There’s an old economic maxim known as “moral hazard,” by which “one party engages in risky behavior or fails to act in good faith because it know the other party bears the economic consequences of their behavior,” as one Investopedia writer explains. Economists often apply the term to insurance situations, such as when an insured might drive at unusually high speeds knowing that his car insurer will pay the bills if he crashes (and survives).
But it’s also applicable to government. “People change their behavior … when the government pays with the taxpayer money,” wrote the great free-market economist Thomas Sowell. Examples abound — from government flood insurance policies that encourage people to build in flood plains, to welfare policies that reward the morally hazardous behavior of slothfulness, to federal bailouts that shield financial firms from the consequences of their bad investments.
It also applies to a policy that politicians, ironically enough, call “hazard” pay. This is the latest morally dubious idea pitched by California officials at the urging of grocery unions. Local governments are imposing massive hourly pay boosts to grocery workers, under the argument that they are “heroes” who face undue “hazards” by working during the pandemic. Long Beach recently mandated a $4-an-hour pay hike, and San Jose just approved a $3-an-hour boost.
I appreciate that these stores are open and that workers are there to serve customers and want them to be paid well. But the idea that they are heroes who face undue hazards is a bit much, given that grocery workers are sentient adults who are perfectly capable of weighing the risks and benefits of their profession. We all face risks — customers included — for engaging in basic shopping tasks. The hazard pay campaign simply is an end-run around current minimum wage laws.
Of course, stupid ideas can be hazardous to the public — and low-wage workers in particular. “As a result of the city of Long Beach’s decision to pass an ordinance mandating extra pay for grocery workers, we have made the difficult decision to permanently close long-struggling store locations in Long Beach,” according to a statement from Kroger, which owns the Ralphs and Food 4 Less stores that will soon be exiting the city.
Store officials are right that the new law “oversteps the traditional bargaining process.” It also ignores, as company officials told the media, the $2-an-hour pay increase that it gave to its employees at the start of the pandemic and the $1.3 billion it has spent on mitigation measures and additional benefits for employees. Apparently money just grows on trees — and how long before city officials blast the grocery chains for price gouging after food costs rise?
The store closings weren’t hard to predict. A new study by Capitol Matrix Consulting for the California Grocers Association makes some critical points for anyone who earnestly wants to boost the wages of low-skill front-line workers — and isn’t just playing cynical union political games. As the study notes, “Average profit margins in the grocery industry were 1.4 percent in 2019, with a significant number of stores operating with net losses.” It noted that profits rose to 2.2 percent by mid-2020, but that those margins were falling to historical levels since then.
Here’s the key point: “Wage related labor expenses account for about 16 percent of total sales of the grocery industry. As a result, a 28-percent increase in wages would boost overall costs 4.5 percent under the city of Los Angeles proposal of $5 an hour. This increase would be twice the size of the 2020 industry profit margin and three times historical grocery profit margins.”
The study looks at the two extreme possibilities. If the stores pass the costs entirely on to customers, then the law will increase a typical family’s grocery bill by $400 a year. If the stores didn’t pass through any of those costs, they would reduce the number of employees by 22 percent. “The grocery business is a high-volume, low-margin industry,” the authors note.
The grocers association also has sued Oakland, which mandates an extra $5 an hour. Their lawsuit touches on what unions really want: “It singles out large grocery companies with unionized workforces (i.e., UCFW 5’s members) without providing any reasonable justification for the exclusion of other employers or frontline retail workers. The city’s stated objectives are merely an attempt to impose a public policy rationale on interest-group driven legislation for labor unions.” The grocers say the law violates the state and federal constitutions.
I know I’m going out on a limb here, but governments cannot simply mandate dramatic wage increases without leading to serious unintended consequences. Strictly speaking, the resulting moral hazard of hazard pay is that low-income workers will perhaps rely on the government to boost their fortunes — rather than getting the education and experience they need to improve their skills and increase their value in the process.
But the more obvious hazard is that will drive marginal stores out of business, dramatically reduce employment levels for those stores that remain in business, and drive up grocery prices — all of which will hit the poorest Californians the hardest. This is hazardous to the economy and morally wrong, so expect it to spread across the state like wildfire.
Steven Greenhut is Western region director for the R Street Institute. Write to him at email@example.com.