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

The lessons from other cities that have taken similar steps are murky.

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

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?

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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.

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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.

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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.

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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).