Los Angeles is the latest city to increase its minimum wage. The city council voted an increase from $9 an hour currently to $15 an hour in 2020. LA joined other west coast cities, San Francisco and Seattle, in increasing the wages of workers on the low end of the pay scale.
How will that work out? At an emotional level it makes sense paying workers a “living wage.” But the laws of economics, which don’t operate on emotion, suggest a different outcome. To start with, who is actually earning the current minimum wage, federally mandated at $7.25 an hour?
According to the Pew Research Center, workers at or below minimum wage are disproportionately young; half are age 16 to 24 and a quarter are teenagers age 16-19. Almost two thirds are part time workers. This means the vast majority are part timers, working their first job, either in or out of school, where the minimum wage is entirely appropriate as it is designed. More than half (55 percent) work in the leisure and hospitality industry and 14 percent in retail. These are industries where tips and commissions may further boost take home pay above and beyond the minimum wage.
Minimum wage workers under age 25 are typically not family breadwinners but instead live in middle class households with an average family income of $65,900. Of the over age 25 workers, three-fourths live above the poverty line with an average family income of $42,500 a year, most working part time, and only 5 percent being married. The stereotype of minimum wage workers living on the edge of destitution is false. The suburban teenager is the typical minimum wager, not a single parent supporting a household.
Statistics and academic discussions are fine and good, but what happens in the laboratory of real life with the minimum wage is raised? Let’s start in San Francisco where the minimum wage jumped from $10.74 per hour last year to $11.05 beginning New Year’s Day, followed by another bump to $12.25 on May 1, with planned increases to $15.00 in 2018. Borderlands Books, an 18-year-old science fiction specialty bookstore in San Francisco, closed, citing the wage increase. “Continuing to pay the higher wage without any corresponding increase in income will expend the store’s cash assets,” reported the store blog.
Laws of economics.
Moving up the coast to Seattle, where the minimum wage rose to $11 an hour on April 1, the owner of Z Pizza is, “being forced to close her doors, because she can’t afford the higher labor costs.” So the pizzeria’s 12 employees go from the previous minimum wage to no wage as they are now out of work. Coastal Kitchen is a Seattle restaurant is struggling to come to grips with the 60 percent increase in the minimum wage. The owner has options though, “Trimming staff hours, opening one hour later and closing one hour earlier. He’s also considering whether to close some hours during the day.” This might allow him to limp along, but with the above measures his employees are likely to have a smaller, not larger, weekly paycheck despite their higher hourly wage.
Ivar’s Salmon House in Seattle responded with a 21 percent increase in their menu prices. “So that meal that last year cost you $100, today costs you $121,” noted the president of Ivar’s. And that doesn’t include the tip on the higher bill amount. How many new $11 an hour minimum wage workers will be rushing to Ivar’s for dinner at those prices? How many other diners will opt for a pizza or a burger rather than Ivar’s salmon? What about the Ivar’s workers who inevitably see their work hours trimmed? Would their increased hourly wage even cover the added cost of dining at their own restaurant?
Los Angeles is next with plans to raise the minimum wage by 67 percent over the next five years. Have no fear. “Scholars who have studied the issue at length indicate that for the most part, the impact on costs for most businesses should be minimal.” Sure, just like in San Francisco and Seattle. Or in Clintonese, it depends on the meaning of “for the most part,” “most,” and “minimal.” The lives of Hollywood actors and moguls won’t be affected. But what about the minimum wage workers? According to a hospitality consultant, “The only [other] way you can control it is to cut people or hours.” Meaning those lucky enough to keep their jobs will end up with the same, or even less, take home pay.
Last but not least on the west coast is Portland, raising the minimum wage to $15, but only for city workers and contractors. Ignored are seasonal and part-time employees of the city and restaurant workers. Bad luck for them. New York may be next with Mayor Bill de Blasio calling for an “organic minimum” wage. Personally I’d rather see a “gluten-free” wage rather than simply “organic,” but we can leave that for Chicago, whose minimum wage increase is set to kick in this summer. Expect similar stories from Chicago as we’ve seen from the west coast cities.
The inconvenient truth about minimum wage laws is that despite their political popularity on a feel-good level, similar to most liberal ideas, they don’t have any significant impact on poverty or standard-of-living, but instead reduce employment and job opportunities. Rather then helping family breadwinners, few of whom actually earn minimum wage, they hurt entry-level employees, typically low skilled, where the minimum wage is entire appropriate for someone entering the work force.
Instead the higher minimum wage will benefit suburban teens and students, most of whose families are well above the poverty line. Employers respond to their increased labor cost as they would any other cost. Reduce it. Meaning elimination of entry-level jobs or fewer hours available for those who are fortunate enough to keep their jobs. Fewer jobs translates to fewer opportunities to enter the labor force, gain experience, and climb the ladder to higher wages. But the politicians and progressives can pat themselves on the back for their compassion, while ignoring the destruction left in their wake.
Brian C Joondeph, MD, MPS, a Denver based physician and writer. Twitter @retinaldoctor.