It continues to look like minimum wage experiments in cities and states across America aren’t going so well.
A few months ago, we heard Seattle’s service sector was getting pummeled by the rapidly rising minimum wage, posting the worst job losses since the Great Recession…
Then California… who reportedly saw a wobble in its unemployment rate over a few months in 2016 after the first of several planned wage hikes took effect there.
Now, reports coming out of Washington D.C. show the restaurant business is shedding jobs. And the steadily rising minimum wage is likely the culprit.
During the first six months of 2016, restaurants in D.C. shed 1,400 jobs. That’s a 2.7 percent decline in food service jobs in just six months, the largest drop seen in that sector in more than 15 years. Even during the 2008 recession, restaurant jobs barely dipped before continuing a steady, decades-long rise in Washington.
AEI scholar Mark J. Perry reported that it seems crystal clear that the minimum wage hike is to blame– DC suburbs in Maryland and Virginia both added jobs in the restaurant sector over the same period.
Since the DC minimum wage increased in July 2015 to $10.50 an hour, restaurant employment in the city has increased less than 1% (and by 500 jobs), while restaurant jobs in the surrounding suburbs increased 4.2% (and by 7,300 jobs). An even more dramatic effect has taken place since the start of this year – DC restaurant jobs fell by 1,400 jobs (and by 2.7%) in the first six months of 2016 between January and July – that’s the largest loss of District food jobs during a 6-month period in 15 years. Perhaps some of those job losses were related to the $1 an hour minimum wage hike on July 1, bringing the city’s new minimum wage to $11.50 an hour. In contrast, restaurant employment outside the city grew at a 1.6% rate in the suburbs (and by 2,900 jobs) during the January to July period.
A 2.7% decline vs. a 1.6% increase just across the border… political science doesn’t get much clearer than that. Minimum wage hikes are job killers.
It wasn’t so long ago that candidate Sanders wanted to bring a $15 minimum wage to the whole U.S. The devastation to employees in labor-intensive businesses like restaurants and retail might have been enormous.
It would have been miserable for restaurant owners, who would have had to lay off good employees to keep their businesses afloat… for restaurant goers, who would have to struggle to get service from a smaller, overworked staff… and of course, for servers themselves, who would have ended up jobless.
As Thomas Sowell famously quipped: “The real minimum wage is zero.”
And yet as politicians do, he would have just made excuses as employment crashed around the country…
“Republicans are just fudging the numbers.”
“Oh, don’t worry it’s temporary.”
“It’s not the law, it’s greedy business owners.”
Last year the Raise the Wage Act was introduced in the Senate and died almost immediately. New versions are expected in the near future.
To be sure, there’s still a big debate over the impact of the minimum wage among economists. According to former Obama administration economist Christina Romer, the policy remains unpopular among economists since the employment impact isn’t well understood and other methods of helping the poor are more effective.
While she leaves a lot out, Romer makes an interesting and impartial analysis of the minimum wage in the following New York Times piece. The bottom line is there are far better ways to assist low-income families than raising prices for consumers and costs for labor-intensive businesses. Well-intentioned but poorly-thought out government solutions usually create as many problems as they solve, and the minimum wage fiasco is no different.
The Business of the Minimum Wage
Christina D. Romer
I don’t believe that’s because economists care less about the plight of the poor — many economists are perfectly nice people who care deeply about poverty and income inequality.
Rather, economic analysis raises questions about whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty.
First, what’s the argument for having a minimum wage at all? Many of my students assume that government protection is the only thing ensuring decent wages for most American workers. But basic economics shows that competition between employers for workers can be very effective at preventing businesses from misbehaving. If every other store in town is paying workers $9 an hour, one offering $8 will find it hard to hire anyone — perhaps not when unemployment is high, but certainly in normal times. Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers’ bottom lines.
One argument for a minimum wage is that there sometimes isn’t enough competition among employers. In our nation’s history, there have been company towns where one employer truly dominated the local economy. As a result, that employer could affect the going wage for the entire area. In such a situation, a minimum wage can not only make workers better off but can also lead to more efficient levels of production and employment.
