"The proposed ordinance, which still needs a public hearing and a final council vote, gives employers five years to increase workers’ pay to $15 an hour. It includes a “training wage” exception for younger workers starting jobs, but does not allow employers to count tips as wages. Businesses that don’t comply could face thousands of dollars in fines."The central argument of those that oppose a minimum wage increase rests on basic microeconomic theory. The argument goes as such: setting a minimum wage above the market equilibrium increases the quantity of labor supplied and decreases the quantity of labor demanded. As a result, unemployment increases.
However, economists vary widely as to whether they think a minimum wage hike actually increases unemployment. Indeed, meta-analyses of the research have come to differing conclusions, indicating that the jury is still out. Nonetheless, it's worth considering the economic arguments proffered by minimum wage advocates, and assessing whether a $15 minimum wage is the right direction for Minneapolis and other cities.
Academics and politicians wield a slew of arguments to explain why microeconomic models are not predictive of real-world results in the case of the minimum wage. These advocates argue that in the real world, unemployment doesn't increase to the extent that introductory economics suggests it would for a variety of reasons. Economics writer and law professor James Kwak offers a helpful summary of these arguments in a piece he wrote for the Atlantic. Kwak first argues that many employers simply can't decrease employment due to practical constraints:
"Although the standard model predicts that employers will replace workers with machines if wages increase, additional labor-saving technologies are not available to every company at a reasonable cost. Small employers in particular have limited flexibility; at their scale, they may not be able to maintain their operations with fewer workers. Therefore, some companies can’t lay off employees if the minimum wage is increased."Kwak goes on to argue that a higher minimum wage transfers wealth from the rich to the poor, and that many companies need not cut employment due to higher worker productivity:
"...many companies can recoup cost increases in the form of higher prices; because most of their customers are not poor, the net effect is to transfer money from higher-income to lower-income families. In addition, companies that pay more often benefit from higher employee productivity, offsetting the growth in labor costs."Indeed, some studies have supported this productivity argument, and the intuition behind it makes sense: when workers are paid more, they value their jobs more and work harder. Kwak offers several other points, arguing that a minimum wage hike decreases worker turnover, and can stimulate local economies by increasing poor peoples' disposable income (the argument resting on the idea that the poor spend a larger share of their income). He also points to a CBO study suggesting that any job losses induced by a wage hike are outweighed by income gains for the poor:
"A study by the Congressional Budget Office (CBO) estimated that a $10.10 minimum would reduce employment by 500,000 jobs but would increase incomes for most poor families, moving 900,000 people above the poverty line."These arguments are compelling, especially in light of the mixed and often favorable empirical research. However, they misconstrue a few issues, and are inadequate to justify the Minneapolis City Council's proposal.
For one thing, Kwak discounts the possibility that small employers unable to decrease their workforce would simply close shop or move. This is especially a problem for restaurants and retailers that operate on small profit margins. Business closures seems an especially pressing concern for Minneapolis given its large restaurant industry, and given its proximity to St. Paul (where the minimum wage is lower).
Furthermore, City Council's proposal lacks a tip credit (wherein business can pay lower wages to account for tipping), meaning that restaurants will have even higher labor costs. Forgoing a tip credit makes little sense. If the goal is to ensure that servers earn at least $15 an hour, this provision is unnecessary. According to one survey, servers in Minneapolis already make an average of $28.56 an hour counting tips. Furthermore, the absence of a tip carve-out gives preferential treatment to servers over cooks and kitchen staff.
To return to Kwak's argument, his assertions that a minimum wage would transfer wealth, increase productivity, and reduce turnover may indeed be correct. However, if the motivation of a minimum wage increase is to improve conditions for the working poor, why don't we just boost the Earned Income Tax Credit (EITC) or implement state-level wage subsidies? Nearly all the arguments for a minimum wage apply to wage subsidies. If laborers work harder and quit less often due to higher wages, then a higher EITC/wage subsidies would have the same effect. If the goal is to transfer wealth from the rich to the poor, wage subsidies funded by tax hikes on the rich would accomplish just that.
Furthermore, wage subsidies would not have the same detrimental impact on small businesses and restaurants. Rather than imposing an unfunded wage mandate on businesses with little room for higher costs, why not impose these costs on wealthier Americans with a greater ability to pay?
That's the fundamental problem with the minimum wage discussion: it lacks policy intelligence and clear thinking. Rather than assessing the goals of a minimum wage increase and realizing that wage subsidies would be adequate, Fight for 15 advocates and others offer simplistic solutions that low information voters can understand. I think this is a dangerous route. Advocates should trust the intelligence of the American people and explain to them the merits of the more sensible wage subsidy approach, rather than insult them with ill-informed, easy answers.
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