Fair for whom?

Photographer: Andrew Burton/Getty Images

Business Bears the Weight of New York's Benefits

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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New York state has always been a very expensive place to do business. Soon, it will be more expensive still, as the state begins implementing two new programs just signed into law by Governor Andrew Cuomo: a $15 minimum wage and 12 weeks of paid family leave.

I hardly need to explain why requiring employers to pay at least $15 an hour is bound to be expensive for businesses. But the family-leave policy may require some explaining, because the governor insists it will not cost businesses anything at all.

So let’s start by explaining what the benefit is. When fully implemented, in 2021, it will cover 67 percent of a worker's weekly salary, capped at 67 percent of the state's average weekly wage (which is currently about $1,200 a week, making for a maximum weekly benefit of about $800). This is supposed to be fully paid for by a payroll deduction, which is allegedly going to be a little over a dollar a week.

In other words, it is supposed to be structured more as a mandatory insurance program than as a free benefit. I don’t see how the promised insurance can possibly be provided on a little over a dollar a week: An employee making the New York state average weekly wage, having an average two children, and perhaps caring for a sick parent or spouse once would collect a lifetime benefit of almost $30,000, while paying in about $2,300 over a 40-year career. But the premiums can be adjusted to make the math work out without forcing employers to cough up. (Though I suspect enthusiasm for the program among its beneficiaries would dim if it started docking substantial amounts from monthly checks.)

But this doesn't mean there is no cost to employers. If the new law encourages people to take more leave, then employers are going to have to find someone to do their work. That means colleagues working harder to pick up the slack, or temporary employees who will need to be trained. There will be paperwork. All of this adds to the cost of doing business. The lower the profit margins, the more these costs will hurt.

By itself, adding mandatory family leave to the schedule of benefits is unlikely to bring many employers to their knees. But, of course, it is not as if this is the only cost that the government has seen fit to impose. It is also mandating that employers must soon start paying their workers a higher minimum wage.

That eventual $15 an hour is going to be costly for a lot of businesses. As I wrote the other day, businesses such as retail outlets in New York City may well be able to simply hike their prices to make up for the increase. But even New York City does not have a huge number of people who are simply bottomless pits of money able to absorb any increase in the cost of the goods and services they consume without adjusting their spending. Most of the people in New York City range from “moderately affluent” to “downright poor,” and they support most of the retail businesses in the area.

If prices at the restaurants near my house went up by 10 percent, I wouldn’t stop eating out, but I would cut back on the number of times I went out. Or I’d have to cut something else out, and “something else” is unlikely to be my physical therapy or my daily commute. It’s likely to be recreational experiences, which are disproportionately staffed by less-skilled labor.

And New York state businesses are already groaning under a huge regulatory burden that makes the state a very expensive place to do business. I’m not talking about just labor-market regulations, but about everything from the tax burden to the expensive workman’s compensation system to the high rents driven by land-use regulations. All of these things conspire to make it very difficult to build a business and employ people.

Of course, New York has offsetting advantages -- notably, the fact that it’s the center of the U.S. financial industry and is home to assorted glamour industries that draw tourists along with high-wage workers. The financial industry probably doesn’t care what the minimum wage is, because no one at those companies makes it. But as noted above, not everyone in New York state, or even New York City, works in finance. Many of them work for companies that sell their goods and services nationwide -- and those companies cannot simply raise their prices to offset their costs, for fear of losing out to competitors.

Moreover, the fact that it’s so expensive to start a new business makes it hard for the state to diversify away from its dependence on an industry that no one else in the country likes very much. If finance follows industries such as publishing into decline, downstate New York could rapidly start to look like northern and western New York: trapped in permanently low growth by an expensive regulatory regime that they can neither afford nor (given the realities of interest-group politics) repeal.

None of New York state’s regulatory decisions is crippling on its own. New York can afford any of them. The problem is that it may not be able to afford all of them -- and none of these things is ever considered as part of an overall regulatory burden, which must be kept in balance with the need for economic growth. Each component is considered only in isolation, and approved in isolation. And so the burden grows.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Brooke Sample at bsample1@bloomberg.net