Bad economics leads to bad H-2B guest worker legislation

Louisiana politicians have been getting bad advice from their state’s economists about the Department of Labor’s guest worker regulations. Rep. Rodney Alexander (R-La.) posted a story on his website about the supposedly enormous negative impact of a new Department of Labor regulation that would raise the wages of U.S. and foreign workers employed by companies that import H-2B guest workers. Alexander and Sen. Mary Landrieu (D-La.) both voted to block the new wage rule from taking effect.

The outsized impact estimates come from a March 23, 2012 report by three Louisiana State University economists, entitled Economic Impact on Louisiana Agricultural Industries of the Proposed Change to the Wage Methodology for the Temporary Non-Agricultural Employment H-2B Program. A careful look at the report shows that the estimates are certainly wrong.

The report’s authors, Kurt M. Guidry, J. Matthew Fannin, and Michael E. Salassi, assume that if wages increase, net income (sales revenue minus wages) will simply decrease proportionately. Rather than increase prices and pass them along to consumers, or mechanize certain operations to reduce the wage bill, or improve productivity through better hiring, training, or management, seafood companies and landscaping contractors will lose $1 of income for each $1 of higher wages. That is an unreasonable assumption, which the report applies to about a dozen different industries, from agricultural aviation and forestry to hotels and food service. There is no evidence that raising wages $1.50 an hour in meat processing, for example, would not be answered with a small price increase in ground beef or pork chops, given that the wages of meat processing employees are only a fraction of the cost of the product.

The authors make other faulty assumptions, but perhaps the most basic is to rely on DOL’s H-2B labor certification data to estimate the total number of H-2B workers employed in Louisiana’s agricultural and agricultural-related industries without mentioning why this might be problematic. They estimate that every labor certification application (LCA) approved by DOL for a Louisiana agricultural employer was also approved by United States Immigration and Naturalization Services (USCIS) and eventually granted an H-2B visa by the State Department. This is a careless assumption that has likely led them to overestimate the number of H-2B workers they assume for their calculations. In 2010, DOL certified 86,596 LCAs nationwide, but only 47,403 H-2B visas were granted, or 55 percent. The authors however, assume that every position certified in Louisiana’s agricultural industry—a total of 3,145—led to the employment of an H-2B worker. If we estimate that what happened nationally occurred in Louisiana (i.e., 55 percent of 3,145 visas were granted to agricultural employers), that would reduce their estimates of H-2B workers employed to 1,730, and the resulting economic impacts by almost half. Unfortunately, a lack of public data on the employment of foreign workers in the United States makes it impossible to know exactly how many H-2B workers were employed in Louisiana in 2010, but national level data suggest the authors estimates are far too high. Guidry et al. fail to disclose or even mention this fact.

The report’s biggest flaw, however, was its faulty method of determining the “indirect” economy-wide impact of the mandated wage increases. Having assumed that output and prices would remain unchanged in its analysis, a reasonable conclusion would be that there will be no macroeconomic effect, or that the effect will be whatever can be measured in a $13 million shift in income from management to labor.

Instead, however, the authors assume a $13 million loss to regional income, and then apply economic multipliers to this loss. But, there has been no loss—there has simply been a transfer from the net income of employers to wages of employees. Ignoring this leads them to the very odd conclusion that giving workers in one industry more income will lead to reductions in output across the economy, in wholly unrelated industries. Normally, wage multipliers are used to show the positive impacts of rising wages as employees spend their increased wages on products and services provided by other businesses. The conclusion that paying landscape laborers a couple of dollars more per hour will reduce economic activity throughout the state of Louisiana is based on fantasy, not economic evidence.

One could argue that the authors have simply calculated the gross loss to economic activity stemming from reductions in firms’ output that result from the wage increases, and that to calculate the full net impact of this policy shift requires also calculating the boost to economic activity due to higher wages. But they have even calculated this gross cost incorrectly—they use “labor income multipliers” to magnify the conjectured reduction in economic activity caused by wage increases. But these estimates have the wrong sign in front of them; labor income multipliers should be used to calculate the gain to activity stemming from higher wages. The proper multiplier for net firm income should be used to gauge the reduction in activity stemming from lower firm incomes.

In conclusion, the number of H-2B visa holders was probably overestimated by almost 100 percent, causing the increased wage bill for Louisiana to be overestimated by nearly 100 percent, as well. The effect of that increase was assumed to lead to reduced corporate profits, which were similarly overestimated. And without explanation, the authors assumed there would be no direct change in employment or output, while the indirect effects of wage increases were mistakenly assumed to be negative and large.

Because of these flaws, the report is of no use to policy makers and its findings should be disregarded.