasury Secretary for economic policy in 2009-10, “I would be skeptical that eliminating the minimum wage would have a noticeable effect on employment.”

Bachmann does have some economists on her side. “Michele Bachmann’s position is not radical,” says Chris Edwards, director of tax policy at the libertarian Cato Institute. Edwards says high unemployment of teenagers in both booms and recessions is evidence that the minimum wage is above the value of their labor. Yet the main cause of unemployment today is a lack of demand, not overpriced labor, says Sylvia Allegretto, a UC Berkeley economist. Even if the minimum wage does keep some low-skilled workers out of the market, eliminating the wage floor doesn’t look like an important way to spur job growth.

The bottom line: Dropping the minimum wage could reduce unemployment among teenagers and other low-skilled laborers—a small part of the workforce.

Gara is an editorial intern for Bloomberg Businessweek.

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ECB’s Noyer Says Greek Restructuring Would Be ‘Horror’

May 24, 2011, 10:12 AM EDT By Mark Deen

(Updates with swaps and bonds in fifth paragraph, comments by economist Behravesh in 14th paragraph.)

May 24 (Bloomberg) -- European Central Bank Governing Council member Christian Noyer ruled out a restructuring of Greece’s debt, calling it a “horror story” that would leave the nation shut out of financing for years.

“There’s no solution possible” for Greece other than its austerity program, Noyer, Bank of France governor, told reporters in Paris today. “Restructuring is not a solution, it’s a horror story.” If the country fails to meet the terms of its bailout, Greek government debt will be “ineligible as collateral” at the ECB, he said.

ECB leaders and European Union policy makers are clashing over how to prevent the currency region’s first default, after 256 billion euros ($360 billion) in bailouts to Greece, Ireland and Portugal failed to stop contagion from the debt crisis. A year after its 110 billion-euro rescue, Greece remains shut out of financial markets and the cost of insuring its debt against default is at a record high.

“The lengthening of maturities raises very difficult questions,” Noyer said. “There’s a strong chance it will be the equivalent of a default.”

Credit-default swaps on Greek debt increased 96 basis points to 1,496 today, after Prime Minister George Papandreou’s government backed a new package of spending cuts and state-asset sales yesterday. The yield on the country’s 10-year bond was down 18 basis points at 16.85 percent.

ECB Position

Bank of France Governor Noyer’s remarks put him in line with ECB Executive Council members Juergen Stark and Lorenzo Bini Smaghi as well as Bundesbank President Jens Weidmann. All of them have said the Frankfurt-based ECB may stop accepting Greek sovereign debt as collateral if euro-area governments proceed with a plan to extend Greece’s debt repayment schedule.

The ECB last year suspended the minimum credit-rating threshold for Greek bonds after the country’s banks were shut out of credit markets for funding. Banks can borrow as much money as they need for up to three months against collateral.

The ECB “accepted temporarily to reduce our minimum level of collateral to BBB,” Noyer said. “If the program is no longer respected, if a country is found off track, immediately our assumption of BBB disappears. If it goes out of the EU program, the collateral is ineligible.”

Rescheduling

European Union finance ministers on May 16 floated the idea of talks with bondholders over extending Greece’s debt-repayment schedule, saying the bailout has failed to restore the country’s financial health. On May 20, Fitch Ratings cut Greece’s credit rating to B+ from BB+, saying that extending its debt maturities would “trigger a credit event and default rating.”

To avert that possibility, Greek Prime Minister George Papandreou’s Cabinet agreed to sell stakes in Hellenic Telecommunications Organization SA by the end of next month, as well as Public Power Corp SA, Hellenic Postbank SA, and the country’s ports. The state’s stakes in those three companies currently have a market value of 2.1 billion euros.

The government, which also endorsed 6 billion euros in budget cuts, said it would create a fund comprising assets to accelerate the sales, intended to raise 50 billion euros by 2015. The bulk of that will come from selling 35 billion euros of real estate.

