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A minimum wage increase in Minneapolis probably wouldn't be as bad (or as good) as people are saying

MinnPost photo by Peter Callaghan
Would a higher minimum wage give a boost to the economy, or presage its destruction?

On Tuesday, the Minnesota Supreme Court heard arguments on whether Minneapolis voters can decide to amend the city’s charter to gradually raise the minimum wage to $15 an hour. If they uphold the decision of the lower court, the amendment will go before voters in November. If they overturn the decision, the amendment won’t go on the ballot, but it’s unlikely the issue will go away — the city council already voted to draft a minimum wage ordinance to consider early next year.

To hear advocates on either side of the issue tell it, the stakes couldn’t be higher. Advocates of the increase speak of a panacea for low-wage workers, and therefore the economy as whole: more money in workers’ pockets will be spent at local businesses, boosting the economy.

Opponents paint a much different — and gloomier — picture: with mandated higher wages, businesses will cut back on hours, let workers go, or shut down because they can’t meet payroll. The fact that the higher minimum wage would only take effect in Minneapolis, and not in the surrounding suburbs or St. Paul, adds another threat: that businesses would relocate to nearby cities where they can continue to pay lower wages.

So who’s right? Would a higher minimum wage give a boost to the economy, or presage its destruction?

We don’t have to rely on pure speculation to try and figure it out — other cities, like Seattle and Santa Fe have already implemented citywide minimum-wage increases like the one Minneapolis is considering. Unfortunately, the evidence from research on the increase in those cities is murky — in terms of its effects on both workers and businesses.

The effect on low-wage workers

As long as you’re comparing apples to apples — for example, comparing New York to areas like it and not, say, a rural area in the middle of the country — the anticipated effects of a minimum wage increase up to about $15 tend to be similar, at least across the types of cities that are raising wages, said Michael Reich, a University of California, Berkeley professor of economics who has worked on a trove of minimum wage studies of cities across the U.S..

That is to say, in urban areas raising the minimum wage, an increase in the number of dollars in low-income employees’ pockets should basically offsets any negative effects on their employment — say due to reduced hours or fewer available jobs.

Reich said that with higher wages, employers have an easier time recruiting, employees stay longer at their jobs and, since they’re happier and more productive, workers probably work harder. He finds that more money in the pockets of low-wage workers increased their spending power (which he believes leads to more job creation), offsetting any job loss, mainly due to automation of low-skill jobs.

“When we add up all those effects, empirically, they pretty much wash out. They offset each other,” he said.

The example of Seattle seems to support this idea of mixed effects. Last year, the city’s minimum wage began a gradual climb toward $15 an hour.

In a 2014 opinion piece published in the Seattle Times, Michael Saltsman wrote that the minimum wage would hurt businesses and low-wage workers. Saltsman is the research director at the Employment Policies Institute, which receives some of its support from restaurants.

He wrote that according to an employer survey commissioned by the institute, “42 percent of surveyed (Seattle) employers were ‘very likely’ to reduce the number of employees per shift or overall staffing levels as a direct consequence of the (minimum wage) law. Similarly, 44 percent reported that they were ‘very likely’ to scale back on employees’ hours to help offset the increased cost of the law.”

The effects don’t seem to have been all that bad — at least so far. But the economy in Seattle is also booming.

The increase won’t fully take effect until 2021, But so far, ongoing studies by a group of University of Washington researchers have found that, to the extent that Seattle’s low-wage workers were doing better than they had been before, it was mostly because of the economy — not the minimum wage increase.

“With people sort of being either fiery or icy about (the minimum wage increase), our report was kind of like a bucket of lukewarm water,” said Jacob Vigdor, a professor at the University of Washington’s Evans School of Public Policy and Governance who worked on the studies. “The basic takeaway from our report was that the minimum wage doesn’t appear to be doing a whole lot of harm but it’s also not doing a whole lot of good either.”

By the end of 2015, low-wage Seattle workers’ median hourly wage had risen by $1.32, but only 73 cents of that increase could be explained by the minimum wage ordinance, the study found. For Seattle workers who had been earning less than $11 an hour before the minimum wage increase, quarterly earnings increased by an estimated $463 — again, mostly because of the good economy.

