The Price of Poverty:
How Corporations Shift Labor Costs Onto Cook County
National People’s Action
The hope of parents in America has always been to see their children do better than they have. But after decades of stagnant or falling wages for the majority of Americans, this has become a distant dream for too many. Each generation is falling further behind — despite the record profits of the companies where they work.
The impact of low wages has become a crisis in Cook County. Nearly 20% of Cook County residents live in poverty and many more struggle to make ends meet on low wages. Too many families—including many with at least one member who works full-time—must rely on government programs to fill in the gaps left when their employers don’t pay enough to sustain a family.
Big corporations that pay low wages, while making large profits are a primary cause of this crisis. Their behavior doesn’t just hurt their own low-wage employees. They are holding our entire community back. When big corporations pay low wages, they rob our local economy of resources and their employees cannot afford to spend money at local businesses. When big corporations pay low wages, government ends up subsidizing the labor costs of profitable corporations through support programs. That means we can’t invest our resources into other areas that could serve our community and stimulate our economy.
The proposed Cook County Responsible Business Act would create an incentive for large employers to take responsibility for their own labor costs. The Act would also require large employers who shirk that responsibility to compensate the County for the costs they are pushing onto the community. Experts say the Act will not only help relieve the burden on our county government and ensure more families can make ends meet, it will also create hundreds of jobs by funneling more resources into our local economy.
Big Companies Paying Poverty Wages
Cook County is facing a serious crisis of poverty. With a poverty rate of 17.8%—well above the national average—nearly 1 million people in Cook County live in poverty, including more than a quarter (26%) of all children in the county. An additional 18.8%—nearly 1 million more people—are barely scraping by just above the poverty line.
A significant portion of people living in poverty are working but remain poor because wages are too low. Nationally, 22.8% of people in poverty are “working poor,” according to the Bureau of Labor Statistics, which defines working as spending at least 27 weeks per year in the labor force. Nearly one quarter of the working poor (23.5%) are poor entirely because of low earnings, with no other contributing factors such as unemployment or involuntary part-time employment. An additional 28.2% are poor due to low wages combined with other factors—meaning more than half of the working poor are poor at least in part because their wages are too low to bring their families out of poverty.
The decline in real hourly wage growth for workers at the lower end of the wage range has been a trend for decades. The wages of the bottom decile of earners was 5 percent lower in 2013 than it was in 1979. But over the last decade the trend has been far more pronounced and widespread, with inflation-adjusted wage growth from 2003 to 2013 either flat or negative for the entire bottom 70 percent of the wage distribution.
The Cost Low-Wage Employers Impose on the Community
Keeping Money Out of the Economy
While employee compensation has fallen to the lowest level in 65 years, corporate profits have been soaring — last year reaching their highest level in 85 years. When businesses hoard record profits they are holding money out of the economy, and increasingly out of the country. A recent report showed that the top 500 US corporations are currently holding $2.1 Trillion in profits in overseas tax havens . Low wages also depress consumer spending and productive capacity, thereby reducing the aggregate value of the economy and causing job losses.
According to conservative estimates, 3.8% of U.S. Gross Domestic Product (GDP) is lost every year due to the effects of low wages in the form of forgone earnings (1.3%), crime (1.3%), and poor health (1.2%) alone. In Cook County, with a GDP of roughly $600 billion, that means poverty costs the economy $22.8 billion in lost earnings, crime, and poor health. Given the figures cited above, $1.4 billion of this can be traced back to low wages—with about $1.2 billion due to poverty caused by low wages alone, and more than $200 million additionally to poverty caused partly by low wages.
The economic cost of poverty from forgone earnings is compounded in future generations if left unaddressed. Children who grow up in poverty have lower educational achievement and can expect significantly lower earnings for the rest of their lives as a result.
Low Wages Burden Government Budgets
When employers pay wages too low to allow families to make ends meet, families turn to government programs to fill in the gaps and meet their basic needs.
According to a recent report by the Center for Labor Research and Education at the University of California at Berkeley, nearly three-quarters (73%) of enrollees in America’s major public support programs (including SNAP, TANF, Medicaid/CHIP and EITC) are members of working families.