Linking Aid

EU policy makers have linked the possibility of further aid to Greece to faster asset sales and additional budget cuts. The Greek Cabinet’s decision may allow EU and International Monetary Fund inspectors, due in Athens this week, to sign off on the bailout’s next installment of 12 billion euros. Greece may have to stop paying its creditors if it does not receive the payment, Finance Minister George Papaconstantinou has said.

Greece now needs to implement the asset sales, reduce monopolies and improve tax collection, Bini Smaghi said in an interview with Austrian ORF radio broadcast today. “People may not like to pay taxes, but that’s the way it is in the European Union,” he said.

Credit-default swaps signal that Greece has about an 80 percent chance of default, Nariman Behravesh, chief economist at IHS Inc., said in an interview today on Bloomberg Television’s “InsideTrack” with Deirdre Bolton. “The markets are getting impatient, they don’t see a real sort of light at the end of the tunnel,” and will impose a negotiated solution to the Greek crisis “in the next three, four, five months.”

Moody’s Concern

Moody’s Investors Service said today that debt-repayment extensions -- what European officials term “soft restructuring” -- would constitute a default and shut Greece out of capital markets for a “sustained period.”

In the case of a default, “the Greek banking sector would require recapitalizing to offset banks’ losses on Greek government bonds, and continued liquidity support from the European Central Bank, at least for as long as the sovereign’s own access to the capital markets remained impaired,” according to the Moody’s note.

Any restructuring of Greece’s debt would cost European taxpayers more as Greek banks would become insolvent, requiring government support that would eventually have to come from other countries, Noyer said. Among other losers in a restructuring would be Greek pension funds, the ECB and European governments who have already lent to Greece, he said.

“No one would be able to finance the Greek state for coming years,” Noyer said. “This is the horror scenario.”

The ECB is also concerned that allowing Greece to renege on some of its obligations would create similar expectations for other indebted euro-area nations such as Portugal and Ireland, which followed Greece in accepting bailouts. The ECB has bought 76 billion euros of bonds of fiscally stressed countries in the past year and may suffer along with private investors in any restructuring.

Contagion Risk

A Greek restructuring wouldn’t improve the sustainability of the country’s debt and “the risks for contagion to other countries would significantly rise,” Weidmann said on May 20. That day, Standard & Poor’s warned it may cut Italy’s credit rating, while Belgium had the outlook on its investment-grade credit rating lowered to negative by Fitch yesterday.

ECB policy makers have called on governments to toughen austerity measures and step up efforts to restore investor confidence in the 17-member currency union. Greece’s additional budget cuts are worth about 2.8 percent of gross domestic product and aimed at reaching a 7.5 percent deficit target for 2011, Papaconstantinou said yesterday.

The ECB has provided banks with unlimited liquidity over three months. Greek banks’ reliance on ECB liquidity amounted to 87.9 billion euros in March, the Greek central bank said May 11.

Any restructuring would undermine the collateral Greek banks use to gain ECB loans, Stark said on May 20. Bini Smaghi that day said restructuring would “jeopardize all of Europe.”

For Greece ‘to reduce the stock of debt, the only solution is ambitious privatization,” Noyer said. “It is necessary to have the equivalent of an internal devaluation. Cut production costs. There is no other solution.”

--Editors: Jeffrey Donovan, Andrew Davis

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net.

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Bill Would Limit Workers' 401(k) Plan Loans

May 18, 2011, 11:01 AM EDT By Bloomberg

(Updates with data on number of loans permitted in plans starting in the fourth paragraph.)

By Margaret Collins

May 18 (Bloomberg) -- Workers will be limited in tapping their 401(k) retirement plans for loans under legislation two senators plan to introduce today that’s designed to counter the erosion of retirement assets.

“During these difficult economic times, we are increasingly seeing 401(k) funds being treated as rainy day funds,” Senator Herb Kohl, a Wisconsin Democrat, said in a statement obtained by Bloomberg News. “A 401(k) savings account should not be used as a piggy bank for revolving loans.”

Kohl, 76, who’s chairman of the Senate Special Committee on Aging, plans to introduce the “SEAL 401(k) Savings Act” with Senator Mike Enzi, 67, a Wyoming Republican. The bill would reduce the number of loans workers may take from a 401(k) and give participants more time to repay after losing a job. It will allow savers to contribute to their plan after taking a hardship withdrawal and ban debit cards linked to the accounts, according to Joe Bonfiglio, a spokesman for Kohl’s aging committee.