“Seattle’s lowest-paid workers saw larger-than-usual paychecks in late 2015, mostly — and perhaps entirely — because of the strong economy. At most, 25 percent of the observed earnings gains can be attributed to the minimum wage,” a report summary says.

Low-pay Seattle workers got more hours after the ordinance took effect, but Seattle lagged behind comparable parts of Washington by 16 hours per year. The report also estimates a 1 percentage point reduction in employment rate growth among low-paid workers due to the minimum wage ordinance.

Vigdor acknowledged that the numbers could change once the full $15 increase takes effect.

“The $11 may be something that business found pretty reasonable ways to cope with … but the move to $15 could be a very different story,” he said. “Whether or not the minimum wage actually ends up raising take home pay is largely a factor of how businesses react.”

What businesses do

When it comes to jobs, raises over time in the minimum wage are not likely to result in many fewer jobs, Reich said: When increases are phased in, he said, employers have time to adjust.

In a previous paper, Reich estimated that raising the minimum wage in San Jose, a city with one of the highest costs of living in the U.S., to $15 an hour by 2019 would increase the average business’ operating costs by 0.3  percent over three years.

The average low-wage worker would make an additional $3,000 a year (though workers making more than minimum wage would also likely get a raise), and San Jose’s estimated employment growth would be slightly negatively affected.

Weak firms may go out of business after a minimum wage hike, because they were already on the verge of going out of business, he said. But thanks to more consumer buying power, research has found the closing of those businesses has been offset by opening new ones, often geared at slightly higher-earning consumers — think trading McDonald’s for Chipotle.

The nature of these citywide minimum wage increases is that they only directly affect people working in the city. But Reich says concerns that cheaper labor outside the city will cause a significant number of businesses to relocate are overblown.

The restaurant industry is the largest employer of minimum wage workers, followed by retail, Reich said.

“The product market for a lot of low-wage businesses is very local, so if you want to buy a cheaper television, you might travel 15 or 20 miles to a shopping mall where there’s a discount retail store, if you’re getting a quick meal, you’re not going to travel very far,” he said.

But since many low-income workers live outside city limits, it’s important to note that much of the additional money they have to spend following a wage increase could flow out of the cities in which they work.

In 2003, Santa Fe became an early experiment in citywide minimum wage hikes when it passed an ordinance increasing the lowest legal pay for some workers from $5.15 to $8.50 an hour (Santa Fe’s minimum wage is now $10.91).

While some say the minimum wage increase caused Santa Fe lose business to Albuquerque, Washington Post reporter Tina Griego wrote a decade after it took effect that the impact of the policy was basically indiscernible.

“The unemployment rate stays where it always stays, lower than the rest of New Mexico. Gross sales tax receipts have climbed back out of the trough of recession. The number of new business licenses rises and falls, rises and falls, never far from about 600 a year. The number of people working in the area’s leisure and hospitality sector, where the bulk of low-wage workers are employed, remains steady,” she wrote. At the time, research on changes in the use of food stamps and public assistance didn’t have conclusive results.

Unique circumstances in Minneapolis

Minneapolis, of course, has its own set of circumstances apart from these cities.

Under the proposal the Supreme Court is reviewing, voters would decide in November whether or not to raise the minimum wage to $10 an hour beginning in 2017. Businesses with 500 or more employees would have to pay at least $15 an hour by 2020, while businesses with less than 500 employees would have to pay a minimum of $15 per hour by 2022. As of Aug. 1, Minnesota’s minimum wage is $7.75 for small employers and $9.50 for large employers.

Another circumstance unique to Minneapolis: a minimum wage increase on top of Minneapolis’ new mandatory employee sick leave policy leave employers with a lot of adjustments to make in short order.

Of course, we won’t know what will happen unless it happens, but Reich said he wouldn’t predict the sky falling.

“I haven’t run the numbers for Minneapolis or the metro area, but I suspect having done a bunch of these that the results are pretty similar everywhere, at least up to $15,” Reich said.

