College American Moral Hazard Economics Discussion

 

 

A moral Hazard is where one company or party engages in risky behavior because they know the other party will hold the consequences of this behavior “Moral hazard is a situation in which one party engages in risky behavior or fails to act in good faith because it knows the other party bears the economic consequences of their behavior” (DePersio, 2021). The main example that I experienced and had people around me experience regarding moral hazard was during the pandemic. During the pandemic employers let many employees go therefore leaving tons of families jobless and unable to feed their families. This caused individuals to pursue unemployment benefits, these benefits that people including myself could not collect due to being a part-time employees. The company I worked for during the time, knew the difficulty the employees being laid off were going through and also the unemployment moral hazard. Therefore as incentives and to compensate the employees they paid us 3 weeks of full-time wages even when we were not working. Even though this did not relieve all concerns it did assist and help in the short term.

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A scenario known as “moral hazard” occurs when one party acts recklessly or fails to perform honestly because they are aware that the other party will be financially affected by their actions. “A moral hazard is when one party is accountable for the interests of another yet has an incentive to put his or her own interests first,” the Cato Journal states. The typical illustration is a worker who has an incentive to avoid doing their job. One instance I’ve seen is workers trying to hold down numerous positions in the same sector, which raises a conflict of interest. It would be a conflict of interest and a moral hazard if working for one firm gave you access to confidential information that the other company did not, and you used that knowledge for your second employment. For instance, if you were the owner of Company X, a restaurant with a tasty secret sauce, you would forbid your staff from working for Company Y, a rival restaurant with a similarly tasty secret sauce. Creating and enforcing a rule in a company’s employee handbook that forbids staff from working for rival companies are steps that can be taken that can minimize moral hazards. If such a strategy were to be followed, it would reduce the incentive for workers to work for one company and then go to a rival in order to improve their careers (Lopen, 2022). The employee handbook at my employer, in particular, has information on this. Along with related employment, consent is required for any position that could conflict with the major responsibilities despite not being in the same industry.

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Minimum wages are the minimum payment that a worker is supposed to get, this is the minimum payment required by law. When it comes to raising the minimum wage this means employees will be paid more for their hourly labor. This sounds positive and it is for those employees continuing their jobs but there are also some downsides. Raising the minimum wage is positive for those employees continuing their jobs but it can cause uncertainty for employers. The article I found regarding minimum wage increases explains in depth how raising minimum wages can have consequences leading to unemployment “Raising the minimum wage would increase the cost of employing low-wage workers. As a result, some employers would employ fewer workers than they would have under a lower minimum wage” (CBO, 2022). I do believe the findings in this article are accurate due to that raising minimum wages does cause friction between employers and employees as employers think they cannot be paying every employee. On the other side of conscious capitalism raising minimum wages helps employees gain stability and therefore get their families out of poverty and have better economic stability. This can also increase the amount of people looking for jobs and create motivation.

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According to (Kennan, 1995), the data to empirically say minimum wage increased lead to reductions in employment is not there. Kennan goes on to say that more sophisticated data is necessary to categorically determine the benefits. He concludes that given the large amount of government statistics available, data is there to make a definitive conclusion, however that data is just not available for researchers to analyze. A number of studies are cited in the article with the author concluding that there is just too much ‘noise’ in the data for researchers to make declarative statements on the merits of minimum wage increases. My assessment is similar to the author’s in that there is just such an enormity of inputs that go into the calculus of raising the minimum wage. It is so area-specific that it is difficult to imagine the federal government (or even state government) being able to pinpoint the necessary wage to attract workers and allow businesses to operate in the black in a particular region or even city. My father-in-law opens a sporting goods store and has a number of minimum wage employees. While he would like to offer more money, he has to reconcile that with his other operating expenses and profit goals for him and his partners. Major companies are now introducing conscious capitalism in their business strategy. This approach is incorporating all stakeholders into account when devising their financial planning. A number such as Whole Foods believe that income equality is something that can help improve with higher wages. Findings on companies that embrace that kind of conscious capitalism prove that the payoff for doing the right thing is not insignificant (Lewis, 2021).

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