The Senate bill would limit the number of outstanding loans for each participant to three, Bonfiglio said. Employers would have the option to reduce the number for their plans. There is no rule right now limiting the number of loans workers may take and it varies by company, Bonfiglio said.

Leaving a Job

Almost 28 percent of participants in 401(k)-type accounts had an outstanding loan at the end of 2010, which is a record, according to a study released today by benefits consultant Aon Hewitt, a unit of Chicago-based Aon Corp. The average outstanding loan balance was $7,860 and 58 percent of plans permit participants to have two or more loans at a time, said Aon Hewitt, which used a database of about 2 million employees in 110 plans.

“The big risk with loans is that participants leave their job,” said Alison Borland, head of retirement strategy for Aon Hewitt. Most 401(k) plans require employees to repay loans in full when leaving a job, usually within 60 days, said Borland, who’s based in Nashville, Tennessee. Almost 70 percent default, Borland said, so the unpaid funds get counted as taxable income and may add to the burden of a jobless worker.

Depending on the rules of an employer’s 401(k) plan, workers generally may borrow from their retirement account for any reason and pay the loan back with interest. About 89 percent of participants were in plans offering loans in 2009, according to the Washington-based Employee Benefit Research Institute, which has a database of 21 million 401(k) savers.

Payroll Deductions

Workers generally may borrow as much as 50 percent of their vested account balance up to a maximum of $50,000, according to the Internal Revenue Service. The loan must be repaid within five years, unless the money was used to buy a primary home.

Employees can repay the loan through payroll deductions and can continue to make contributions to their retirement accounts, Borland said. More than 80 percent of those with a loan do continue to save, she said.

“For these workers who take a loan, repay it and continue to save, they haven’t done significant damage to their retirement prospects,” Borland said. “They are at significant risk if they change jobs or lose their job.”

The average interest rate on loans from 401(k) plans is the prime rate plus 1 percent, currently 4.25 percent, David Wray, president of the Profit Sharing/401k Council of America, said in an e-mail. The median loan origination fee in 401(k) plans is $75 and the median annual loan maintenance fee is $25, according to the council, a Chicago-based non-profit association of employers that sponsor retirement plans.

Tax Penalty

For workers who lose their jobs before repaying a loan, the bill would let them pay down their balances into an individual retirement account before filing their taxes for that year. That way the saver doesn’t incur a withdrawal tax penalty on those funds, Bonfiglio said. The IRS and Treasury Department would need to issue guidance on how the process will work, he said. About $663 million of 401(k) loans in 2008 were deemed taxable distributions, according to a December report by the Department of Labor.

The flexibility to take loans or withdrawals is an attractive feature of the accounts for some participants, said Sarah Holden, senior director of retirement and investor research for the Investment Company Institute, a mutual-fund trade group based in Washington.

“Knowing that you can borrow the money if you need to frees people to participate in the plan and contribute more,” she said.

Hardship Withdrawals

A 401(k) plan’s terms also may let individuals take a hardship withdrawal that doesn’t have to be repaid if they demonstrate a financial need such as medical or funeral expenses. That money generally is included in an employee’s income for tax purposes and may trigger an additional 10 percent tax penalty, according to the IRS. Employees also are generally prohibited from making contributions to their account for at least six months after taking the withdrawal, the IRS said.

The legislation would allow participants to continue to contribute during the six months following a hardship withdrawal because the loss of employee and company matching contributions during that period can further erode retirement savings, according to Kohl’s statement. Kohl said on May 13 that he won’t seek re-election next year.

The bill also would ban products that promote so-called leakage of savings including 401(k) debit cards, which may carry high fees, Bonfiglio said. While use of 401(k)debit cards is not widespread, they have been offered by companies in the past, he said. Using the card essentially triggers a loan.

--Editors: Rick Levinson, Rick Green.

To contact the reporter on this story: Margaret Collins in New York at mcollins45@bloomberg.net.

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.

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