(Want to read more? Here’s a roundup of news on minimum wage increases in U.S. cities).

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Comments (21)

More on this, please

A lot is written about the financial impact on employees and employers moving the minimum wage up to $15 including the number of employers and workers likely impacted but this one-sentence in the article needs more discussion - "(though workers making more than minimum wage would also likely get a raise".

If you have been at a job for a while and you've worked your way up to $15 you're going to be furious to see a newly hired individual at your same wage. so you'll expect a raise. This could shift the entire hourly wage structure up for some companies where people stay in their roles for a while or flatten out rate of promotional increases.

Is it true that some unionized jobs link their base wage to the minimum wage? Will this increase then cascade up to raise wages as well?

Is Every Worker going to Be Furious?

(Response to "More on this, please"): you make a legitimate point in your comments. Certainly workers whose pay, after some time in their job, has barely caught up to a new minimum wage for starting workers have a legitimate expectation that their employers will adjust their pay upward also.
I hear, not only in your comments but in most writing or talking about raising the minimum wage anywhere, any time, the assumption that it's a hardship on employers to pay their employees more. This may be true for some; if so, subsidies should be paid (I am far from wealthy but am willing for my share of taxes to be used this way, rather than to pay subsidies to billionaires and to support wars).
But most corporations in this country make obscene profits and can easily afford to raise wages and salaries.
Historically, employers have always complained that not employing children, paying everyone equally for the same work (which is still not done), making workplaces safe (we don't have to go back to the Triangle Shirtwaist fire to find examples; fires and building collapses are still happening, with escape routes for workers blocked), all of these expenses that decent human beings would pay at once rather than chance the alternatives, will put them out of business!
Does that ever happen? Maybe. Is that a tragedy comparable to one human life, or the inability of a worker to support herself, himself, their families? No.
Let's value human beings and human needs above profits.

Obscene?

"most corporations in America make obscene profits?"

Is an average of 7.5% obscene? Is Walmarts 3% obscene?

What should the profit margin be to not be obscene?

www.aei.org/publication/the-public-thinks-the-average-company-makes-a-36...

No Tip Credit

A major unique circumstance that you did not touch on, is Minnesota does not have a tip credit. Which is the case in only a few states. All Minneapolis restaurants, if this passes as is, will then have to pay their servers the higher wage, even though they may already make this much or much more in tips. Servers likely account for most of the current minimum wage workers in Minneapolis, and this could cause many restaurants to close, or find new creative solutions.For example, a restaurant might need to add a "service charge" to each bill , and keep that added amount to offset the wage hikes. Would the customer then tip , as well?
Secondly, the prices in every Minneapolis restaurant will have to be raised considerably if this takes effect. And the neighboring suburbs and St. Paul will not have to raise theirs. Patronage within the city, will definitely be lost to the lower priced suburban restaurant or bar.
One more effect this may have on restaurants, or any business really- would be payroll tax increases and workers comp insurance rate hikes. Work comp insurance is figured by payroll costs, as is un- employment insurance contributions.
The menu price raises will have to be significant to cover all this.

You Say To-MAH-to

You call it a "tip credit", which sounds kind of positive. I call it a "tip deduction", since it allows employers to deduct a set amount from the server's wage.

Not the way it works

A tip credit doesn't work that way. Tips are included to determine if an employee has met the minimum wage threshold, if not the employer must make up the difference.

So if you today have a server making $10 hr salary and another $10hr tips they would continue to make $20 hr even if the minimum wage went up to $15 because they were above, you know, the minimum.

If they had a really bad stretch and for some reason made little on tips say $3 an hour the employer would need to kick in $2 per hour to keep them at $15.

So there is no set amount the employer deducts from anything.

It is clearly though more complicated for both employer and employee and likely would eliminate situations where tipped employees are responsible for recording those tips themselves which means if some of them today take some home in cash undeclared (not a legal move to avoid taxes) they'd have some records now and wouks begin paying taxes on all their income.

