Los Angeles Makes A Risky Bet With Its Minimum Wage Increase
Los Angeles became the latest major city to increase its minimum wage. It's a risky bet that is likely to do more harm than good.
Earlier this week the City Of Los Angeles became the latest major city to approve an increase in the minimum wage to $15 per hour:
LOS ANGELES — The nation’s second-largest city voted Tuesday to increase its minimum wage from $9 an hour to $15 an hour by 2020, in what is perhaps the most significant victory so far for labor groups and their allies who are engaged in a national push to raise the minimum wage.
The increase, which the City Council passed in a 14-to-1 vote, comes as workers across the country are rallying for higher wages and several large companies, including Facebook and Walmart, have moved to raise their lowest wages. Several other cities, including San Francisco, Chicago, Seattle and Oakland, Calif., have already approved increases, and dozens more are considering doing the same. In 2014, a number of Republican-leaning states like Alaska and South Dakota also raised their state-level minimum wages by ballot initiative.
The effect is likely to be particularly strong in Los Angeles, where, according to some estimates, almost 50 percent of the city’s work force earns less than $15 an hour. Under the plan approved Tuesday, the minimum wage will rise over five years.
“The effects here will be the biggest by far,” said Michael Reich, an economist at the University of California, Berkeley, who was commissioned by city leaders to conductseveral studies on the potential effects of a minimum-wage increase. “The proposal will bring wages up in a way we haven’t seen since the 1960s. There’s a sense spreading that this is the new norm, especially in areas that have high costs of housing.”
The groups pressing for higher minimum wages said that the Los Angeles vote could set off a wave of increases across Southern California, and that higher pay scales would improve the way of life for the region’s vast low-wage work force.
Supporters of higher wages say they hope the move will reverberate nationally. Gov. Andrew M. Cuomo of New York announced this month that he was convening a state board to consider a wage increase in the local fast-food industry, which could be enacted without a vote in the State Legislature. Immediately after the Los Angeles vote, pressure began to build on Mr. Cuomo to reject an increase that falls short of $15 an hour.
“The L.A. increase nudges it forward,” said Dan Cantor, the national director of the Working Families Party, which was founded in New York and has helped pass progressive economic measures in several states. “It puts an exclamation point on the need for $15 to be where the wage board ends up.”
Much of the debate here has centered on potential regional repercussions. Many of the low-wage workers who form the backbone of Southern California’s economy live in the suburbs of Los Angeles. Proponents of the wage increase say they expect that several nearby cities, including Santa Monica, West Hollywood and Pasadena, will also approve higher wages.
But opponents of higher minimum wages, including small-business owners and the Los Angeles Chamber of Commerce, say the increase approved Tuesday could turn Los Angeles into a “wage island,” pushing businesses to nearby places where they can pay employees less.
“They are asking businesses to foot the bill on a social experiment that they would never do on their own employees,” said Stuart Waldman, the president of the Valley Industry and Commerce Association, a trade group that represents companies and other organizations in Southern California. “A lot of businesses aren’t going to make it,” he added. “It’s great that this is an increase for some employees, but the sad truth is that a lot of employees are going to lose their jobs.”
The 67 percent increase from the current state minimum will be phased in over five years, first to $10.50 in July 2016, then to $12 in 2017, $13.25 in 2018 and $14.25 in 2019. Businesses with fewer than 25 employees will have an extra year to carry out the plan. Starting in 2022, annual increases will be based on the Consumer Price Index average of the last 20 years. The City Council’s vote will instruct the city attorney to draft the language of the law, which will then come back to the Council for final approval.
Not surprisingly, the news of a victory for the forces that have been lobbying for an increased minimum wage in the nation’s second largest city is being viewed as good news in many quarters, not the least of them being the Editorial Page of The New York Times, which describes the vote as a challenge to Congress and other states where the issue is being debated. The editors at Bloomberg are far more sanguine:
A scholar whose work is often cited in support of a higher minimum wage is Arindrajit Dube of the University of Massachusetts at Amherst. He argues that moderate increases are unlikely to have much effect on jobs. What’s “moderate”? Dube says a minimum set at half the prevailing median wage, plus a cost-of-living adjustment, would strike a prudent balance between raising the incomes of the low-paid and maintaining employment. For metropolitan Los Angeles, this suggests a figure of maybe $12 an hour, not $15.
Some researchers are less optimistic than Dube about the employment effects. At least one councilman who voted for the measure is also concerned. Gil Cedillo, who represents some of the city’s poorest districts, said he would have preferred to see the most prosperous residents, rather than small-business owners, carry the burden. “Instead, it’s going to be coming from people who are just a rung or two up the ladder here,” he told the New York Times. “It’s a risk that rhetoric can’t resolve.”
Raising the incomes of the low-paid is a worthy goal. And if wage mandates aren’t the best way to do it, they might be one feasible way. By all means, let Los Angeles find out. Other big cities should wait and see what happens.
While the argument in favor of minimum wage increases have typically relied more on emotion than reason, in recent years there have been some efforts by advocates of the idea to push back against the traditional economic argument on the issue that states that, on average, an increase in the mandated minimum wage is more likely than not to lead employers to cut back on hiring to engage in other measures designed to save labor costs such as cutting back on hours for individual employees or investing in automation that has the effect of replacing human workers. According to these new studies that have been advanced by advocates, an increase in the minimum wage has no real impact on employment or wages and that its positive benefits outweigh any of the minimal negative impacts that economists have talked about in the past. As Peter Suderman notes at Reason, though, those studies are of dubious value in the current context:
For the past few years, liberal economists and policy wonks have been increasingly vocal in arguing that that it’s not true that increasing the minimum wage costs jobs. As senior administration econ adviser Jason Furman said last year when President Obama called for a national increase in the minimum wage, “Zero is a perfectly reasonable estimate of the impact of the minimum wage on employment.” Echoing the sentiment, The New York Times editorial boardwrote around the same time that “the weight of the evidence shows that increases in the minimum wage have lifted pay without hurting employment.”
