The Chamber of Commerce and NorthStar Economics, Inc. have pulled the risible sick-leave study from their respective websites, but Shane Wealti at Dane 101 managed to grab a copy before it disappeared. Having read the report, I think it’s time for a little bit of dead-horse kicking, and some political analysis.I won’t discuss the bogus property tax numbers (which Brenda Konkel and others have already debunked) , or the idea that 40% of Madison businesses would “consider leaving Madison” (*). Those numbers are obviously wrong, and the authors have admitted as much. Nevertheless, despite the errors, the authors told the Wisconsin State Journal that they “stand behind the report”.

II. On business profitability

If they’re standing behind the report, I assume they’re standing behind the only other set of quantitative data in the report, which is the section that claims “ordinance compliance costs would make some businesses unprofitable and force them out of business”. This claim is based on the idea that “a typical retail firm” would see its profit on $100 in sales drop from a 20-cent gain to a 56-cent loss.That point is made in bold letters on page one, and is clearly the take-away lesson of the study. The “research” behind this point is found on pages 14-15 (RMA is Robert Morris Associates, a reference to a collection of financial statement data for which no more specific citation is given) :

Let’s use Women’s Clothing Stores to illustrate the microeconomic affects of the mandatory sick leave ordinance on a local business. The industry is fairly representative of the selected industries. The PBT [profit before taxes] for women’s clothing stores for 2001-03 period [sic] ranged from 1.2 percent to 3.1 percent. Operating expenses (which include labor costs) are in the midrange of the industries, at about 40%.

A typical women’s clothing store in 2003-04 with $4 million in sales has a PBT of 1.0% (see RMA, 2004, page 959). That store generated a before tax profit of $40,000. Likewise, a women’s clothing store with $17.5 million in sales (mid-point of the $10-25 MM RMA sales category) had a PBT of just 0.2 percent in 2003-2004, generating a before tax profit of $35,000.

It’s unclear if the authors have averaged a set of women’s clothing stores in order to create a “typical” mean, or if they just picked one for use in the study. Given the fact that the given profits (1.0 percent and 0.2 percent) fall well outside the given range of 1.2 percent to 3.1 percent (**), my suspicion is that the “typical” store (only the 0.002-profit store is included in the labor cost analysis) is a specific store picked because its data is useful to the argument. The careful phrasing of all the references to this “data” in the rest of the report further raises my suspicions. Things like this are why legitimate studies are peer-reviewed, folks.

The study then contends (without supporting evidence) that the sick leave policy will increase labor costs by 3 percent, which will in turn put the “typical” business (with the 0.002 profit margin) into the red. Since the crux of the whole argument (even with the cherry-picked “typical” store) is the 3 percent increase in labor costs, it’s worth considering how they arrive at this number. They never claim 3 percent as explicitly correct, but it’s easy to guess where they get the number from. One hour of sick leave per thirty hours worked is translated to 31/30 = 1.03 times the base labor rate. It’s really that stupid.

It only works if you assume that (a) no workers in the examined industry currently have sick leave, vacation leave, or any other type of leave that satisfies the proposed mandate, (b) every single worker will use every single sick day they have, every year, and (c) there is no current loss of productivity from non-sick leave practices like working while sick and/or infecting co-workers. All the grade-school teachers in the audience are free to chuckle knowingly at this point. The study also (d) translates “lost worker-years” directly into “workers”, and assumes that the same labor costs apply to both. And then in a conclusion that vitiates point (a), they determine that 45,848 (***) workers will be affected by the sick leave ordinance.

In other words, the study’s conclusions about business profitability are just as silly as its already-debunked claims about city government and business relocation. What’s going on here? I assume that the economists at NorthStar are smarter than this, and that they have done real economic work in the past. Why would they risk their good (as far as I know) name and reputation on a hatchet job like this?

III. What’s the real reason for this study?

The only explanation that makes sense is a political one. The study is designed primarily as a hit-piece on Mayor Dave. Cloaked behind vague language like “local economists claim”, the conclusions of the sick-leave study can be spread anonymously, or in letters to the editor and on radio spots. Someone is going to run for mayor from Cieslewicz’s right, and the line of attack is going to be “Mayor Dave is imposing too many restrictions on local business. The resulting uncertainty and instability is causing businesses to flee our fair city”. By the time the election campaign heats up in a couple of years, the specific details about this absurd study will have faded into the mists of time, and it can be safely used as a run-of-the-mill political lie dressed up as a statistic. “Local economists claim…”

This explanation is strengthened by the high percentage of the report that is dedicated, not to the proposed sick leave ordinance, but to the airing of grievances against the mayor and the current city council.