Between 2009 and 2011 the federal government spent $127.8 billion per year on these four programs for working families and the states collectively spent $25 billion per year on Medicaid/CHIP and TANF for working families for a total of $152.8 billion per year. In all, more than half—56 percent—of combined state and federal spending on public assistance goes to working families. Illinois had the 4th highest budgetary cost of low wage work in the nation, spending $1,098 million. In Illinois nearly 60% of the cost of public assistance goes to members of working families.
Studies have also consistently shown that employers who pay low wages are shifting their labor costs onto the public through government programs:
• Over one million low wage employees of federal contractors use an estimated $9 billion annually in federal public assistance, including $3.3 billion for the SNAP program, $2.5 billion for EITC, and $3.1 billion for Medicaid.
• Walmart’s low wages cost taxpayers an estimated $6.2 billion because workers turn to public assistance to survive. An analysis of Wisconsin’s Medicaid data found that a single 300-person Wal-Mart Supercenter store in the state costs taxpayers an estimated $5,815 per employee annually.
• Walmart is actually double dipping by having government support its labor costs while bringing in approximately $13 billion in revenue from SNAP benefits spent just last year in their stores.
• Low-wage workers are disproportionately reliant on SNAP, therefore a 10 percent increase in the minimum wage is estimated to reduce SNAP enrollment by between 2.4 and 3.2 percent.
The High Cost of Low Wages in Cook County
While some of the cost of poverty is covered by federal and state governments through programs like SNAP and Medicaid, low wages increase costs for local government as well.
One of Cook County’s primary roles is to provide health care. When employers don’t offer affordable health insurance to their employees or pay wages that are too low to allow them to buy health insurance on their own, families use the county health system. The Cook County healthcare system budgets $150 million or more each year to cover unreimbursed healthcare costs, with $164 million budgeted for 2015.
Low wages do more than add patients to the county health system, they also make it more likely that families will have serious health issues to manage. Low-income families, particularly African American and Latino children, are exposed to more health risks, including lead, asthma-inducing pollution, and a lack of preventive health and dental care. Children from low-income families are also more likely to suffer chronic conditions and health shocks such as accidental injuries, causing their health to worsen disproportionately with age. Moreover, aside from creating additional healthcare costs, sickness results in further lost earnings.
Low wages also impose significant cost to another major role of county government—the criminal justice system. Poverty is associated with higher levels of interaction with the criminal justice system. According to a conservative estimate, 40% of prosecutions of crime is attributable to poverty and concentrated policing. The Cook County jail budget for 2015 is $381 million, which means over $152 million of this expenditure is attributable to poverty.
But the economic impact of higher crime rates go beyond the direct cost to the county government. Our economy is hurt by losses incurred by victims of crimes as well as the losses incurred by those who are jailed and their families, such as lost earnings, job losses, long-term employment barriers, decreased economic security, and increased childcare expenses.
We Pay the High Costs of Low Wages
The cost low-wage employers shift onto government programs puts an unnecessary burden on our federal, state and local government budgets. Additionally, the recent Cook County sales tax increase placed a heavier burden on the very workers who are already being hurt by low wages rather than on the low-wage employers who are shifting labor costs to governments.
In July 2015, the Cook County board voted to increase the county’s sales tax by 1% to address its budget shortfall. But according to an analysis of state tax systems, Illinois already had the 5th most regressive tax system in the nation—meaning lower income families pay a greater share of their income in taxes than wealthier families. While the lowest income families in Illinois spend more than 13% of their income on taxes, the wealthiest spend less than 5% of their income on taxes.
The same analysis states: “Sales and excise taxes are very regressive. Poor families pay almost eight times more of their incomes in these taxes than the best-off families, and middle-income families pay more than five times the rate of the wealthy.”
“Unfair tax systems not only exacerbate widening income inequality in the short term but they also will leave states struggling for enough revenue to meet their basic needs in the long term,” the analysis concludes.