The evidence for this isn’t nearly as overwhelming as boosters sometimes like to suggest. Economists David Neumark and William Wascher, for example, have surveyed the literature and found that, overall, most studies still show that wage increases cost jobs. And the Congressional Budget Office (CBO) estimated that raising the federal minimum from $7.25 to $10.10 over a three year period would probably cost about 500,000 jobs, and perhaps as many as 1 million. But the CBO also said it was possible that the number of jobs lost would be minimal, pointing to some studies suggesting that the wage floor could be increased with very little effect on jobs, at least in certain circumstances, up to a certain point.
Assume, just for a moment, that liberal wonks are basically right and it is possible to hike the minimum wage without significantly reducing employment. Fine, sure. But this only gets you so far, because at some point, a high enough minimum wage would eventually start to cost jobs. There’s no serious person who thinks that employment will remain the same if you, say, raise the minimum wage to $100 an hour, or even $40 an hour. So the question becomes: If it’s possible to raise the minimum wage some amount without significantly reducing employment, then how big a hike would it take to have a meaningful effect?
Megan McArdle makes a similar point in her column at Bloomberg, and points out that the impact of the kind of large-scale increase in wages that the Los Angeles law contemplates isn’t something that would be readily apparent in a short period of time:
When the minimum wage goes up, owners do not en masse shut down their restaurants or lay off their staff. What is more likely to happen is that prices will rise, sales will fall off somewhat, and owner profits will be somewhat reduced. People who were looking at opening a fast food or retail or low-wage manufacturing concern will run the numbers and decide that the potential profits can’t justify the risk of some operations. Some folks who have been in the business for a while will conclude that with reduced profits, it’s no longer worth putting their hours into the business, so they’ll close the business and retire or do something else. Businesses that were not very profitable with the earlier minimum wage will slip into the red, and they will miss their franchise payments or loan installments and be forced out of business. Many owners who stay in business will look to invest in labor saving technology that can reduce their headcount, like touch-screen ordering or soda stations that let you fill your own drinks.
These sorts of decisions take a while to make. They still add up, in the end, to deadweight loss – that is, along with a net transfer of money from owners and customers to employees, there will also simply be fewer employees in some businesses. The workers who are dropped have effectively gone from $9 an hour to $0 an hour. This hardly benefits those employees. Or the employee’s landlord, grocer, etc.
There’s no way to say until the new wage is fully phased in and we have years of data. But it seems unlikely that you can increase the minimum wage by 65 percent, mandating higher wages for almost half of your workforce, and be confident that the other effects will be small. If I had to lay money, I’d put it the other way: The effects will be significant. The long-term result will be higher wages for many low-wage workers, but the desperation of unemployment, or a forced relocation, for many others.
Even if the outcome that McArdles foresees come to pass, it’s likely that few people will make the connection between a higher minimum wage and fewer available jobs at the lowest end of the employment spectrum. Not every low wage worker will be harmed, of course, but the ones who are will become part of what Frederic Bastiat called “the unseen,” meaning the people who are on the losing end of an idea that, while good intentioned, has some very bad unntentioned consequences. The studies that the supporters of the Los Angeles minimum wage increase, and similar proposals across the country, rely upon all basically stand for the proposition that a “moderate” increase in the minimum wage will have a minimal impact on the economy. As it stands, this seems like an axiomatic proposition. If a wage mandate increases by some small amount then it probably won’t have that big of an impact overall. However, the increase that was just approved in Los Angeles constitutes a 66% increase over a very short period of time followed by increases tied to the Consumer Price Index on an annual basis going forward. That hardly sounds like “moderate” to me, and while it’s true that many major employers will likely be able to absorb these additional labor costs quite easily, it’s also probable that we will see some efforts by employers at this level to curtail labor costs. As I said, this can amount to anything from cutting hours or reducing planned hiring to replacing order takers at fast food restaurants with computers, something that is already becoming quite common. For example, Panera Bread Co.’s CEO has said that he hopes to have touchscreens replace cashiers in all the company’s stores by 2016. McDonald’s began moving to replace cashiers with touchscreens in its European restaurants four years ago. Eventually, technology like this is going to make its way to the United States. If and when that happens, the fact that the minimum wage is now $15 per hour will mean very little to people who are earning less because they aren’t being giving as many hours as they used to, people who aren’t being hired, or people who have been laid off because their employers discovered that a touchscreen doesn’t make any minimum wage demands at all.
As I said above, though, the minimum wage debate is more about emotion than it is about a rational discussion of economic consequences, and it’s understandable that it would be that way. Everyone can agree with the general idea that people ought to earn more money, and $9.00 per hour even for a menial job certainly doesn’t sound like a lot of money. That’s why the people making the argument in favor of raising the minimum wage succeeded in Los Angeles, and why they are already talking about using their victory there to achieve the same thing elsewhere.However, public policy ought to be made based on something better than emotions and feelings, especially when there is incontrovertible evidence that the policy being advocated has the potential to cause harm to some of the most vulnerable people in society. Given that, one would think that people would want to approach the issue with something more than blatant appeals to base emotions that don’t even bother mentioning facts. In any case, Los Angeles has now made itself a test case, and other cities will likely follow. Perhaps the predictions of doom will be wrong, but I suspect that they won’t be. If you end up ordering your Big Mac off a touchscreen in five years or so, you’ll know why.