A new creative solution

would be for the restaurants to lower the amount of profit they take so they would not "have to raise their prices considerably". By the way, what is your evidence for their having to raise their prices?
Many servers, instead of, or worse IN SPITE OF, making "much more" than the old or new minimum wage in tips, are living in one room, with relatives, or in their cars, because they don't earn enough to pay security deposits! Please read Barbara Ehrenreich's "Nickled and Dimed" for another take on this minimum wage thing.

YES YES YES

This has been my point all along. The people with skills and experienced making $15/hr now are not going to be happy at all with co workers with less skill and no experience making the same wage rate. They are going to demand higher wages too.

Proponents tend to focus on just what happens at the bottom. Wage rates are rarely independent of each other - they are usually part of a wage scale that rewards performance, skills, experience, etc. When you change the lowest number you need to shift the entire scale to properly reward all employees.

As a business owner who's entry wage is significantly higher than minimum wage and is located in the suburbs, I have already shifted my entire pay scale by ~$2 /hr to stay in sync with the new state minimum wage. The net cost to me has been ~$70,000 annually. And in a competitive market, prices increases are not always possible. In fact, I read with just a hint of joy, that the CEO of Starbucks admitted to "customer price pressures" as the reason for their poor 2nd quarter same store sales. Even fancy coffee has found its maximum price point!!

Finally, what also fails to get mentioned is money spent on labor is money not spent to grow the business and create more jobs. Every business owner is now considered wealthy, greedy and self centered - which is far from the truth with most of the businesses I work with.

If minimum wage needs adjusting (and I can see a case - regular smaller increases over longer times), it needs to be done on a Federal or State basis. Not on a local government level.

Labor as "takers"

Try cutting your labor cost down to zero and see how fast your business grows.

minimum wage

good or bad for business? will lower employment?
what about improvement in the workers' life? I believe that workers deserve a living wage, health insurance, vacation, sick leave, maternity/paternity leave, jury duty leave, etc. We all need to pay for these benefits. And they are costly. unfortunately our consumer society values inexpensive goods over population well being.

Workers responsibility to earn minimum wage?

What should the workers themselves to able to do for that minimum wage?

From my experience, if a worker can:

1 - consistently show up on time to work each day without being under the influence of drugs/alcohol

2 - earnestly try and do the job they were hired for to the best of their ability each shift

3 - follow the company policies for safety and interpersonal interactions with other employees

that worker will in no time be paid far higher than minimum wage. And by that I mean less than 6 months in today's market. So if you know someone with these qualities now who is not being paid higher than minimum wage, tell me. I can have them placed a new job in less a couple phone calls.

But there are workers who don't have, for whatever reasons, the ability to do 1-3 above. They are the ones who typically stuck at minimum wage - many times as a result of needing to find a new job and start at the bottom again.

Is there a valid reason that businesses should be the ones responsible for insuring they have a "living wage"? What responsibility does that person have? What role does government social services have? I'd like to hear more discussion on this topic - another one of the complex issues that never gets much attention in this minimum wage discussion.

This is illogical

I'm sure there are many WalMart employees on government assistance who fit your three requirements.

Lukewarm water

So raising the minimum wage doesn't have much effect on business either way. And probably the minimum wage workers don't see much of an increase, due to hour cuts or whatever. So the point then is...?

If this law passes I expect a

If this law passes I expect a domino effect to surrounding areas. St. Paul will likely follow, just as it's doing with the issue of Sick Leave.

We heard similar warnings when the smoking ban was enacted about 10 years ago. But not long afterwards the ban was made statewide.

If Minneapolis does a $15 min wage, the rest of the state is going to follow. Even both (yes even Trump!) presidential candidates are talking about bumping up the minimum wage.

Please take some micro & macro economics classes!

If readers would understand elementary economics, they would understand that a free market with competion establishes both prices and wages. Government intervention in markets create distortions that have unintended consequences.

Government intervention typically has an adverse effect on the economy and on people.

Minimum wage jobs are intended to be entry level jobs for teenagers and high school graduates. They were never intended to provide a living wage for adults. There is only one proven way of increasing one's wages and that is with increasing one's education & training. That will provide a living wage for adults.