Big Businesses Can Afford to Be Responsible
Big corporations can afford to take responsibility for their own labor costs. While wages and corporate income taxes have been falling, corporate profits have been soaring—reaching the highest level in 85 years in 2013. Corporations earned $2.1 trillion during 2013, and paid $419 billion in corporate taxes—an after-tax profit of $1.7 trillion which amounted to 10 percent of gross domestic product during the year, according to a New York Times article analyzing estimates from the Commerce Department.
Not only are corporations making record profits, but they are keeping a far greater share of those profits as well. “Before taxes, corporate profits accounted for 12.5 percent of the total economy, tying the previous record that was set in 1942, when World War II pushed up profits for many companies.” the article stated. The difference is that in 1942, the effective corporate tax rate was a much fairer 55 percent versus 20 percent today.
In addition to lower federal tax rates, profitable companies are not paying their fair share of state taxes. Two hundred and sixty-nine Fortune 500 companies that were profitable every year between 2008 and 2012 collectively avoided paying $73.1 billion in state corporate income tax. According to the Illinois Department of Revenue, two-thirds of Illinois corporations pay no Illinois income tax at all.
Despite paying no Illinois corporate income tax, companies still find ways to further pad their profits with state tax breaks, according to a Chicago Tribune analysis of the Illinois EDGE program—a corporate tax break program that has awarded funds to many companies that created no jobs or even cut jobs. The analysis showed that companies who paid no corporate income tax to the state successfully lobbied to retain some of their employees’ state income tax withholding payments.
Research has demonstrated that elevating standards for low-wage workers would amount to a small portion of what big businesses bring in. For example, the cost of increasing wages for retail workers to $25,000 a year for full-time work amounts to an estimated $21.5 billion, or less than 1 percent of total annual retail sales. And companies find the means to overcompensate executives, even when voicing concerns over raising wages for other employees. CEO compensation averaged $15.2 million in 2013. From 1978 to 2013, CEO compensation, inflation-adjusted, increased 937 percent.
A Fairer Step Forward:
The Responsible Business Act
When low-wage workers are forced to rely on government programs that were never intended for working families just to make ends meet while their employers reap billions in profits and avoid billions in taxes, it reveals a fundamental imbalance. To offset some of this imbalance Cook County could pass the Responsible Business Act.
Since low wages are a significant cause of poverty, it’s only fair for low-wage employers to share responsibility for the costs. This Act would benefit all of Cook County by:
• Creating an incentive for businesses to improve the low-wage jobs that are holding our economy back;
• Leveling the playing field so businesses who take responsibility for their own labor costs can compete fairly;
• Establishing a means for businesses who choose not to pay livable wages to partially offset the costs they pass on to the community; and
• Creating hundreds of new jobs and stimulating consumer spending in our local economy.
The proposed Act would charge a fee to corporations with more than 750 workers who are paid less than the Cook County Living Wage rate. The fee is proposed to be $750 annually for each dollar each worker was paid less than the living wage rate in the previous year. This is estimated to bring in $503.2 million between 2015 and 2019 from 67 large employers and create 637 full-time equivalent job years in that same period, which is an average of 128 full-time equivalent jobs per year.
Large corporations operating in Cook County—such as McDonald’s, Walmart, and grocery conglomerates like AB Acquisition—are paying poverty wages to tens of thousands of Cook County residents. Workers, their families, their communities, and taxpayers all bear the burden when big companies like these pay low wages. It’s clear from the record profits companies are bringing in that this low-wage employment model is a choice companies make and not an inevitable business model.
To turn this situation around, elected officials need to require low-wage employers to make a different choice—either choose to be responsible employers or compensate the community for the costs of low-wage jobs. The Cook County Responsible Business Act would have employers make that choice and would be a step in the right direction toward addressing the economic crisis of poverty and distributing its costs more fairly.
Summary of the Responsible Business Act
What does the Responsible Business Act do?
The Act would require that covered employers choose to either pay a specified livable wage or contribute to a fund to help offset public costs related to the low wages they pay their employees.
Which companies are covered?
