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Commentary By Jacob L. Vigdor

About That Raise: Take It From Seattle, a $13 Minimum Wage Won't Necessarily Boost Pay

Cities, Economics New York City

It all started at a McDonald’s at the corner of 40th and Madison, early one morning in November 2012. That day, 200 striking fast food workers began a movement that swept the nation, calling for a major increase in the minimum wage under the slogan “Fight for 15.” Within a few short years, this small action became a mainstream movement for the Democratic Party, gaining the support of Mayor de Blasio and eventually Gov. Cuomo.

The transformative result: By the end of 2018, just over six years after the dream was hatched, the $15 minimum wage will be a reality for New York City’s larger businesses. As an interim step, by this year’s end, New York City companies with 50 or more employees will have to pay $13 an hour, offering the promise of an instant 18% pay boost for anyone employed at the current $11 minimum wage.

The dream was about more than an hourly wage, though. It was about bigger paychecks. And here New York and other cities boosting their local minimum wage must confront the possibility of unintended consequences: Higher wages might not make the dream of a bigger paycheck come true if employers lay off workers, or scale back their hours. Given the precarious finances of most low-income families, it is no exaggeration to state that tens of thousands of lives hang in the balance.

Now the latest data in from Seattle - where the minimum wage hit the $13 level last year - brings renewed fears that these increases cause real harm, at least to some workers.

Here in Seattle, where my University of Washington colleagues and I have been working on a minimum wage study for nearly three years, it’s easy to see that the overall economy is doing fine. Construction cranes dot the skyline, and the city has seen tens of thousands of new high-paying jobs for skilled workers in the tech industry.

When the minimum wage went as high as $11 an hour in April 2015, the low-wage job market appeared to experience no more than a minor hiccup. We reported this to the City Council last year, and a new analysis we released last week confirms the first take.

Something different happened in January 2016, when the minimum increased for the second time in nine months, to as high as $13 for the city’s largest businesses and franchises.

The number of jobs paying low wages - under $19 per hour - dropped noticeably. Having counted 93,382 jobs paying under $19 in the peak of Seattle’s summer tourist season in 2015, we could find only 86,842 the following summer. (We chose to set $19 as the bar for low wage jobs given the low chance that a worker earning less than the new $13 minimum would be bumped up above $19.)

We can count not only jobs but the number of hours worked at wages under $19. By our best guess, hours dropped about 9% in 2016 compared to earlier years, while wages went up only 3%. Put these numbers together and you get a conclusion that surprised us and many others: the minimum wage increase actually reduced the amount of money paid to low-wage workers in Seattle, an average of $125 per month for each.

We looked to see whether the same reductions were going on in other parts of Washington state, where the minimum wage had stayed constant, and they were not. We looked to see whether we were making a mistake because the minimum wage increase had led some workers to have their hourly rate boosted above $19. To do that, we checked whether employment under $25 per hour had also dropped. It had, by about the same amount.

We worried - and to some extent, we still worry - that our data might be missing some jobs. We’re using data collected by the State of Washington covering almost every worker who receives a W-2. But sometimes the data aren’t specific enough to let us know whether a job was in Seattle or another part of the state. This is a particular problem for businesses with many locations. Maybe these businesses were adding jobs even as others cut them.

Fortunately, my colleagues participating in the Minimum Wage Study at the University of Washington have been conducting a survey of over 500 licensed Seattle businesses, many of them with more than one location. Owners of these chain businesses were actually more likely to report cutting jobs compared to small one-location companies. So our best guess is that adding in the data for these companies would make our results even more negative.

The survey gives us a chance to make up for one blind spot in our data. But there are others. We don’t have information on contractors, or people working in the “gig” economy, or those working off the books. It’s possible that the minimum wage drove some businesses to stop reporting employment to tax authorities. This would mean the jobs that seem missing to us are actually still there, but the workers are not having taxes or Social Security withheld, and not entitled to unemployment benefits if they are laid off.

Eliminating possible alternative explanations for developments is the way we’re trained to do our work as researchers and professors. We tell you something we think we know - in this case, that a $13 minimum wage has had a measurable effect on Seattle earnings - and then start telling you all the reasons we’re not completely sure we’re right.

But when it comes to wage increases and their impacts, the findings are nonetheless firm enough that Seattle and other cities raising their wages, or thinking about it, should take notice.

Let’s take a step back for a minute, and ask the big-picture question: What is the problem that local minimum wage increases are trying to solve?