False

I happen to have taken a number of micro and macro economics classes (and passed them!) and can say you are wrong on nearly every point.

"A free market with competition"

You are assuming that the competitors are somehow equal. Employers and employees do not have equal power in the marketplace, so there is no real "competition."

"Government intervention typically has an adverse effect on the economy and on people." That statement is way too broad to support or contradict. Off the top of my head, however, I would ask for a comparison between living standards today and living standards of the general population in 1890, when there was far less "government intervention."

"Minimum wage jobs are intended to be entry level jobs for teenagers and high school graduates. They were never intended to provide a living wage for adults." Sorry, not true. When President Roosevelt called for the establishment of a minimum wage, he said it was a start "toward a better standard of living and increase[d] purchasing power to buy the products of farm and factory." He said nothing about teenagers or high school graduates (In 1938, when the permanent minimum wage law was enacted, fewer than 1/3 of all Americans had finished high school).

$400 more is a lot for low-wage workers!

For people whose income is in the six, or even seven and eight figures, an increase in the minimum wage doesn't seem like much. But, ask somebody who earns the MN minimum wage (less than $8 an hour, before taxes!) what they would do with an extra $400 or $500 a year. We're talking survival mode.

Another true thing? All these workers will spend every penny of their wages. Wealthy people don't do that, so it's the lower end of the economic scale where the new jobs come from, from the increased consumption the author of this article refers to.

And, one thing that the greed-inspired 2008 financial industry implosion and world-wide recession taught us definitively is, that capitalism will eat its own if there is insufficient governmental regulation to prevent its inherent greed from overwhelming an economy. There are die-hards out there who refuse to look at the conclusions necessarily drawn from the boom-bust cycles of unregulated capitalism (some nice Depression-era controls were recently removed from our financial system and we went back, quite quickly, to a nineteenth-century-style Panic).

Quoting Econ 101 to us about "the market must be free" is simply not sophisticated enough for this discussion.

Poverty, government subsidies and income disparity

This discussion ignores a number of critical issues. First, the shrinking of the middle class in terms of the race to the bottom with wages. If you look at the minimum wage of 30-40 years ago and applied the inflation rate, the minimum wage worker would be making closer to $15 per hour than the current minimum. Likewise wages of middle class workers as the investor manager class has shifted money into their pockets.

Second, the level of poverty in our prosperous society is appalling and the children of low wage workers have little chance to get out of poverty as long as their parents don't earn enough to support a family. Single parent households - often a result of who adults who cannot have a decent lifestyle with both parents working. $3000 per year more income, chump change for most Americans, make poor families more whole.

Third, in essence government by providing social benefits to low wage adults are providing business subsidies. When a highly profitable company like Walmart force the government to support its workers, that money goes right to the company bottom line. In other words, middle class people pay for social benefits, allowing executives and stock holders to pocket bigger checks.

Finally, this dynamic fuels income disparity and creates problems through society. When people have education and good paying jobs, they are better family members, neighbors and citizens. Why should government tolerate greedy people expecting subsidies, when it creates social dysfunction. Trump supporters, you are not getting screwed by government, but by businessmen like Trump who care about nothing other than their personal bottom line. Only government action can set things right.

Stegner comment

Bravo!

Same old story

1. A large majority of American Consumers want the best quality, features, performance, etc for the best price. Therefore many jobs went overseas and wages dropped. (ie the first Datsuns, Hondas, Nissans, etc)

2.Single parent households are poor because there is one adult and one or more kids. And unfortunately often the one Parent is low skilled or has low academic capability.

3. The subsidies go to those low skilled / low academically capable parents to reduce the natural consequences of their poor choices. They are better for our society than raising the minimum wage. Rationale: a higher minimum wage will increases prices for everyone, and put more pressure to off shore more jobs. Where as work credit, child credit, food stamps, etc are paid for by the wealthy and given to the poor.

4. Currently we encourage single parent households and all the societal problems they cause by paying them with medical care, food, cash, etc. This unfortunately promotes the behavior, children failing in school, generational poverty, etc. I understand your desire to double down on the "war on poverty, however I am not sure the poor or our country will be able to survive it.