Any business or franchisor who employs at least 750 low wage employees in Cook County or whose franchisees, collectively, employ 750 low wage employees in Cook County.
What is the wage rate?
The wage rate will be equal to the Cook County Living Wage hourly rate: $10.00 on Dec. 1, 2015, and increasing each year on Dec. 1 to $11.25 in 2016, $12.50 in 2017 and $13.75 in 2018. After 2018 the wage rate will remain equal to the Cook County living wage rate.
How much do employers pay into the fund?
If a covered employer pays more than 750 employees less than the specified wage rate, the employer is required to pay $750 per employee per $1 below the rate for that year.
How will the Act be enforced?
Employers will be required to submit a sworn statement annually that includes the following information about their employment in the previous year:
• The total number of employees,
• The percentage of full-time versus part-time employees,
• The average hourly wage rate of full-time and part-time employees,
• The total number of all employees who are paid less than the specified wage rate.
Employers will be assessed a fee for each covered worker paid less than the wage rate, which will be placed in a Family Sustainability Fund. The Act also sets up penalties for employers who file false reports or try to avoid payments by incorrectly classifying employees as independent contractors.
How is the money in the Family Sustainability Fund distributed?
A Family Sustainability Commission made up of government officials and community stakeholders will advise the Cook County Board of Commissioners on appropriating money in the Fund to address issues including health care, pre-trial services, the criminal justice system, and housing assistance to low-income communities. The Commission will also advise the Board on awarding grants to community-based organizations to provide family care assistance, heating assistance, nutrition assistance, job training and placement assistance, and advocating for workers’ rights. Preference will be given for funds going to assist employees of the affected employers.
How the Responsible Business Act Could Help in Cook County
Housing: Invest in Affordable Housing and Revitalize Communities
Cook County is experiencing an affordable housing crisis with more families every year unable to find adequate housing that they can afford. According to the DePaul Institute for Housing Studies, the need for affordable housing in Cook County is growing and is far outstripping current supply. Between 2007 and 2011, the mismatch between the number of people who need housing and the number of units available grew 8% in the City of Chicago and grew a whopping 25% in suburban Cook County. The strain is easy to see in the County’s own Section 8 voucher program, whose 8,000 person waiting list is full and closed. For approximately $56 million that backlog could be cleared.
Additionally, 200,000 housing units—nearly 10% of Cook County’s total housing units—are currently vacant, according to the latest census. Many of these properties have depreciated significantly in value and have been rendered completely uninhabitable as plumbing, wiring, windows and fixtures have been stripped out. Rehabilitating (or in some cases demolishing) these homes is an opportunity for the County to reduce neighborhood blight, increase the supply of safe and affordable housing, boost the local construction industry, and improve neighboring property values. While the cost of rehabbing (or demolishing) individual properties will vary due to the extent of the damage sustained, an investment of $50 million per year would enable the County to rehabilitate or demolish 1,000 homes per year with an average of $50,000 spent on each home.
Criminal Justice: Reduce Cost of Pretrial Incarceration
An estimated 20 percent of inmates in the Cook County Jail are there simply because they cannot afford to pay the bond to get out—$6,000 or less. To relieve pressure on the jail system and reduce the number of people suffering outsized consequences such as job loss for missed work days, the County could establish a fund for low-level offenders and people with extremely low bonds to get out of jail. Setting aside just $5.64 million would be enough to pay the bonds up to $3000 for 1,880 people (about 20 percent of the daily average).
Additionally, according to the Illinois Supreme Court’s Pretrial Operational Review, the average time of incarceration even for those able to make bail has risen each year from 2010 to 2012, the last year covered in the report. Consistently, only 19% of discharges were due to prison sentencing. For 16%, charges were dropped altogether. The county currently has no standing pretrial services department and nearly 20% of probation departments do not provide regular pretrial services, either providing none at all or some on an “as-needed” basis. Allocating an additional $71 million to improve pretrial services in Cook County could enable the County to significantly improve its ability to engage in risk assessment, electronic monitoring, substance abuse treatment, and other services aimed at reducing the County’s inmate population.