Excluding the executive summary, the first four pages of the fourteen-page report don’t talk about the sick leave ordinance at all. They complain about … *drum roll please* … the smoking ban. They complain (again) about “a local smoking ban or any other local business ordinance that raises operating costs”, by which they mean the minimum wage (and probably inclusionary zoning, whose relationship to increased business costs seems somewhat tenuous outside of the real estate industry).

Since this is the People’s Republic of Madison, this right-wing criticism is couched in vaguely left-wing terms, one of the best of which is this:

Social policy initiatives at the national level do not put local communities at a competitive disadvantage with their neighbors. There already is pending federal legislation sponsored by Senator Kennedy of Massachusetts that seeks to give employees paid time for unanticipated family exigencies. Mandating similar compliance at the local level appears premature and unneccessary.

Raise your hand if you think Ted Kennedy’s legislation has a chance of even being taken up in committee in a GOP-controlled Senate. The Chamber of Commerce also attacks local minimum wage ordinances on the grounds that these things are best done at the federal level. Of course, the national Chamber of Commerce spends millions opposing the minimum wage at the federal level, so there you go.

The study warns of dire “microeconomic consequences” for higher labor costs. These consequences apparently include (I’m not making this up) replacing waiters with some hybrid of a bank-window vacuum tube and a Star Trek food replicator:

Soon your restaurant payment will be scanned at the booth, matched to your order, and then a receipt will be printed and your plastic returned, because it will be cheaper than paying even waiter wages and benefits.

The study goes on to argue (correctly) that the key to a strong economy is attracting a talented workforce to a vibrant city. They claim that high labor costs “raise construction costs, transportation costs, food costs, housing costs, etc.” They don’t make the connection between high labor costs and high wages, which are often considered a good thing, and which tend to attract people to an area. No mention is made of the connection between a strong economy and a good school system, or low crime, or progressive government, or well-funded parks and universities. They don’t mention that Madison is consistently rated one of the best and most-livable cities in the country.

They do mention that our unemployment rate is 2.9 percent, but that serves as a rather incongruous lead-in to the assertion that in such a competitive economy, it must be “market dictated influences” which raise employment compensation packages. Of course, if enough businesses in town were already offering luxurious compenstation packages, there wouldn’t be 45,858 people who can’t even take a day off when they are sick. On the other hand, a wealthy, well-educated and fully-employed economy can probably afford to mandate a higher baseline for compenstation at the lower end of the pay scale.

The economists who wrote the study know that what they’re saying is crap. They “stand by” the report for only one reason: when it serves as the basis for political dirty tricks, they don’t want to give the mayor the ability to counter, “those local economists disavowed that study”. They want it to degenerate into a he-said, she-said spat. “Well, of course the mayor doesn’t think he’s destroying the city. He would say that, wouldn’t he?” When the discussion is framed in these terms, the fact that the study is rubbish doesn’t matter. It becomes one side of the debate, a legitimate position to hold. The Swiftboaters don’t need to convince everyone. They just need to give their supporters something to hang their hats on. Their lips drip with contempt for science, for facts, for reason, and for the political process. They are filled with contempt for the voters and the citizens of Madison.

Don’t believe the Swiftboaters about this one. Mayor Dave’s doing a great job. Madison is a booming, healthy city, and I salute our council for trying to raise the quality of life for everyone in town.

(*) - Briefly, they assume that “only” 2 percent to 10 percent of that self-selecting group of businesses will follow through, and thus come up with numbers based on 37 - 185 businesses decamping for the libertarian paradise of Middleton. This is compounded by the fact that the question asked if you would “consider” leaving, and the authors translate this into “will leave”. On top of that, the respondants to the survey were self-selecting.

(**) I realize that one set of numbers comes from 2001-03, and the other from 2003-04, but there is no suggestion that there is any substantial difference between the two dates. Both of the dates are before both the apparently catastrophic enactment of the indoor smoking ban and the push for a higher minimum wage. (And quick, name the last time you could smoke inside of a clothing store).

(***) - Data reported with unjustified precision is usually a sign of bad science.

Posted by Ben Brothers at 1:23 pm, 15 January 2006 and filed under Madison News. You can follow any responses to this entry through the RSS 2.0 feed.