The answer, plain and simple, is income inequality. Over the past century, we’ve seen three stages of inequality in the U.S. Up until the stock market crash of 1929, American incomes were very unequal. Cities like New York were home to incredible wealth, but much of the population still languished in rural poverty and urban slums. Through depression, war and the middle of the century, America became much more equal - in part through tools like the national minimum wage, first established in 1938.

Problems persisted - pay gaps between races and genders are stubborn even to this day - but this was an era when even a blue-collar worker could live the American dream. Starting around the 1970s, however, things started to change. Those high-paying blue-collar jobs started to dry up. Today, using basic measures, income inequality is back to the high levels we last saw a century ago.

But there’s something different about today’s inequality - something that suggests the minimum wage (which today stands nationally at $7.25) might have limited power to fight it.

A century ago, American businesses generated significant profits from labor. Companies like Carnegie Steel, Ford Motor and Standard Oil made their founders wealthy as they employed thousands. The key to more evenly distributing the money companies made was negotiation between labor and management. In this sort of economy, the minimum wage could help make sure workers got a fair share of a company’s spoils.

There are big corporate profits in the modern economy as well. But unlike a century ago, when the profitable companies employed workers who toiled in physical labor, today’s profit giants tend to have a relatively small number of workers who sit at desks. The two most profitable American companies in 2016 were Apple and J.P. Morgan Chase. Wells Fargo, Google’s parent Alphabet and Microsoft were not far behind. Each of these companies managed to turn over 20 cents of every dollar they earned into profit. But their employees have titles like computer engineer and banker, rather than server, custodian or cashier.

At the other end of the spectrum, companies that employ a lot of lower-paid workers might look profitable on the surface, but not quite so much when you consider how many dollars in sales they have to rack up to make that profit. Of every dollar a customer hands over to a cashier at Wal-Mart, only three cents turn into profit.

Here’s a way to think about it. For every hour of work, how much profit does a company make? Statistics from the U.S. Department of Commerce show incredible differences across industries. In restaurants and hotels, profit - counting both corporate profits and whatever the owners of small mom-and-pop businesses take home - amounts to about $2.50 for every hour an employee works. In the information technology industry, the number is closer to $22.

We can ask the owners of restaurants to cover the costs of higher income for their workers, but they don’t have a whole lot of resources to cover them with. Raising wages by a dollar? If owners are going home with $2.50 for every hour an employee works, it’s not that unreasonable a request. Raising wages by several dollars? Unless owners make some significant changes to their business model, we’re asking them to lose money.

The real key to getting more corporate profits into the pockets of low-wage workers is to find a way to tap into the industries that make lots of money while employing few if any low-wage workers - industries that, ironically, are often finding ways to help other businesses cut back on labor. (Think self-driving vehicles, or Amazon’s cashier-free convenience store here in Seattle.)

If we were inclined to make that kind of income transfer happen, how would we do it? Not with a minimum wage. The traditional tax-and-transfer system could do the trick. At least in theory, taxes on corporations, capital gains and dividend income could fund programs like the Earned Income Tax Credit or even more ambitious ideas like a Universal Basic Income. That is, if - and it’s a big if - the public were willing to elect politicians committed to making that happen.

What does all this mean for New York’s impending minimum wage increases? Can the Emerald City offer some lessons for the Big Apple? Although they are on opposite coasts, the two cities have much in common. They are booming cities with lots of high-paying jobs for people with the right training and talent. They are expensive places where families can struggle to make ends meet if they don’t qualify for a high-paying job.

Unfortunately, we aren’t in a great position to tell New York what to do. We’re having a hard enough time struggling with the question of what Seattle should do. After all, even if many workers are seeing their hours and paychecks cut, many others aren’t. To make a good decision about whether the gains to some justify the losses to others, we need to understand exactly who gains and who loses. We haven’t been able to analyze that yet. Within a year or two, we’ll have the data to do that - to see how things break out between teenagers and older workers, and between workers poor enough to qualify for public benefits and those who can count on the paychecks of others to raise their family income.

The easiest thing to say is that even in the best of all possible worlds it’s hard to make an expensive city affordable by raising the minimum wage alone. Many working families will see any higher pay eaten away by cutbacks in public benefits. Saving room in our successful, expensive cities for the people doing critical but low-paid work will still be a challenge even when the minimum wage hits $15. It may be time to think outside the minimum-wage box.

This piece originally appeared in New York Daily News


Jacob L. Vigdor is a professor at the University of Washington’s Evans School of Public Policy and Governance and an adjunct fellow at the Manhattan Institute.

This piece originally appeared in New York Daily News