Cook County currently employs 500 officers in the Sheriff’s department. A program to equip these officers with body cameras and train them (the first program of its kind in the Chicago area) could be implemented for just $500,000.
Child Care: Keeping Stable Jobs and Keeping Kids Safe
Without safe, quality, affordable childcare, parents can’t work, children can’t thrive and our community suffers. Despite clear evidence that access to childcare subsidies improves parents’ ability to work, boost children’s health and development and returns $8 back to the economy for every $1 invested, only 24% of children under twelve in Cook County can access formal licensed childcare and among infants, the number drops to as low as 7% in North Chicago.
The situation is even more desperate for low-wage working parents. The average cost of full time childcare for a child under three is $12,788 in Cook County, more than the cost of tuition at a four-year public university in Illinois. For a family of three with two working parents earning minimum wage, that is nearly 40 percent of the family’s income before taxes. Nearly one in five low-wage workers in Cook County is a working mother with a child under three years old. One quarter of Cook County’s children live in poverty and nearly half live in households earning under 185% of the poverty line. Yet, despite the obvious need for childcare assistance, Illinois has the lowest income limit for childcare assistance of any state in the nation at just $838 per month for a family of three. In addition to the crippling cost of childcare for low-wage working parents, they face additional challenges including unpredictable work schedules and long hours.
Quality early childhood education can transform a child, a family, and a community’s future. Yet, poverty wages mean that hard-working parents can’t afford to give their children a fair start in life. The proposed Responsible Business Act will provide critical funding to expand access to quality childcare for low-wage working parents.
Partnerships: Grants to Organizations in the Community
The costs of poverty are huge, spreading out from unstable housing to impact health outcomes, education outcomes, and experiences with violence. A general grants program as proposed in the Responsible Business Act could meet those challenges head on by providing flexible resources to meet the needs of low-wage workers; from food assistance to heating assistance, from legal services to social services.
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Secret Life of Food Stamps: Part II ‘Save money, live better’ Marketplace report, National Public Radio http://www.marketplace.org/topics/wealth-poverty/secret-life-food-stamp/save-money-live-better.
West R, Reich M. 2014. The Effects of Minimum Wages on SNAP Enrollments and Expenditures. Washington, DC. Center for American Progress, March.
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March 2015, the University of Illinois at Chicago’s Center for Urban Economic Development completed a study of the impact of the proposed Cook County Responsible Business Act.
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Carlsen, Deven, Robert Haveman, Thomas Kaplan, and Barbara Wolfe (2010), “The Benefits and Costs of the Section 8 Housing Subsidy Program: A Framework and First-Year Estimates”, Institute for Research on Poverty, http://www.irp.wisc.edu/publications/dps/pdfs/dp138010.pdf. The estimate assumes a cost of $7,000 per year for a voucher.
Administrative Office of the Illinois Supreme Court (2014), “Circuit Court of Cook County Pretrial Operational Review”, http://www.illinoiscourts.gov/SupremeCourt/Reports/Pretrial/Pretrial_Operational_Review_Report.pdf.
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Gould, Elise and Tanyell Cooke, “High Quality Child Care is Out of Reach for Working Families,” Economic Policy Institute, (2015). Available at: http://www.epi.org/publication/child-care-affordability/
Blank, Helen, Karen Schulman and Lauren Frohlich, “Nearly One in Five Working Mothers of Very Young Children Work in Low-Wage Jobs,” National Women’s Law Center, (2014).
Illinois Action for Children, “2015 Report on Child Care in Cook County,” Illinois Action for Children (2015). Available at: http://www.actforchildren.org/site/DocServer/2015_Report_Child_Care_Cook_County.pdf?docID=9301
Eric Dearing, Kathleen McCartney, and Beck A. Taylor, Does Higher Quality Early Child Care Promote Low-Income Children’s Math and Reading Achievement in Middle Childhood?, Child Development, 80 (5), 2009, 1329-1349; National Research Council and the Institute of Medicine, From Neurons to Neighborhoods: The Science of Early Childhood Development (Washington, DC: National Academy Press, 2000).