As Seattle addresses income inequality by raising the local minimum wage to $15, how will it affect the low-income job market inside and outside of the city?
Minimum-wage workers in Seattle may have cheered last week when the city council last week approved a phased-in 61% increase to a $15 minimum wage, but others are more cautious. Michael R. Strain at the American Enterprise Institute says such a wage will “noticeably hurt the very people its authors are trying to help.” Strain argues that when a higher minimum wage drives up the payroll costs, businesses will respond by reducing jobs for minimum-wage workers, thus hurting instead of benefiting these workers:
Another major source of concern is that only Seattle-based firms are affected. Because it will cost firms located outside the city about 60 percent less to employ minimum-wage workers, fast-food restaurants, retail and grocery stores and other businesses in the Seattle suburbs will be able to offer lower prices than competitors inside the city limits. That is likely to translate into fewer jobs for low-wage workers in Seattle.
Source: Brookings Analysis of 2009-2011 American Community Survey data[/caption] The potential difference in urban and suburban outcomes is particularly interesting in light of a collection of articles we shared last August on how poverty is moving to the suburbs. The Washington Post explores the question with Alan Berube and Sid Kulkarni of the Brookings Institution, who find that there are more jobs paying under $15 in the suburbs than in Seattle (see chart above). They also spoke with UC Berkeley economist Michael Reich, whose studies of minimum wage differentials in neighboring counties “has found no negative employment effects in those areas that have raised the minimum wage.”
What’s going on?” Reich asks. “A lot of the attention goes to the demand side of the labor market and the argument that if you raise the price of labor, you’re going to want to demand less of it if you’re an employer. It’s almost like a law, a downward sloped demand curve. But, we teach in Econ 101 that markets are determined by labor demand and supply sides.”
Most of the jobs we’re talking about here are in sectors like retail, hospitality and restaurants. Those businesses spend a lot of money on employee turnover. But with better wages, Reich says, employees are likely to stay longer, meaning they become more experienced and productive, and the costs of replacing them and retraining workers declines. Those benefits offset some of the higher costs of labor. The rest of the costs, Reich says, may be passed onto consumers in barely perceptible ways — a few cents on the dollar in restaurants.
Click here for more quick reads featuring interesting articles on philanthropy and impact investing.