Minimum Wage – Reasons To Be Cautious

Los Angeles celebrates a minimum wage hike
Los Angeles celebrates a minimum wage hike

I’m not a mean-spirited person (at least not after I’ve had my morning coffee) but I worry that writing about recent minimum wage law changes could lead some friends to accuse me of heartlessness. I don’t mean to be heartless.

The Los Angeles City Council recently voted 14-1 to raise the employee minimum wage in the city to $15 an hour, up from $9 an hour, in a gradual phase-in through the year 2020.

Meanwhile, New York City raised the minimum wage hike for fast food restaurant workers. Minimum wage hikes are ‘in the air’ as an urban policy idea nationwide.

While I don’t doubt the excellent intentions of the Los Angeles city council and their supporters, my immediate finance-guy reaction is to suspect that the minimum wage hike will leave many of the intended beneficiaries of this law worse off.

Wage island problem

Passing a private sector minimum wage law in a limited area – like within a single city’s boundaries – seems to me an invitation to employers to move businesses just outside city limits, or to consider starting businesses away from high-wage cities.

Minimum_Wage_Cities
Minimum Wage Cities

I know if I were an entrepreneur in Los Angeles this law might make me more likely to look to build or grow my business away from the city.

Clearly some service industries like retail stores and restaurants that depend on urban density cannot relocate away from a higher-wage area like Los Angeles.

But many other types of businesses can relocate to outside of a city limit, or can be started away from a city.

Most vulnerable workers

Employees with experience and specialized skills have significant leverage when setting their pay. Employers often complain that they cannot find enough skilled workers to fill their company’s needs.

Employees seeking a minimum wage job, by contrast, lack specialized skills or relevant experience unique for their job. They might be too young to have worked much, or they might lack desirable educational degrees. If they are older workers, they may have a checkered employment history or background. Employees seeking minimum wage work need a chance to build up experience or a track record to prove their worth to an employer. The minimum wage job could (and should) be the entry-level step, an on-ramp to higher skills and higher pay.

I’ve been an employer and an entrepreneur, and one of the scariest things for a small business is hiring new employees. Before the employee starts, you don’t how it all will work out. New hires, in fact, often don’t work out. You end up losing time, money and resources with new employees, in addition to suffering a spike in unemployment insurance rates for your business.

As an employer in Los Angeles, I might go to great lengths to avoid hiring an unskilled, untested worker at $15 an hour, compared to the federal minimum wage of $7.25 per hour.

I would hire fewer people, more reluctantly. I would lean on my proven, experienced workers more. I would seek to substitute automated processes for human processes. I would figure out a way to get by on fewer workers, because of the clear difference in my bottom line survival as a business.

minimum_wages_nationwide

Multiply that effort by tens of thousands of employers and I think you’ve got the makings for many fewer entry-level job opportunities in a high minimum wage area. I think you’ve got the making of higher unemployment rates in Los Angeles compared to outside the city.

Leap of Logic

Forgive me for the following leap of logic, in which I mention an extremely complex economic situation and simplify it for my purposes, but I think it relevant to mention that France’s official unemployment rate hovers above 10%. In a related story, France’s minimum wage is approximately three times higher than in the US, according to Thomas Piketty, the author of Capital In The Twenty-First Century.

Of course that’s not the whole story. There are undoubtedly many reasons for structural differences in France’s unemployment rate when compared to the United States’ rate, currently a little over 5%. But most people would agree that they have something to do with the well-intentioned worker protections in place in France. Those worker protections – which include minimum wages, in addition to rules about firing, and the social safety net – have great effects on both employee and employer behavior.

If you talk to an employer in France, they will describe their extreme reluctance to hire anyone, because of these protections.

Unintended consequences

The goal of minimum wage laws is to ensure better living conditions for the most vulnerable workers in an economy, by definition folks earning the least amount of money per hour that an employer may legally pay. But if the result is fewer jobs for that most vulnerable population, then is the law hurting or helping?

3.8 million people live in Los Angeles, with an estimated 800,000 affected by this change in the law. Each 1 percent increase in the unemployment rate among that population could mean 8,000 fewer people with any job at all.

Those 8,000 would be the most hurt by this minimum wage hike with only a 1% rise in unemployment. A move to France-like unemployment rates would mean 40,000 people in the Los Angeles area without a job. While that’s too extreme an effect to be likely, I do worry that well-intentioned city policy hurts the very people it’s meant to help.

You know what’s another possibility though? I’m totally wrong. I’ll discuss that, as well as San Antonio’s current proposal regarding minimum wages, in a subsequent column.

A version of this post appeared in the San Antonio Express News.

 

Please see upcoming post on

San Antonio’s minimum wage for government workers

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5 Replies to “Minimum Wage – Reasons To Be Cautious”

  1. Mike,
    the high unemployment rate in France, as in many European countries, has more to do with the high costs associated with laying workers off as opposed to the minimum wage itself. And if you choose to build your empirical case on a sample of one, perhaps look at Denmark (min wage USD 20/hr, unemployment ~6%), Norway (~USD 20/hr, ~4%) or Australia (~USD 12.75, ~6%). (The Scandinavian countries don’t have official minimum wages but unions negotiate minimum rates by industry.)

    In economies as advanced as the US, 70-80% of the jobs covered by minimum wages are in the local service sector and as such “nonfungible”. These jobs are typically not at risk (and the businesses often benefit from higher disposable income of local area workers). And of the 20-30% of jobs that are at real risk of moving out of the area, don’t forget that it’s possible to mitigate the negative impact of the wage cost increase with tax credits or other targeted policies. This is before talking about secondary employer benefits that typically accompany higher minimum wages such as lower employee absentee rate and lower staff turnover.

      1. Full disclosure, I’m a bleeding heart liberal. But, I can’t help but feel like the minimum wage is the wrong tool for the job. In particular, there needs to be an accessible wage for unskilled new entrants to the workforce and the arbitrary nature of the minimum wage ends up hurting many who need it the most, the working poor who currently make at or above the new minimum wage. Couldn’t we use employment tax policy to encourage higher wages in a similar manner? Say no taxes on wages below a certain minimum wage and a gradational rise in taxes up the wage scale.

  2. As a college student, the idea of the minimum wage legislation is an important issue to me. As a young student if the minimum wage increases, my job would be one of the first to be cut. I recently listened to a debate between Professor Thomas Weisskof and Dr. Mark J. Perry at Northwood University. They argued whether or not the wage should be raised to $10.10 by 2016. My big problem with the entire debate is the seemingly arbitrary amount of $10.10. President Obama picked this number because it is considered “easy to remember.” I simply do not understand. Why stop at $10? With this argument there is no reason that the minimum wage should not raise at an unprecedented rate. With this, the demand for labor would have to fall dramatically and therefore only increase unemployment. If anything, the minimum wage should be lowered and the market should be allowed to function normally.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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