But I suspect that few people, including economists, find this argument compelling today. Company towns are largely a thing of the past in this country; even Wal-Mart Stores, the nation’s largest employer, faces substantial competition for workers in most places. And many employers paying the minimum wage are small businesses that clearly face strong competition for workers.
Instead, most arguments for instituting or raising a minimum wage are based on fairness and redistribution. Even if workers are getting a competitive wage, many of us are deeply disturbed that some hard-working families still have very little. Though a desire to help the poor is largely a moral issue, economics can help us think about how successful a higher minimum wage would be at reducing poverty.
An important issue is who benefits. When the minimum wage rises, is income redistributed primarily to poor families, or do many families higher up the income ladder benefit as well?
It is true, as conservative commentators often point out, that some minimum-wage workers are middle-class teenagers or secondary earners in fairly well-off households. But the available data suggest that roughly half the workers likely to be affected by the $9-an-hour level proposed by the president are in families earning less than $40,000 a year. So while raising the minimum wage from the current $7.25 an hour may not be particularly well targeted as an anti-poverty proposal, it’s not badly targeted, either.
A related issue is whether some low-income workers will lose their jobs when businesses have to pay a higher minimum wage. There’s been a tremendous amount of research on this topic, and the bulk of the empirical analysis finds that the overall adverse employment effects are small.
Some evidence suggests that employment doesn’t fall much because the higher minimum wage lowers labor turnover, which raises productivity and labor demand. But it’s possible that productivity also rises because the higher minimum attracts more efficient workers to the labor pool. If these new workers are typically more affluent — perhaps middle-income spouses or retirees — and end up taking some jobs held by poorer workers, a higher minimum could harm the truly disadvantaged.
Another reason that employment may not fall is that businesses pass along some of the cost of a higher minimum wage to consumers through higher prices. Often, the customers paying those prices — including some of the diners at McDonald’s and the shoppers at Walmart — have very low family incomes. Thus this price effect may harm the very people whom a minimum wage is supposed to help.
It’s precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families. For example, the current tax system already subsidizes work by the poor via an earned-income tax credit. A low-income family with earned income gets a payment from the government that supplements its wages. This approach is very well targeted — the subsidy goes only to poor families — and could easily be made more generous.
By raising the reward for working, this tax credit also tends to increase the supply of labor. And that puts downward pressure on wages. As a result, some of the benefits go to businesses, as would be the case with any wage subsidy. Though this mutes some of the direct redistributive value of the program — particularly if there’s no constraining minimum wage — it also tends to increase employment. And a job may ultimately be the most valuable thing for a family struggling to escape poverty.
What about the macroeconomic argument that is sometimes made for raising the minimum wage? Poorer people typically spend a larger fraction of their income than more affluent people. So if an increase in the minimum wage successfully redistributed some income to the poor, it could increase overall consumer spending — which could stimulate employment and output growth.
All of this is true, but the effects would probably be small. The president’s proposal would raise annual income by $3,500 for a full-time minimum-wage worker. A recent analysis found that 13 million workers earn less than $9 an hour. If they were all working full time at the current minimum — and a majority are not — the income increase from the higher minimum wage would be only about $50 billion. Even assuming that all of that higher income was redistributed from the wealthiest families, the difference in spending behavior between low-income and high-income consumers is likely to translate into only about an additional $10 billion to $20 billion in consumer purchases. That’s not much in a $15 trillion economy.
SO where does all of this leave us? The economics of the minimum wage are complicated, and it’s far from obvious what an increase would accomplish. If a higher minimum wage were the only anti-poverty initiative available, I would support it. It helps some low-income workers, and the costs in terms of employment and inefficiency are likely small.
But we could do so much better if we were willing to spend some money. A more generous earned-income tax credit would provide more support for the working poor and would be pro-business at the same time. And pre-kindergarten education, which the president proposes to make universal, has been shown in rigorous studies to strengthen families and reduce poverty and crime. Why settle for half-measures when such truly first-rate policies are well understood and ready to go?
P.S: Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.
(This essay originally appeared in the New York Times)