Today Chicago gave its city minimum wage a sharp boost to $10 per hour. There’s some disagreement over what impact that will have:
A $1.75 an hour increase in Chicago’s minimum wage came into effect Wednesday, prompting yet another round of the ongoing debate over its effects on employment and the wider economy.
City officials estimate 200,000 workers will benefit from the new $10 an hour minimum wage, which is still well below the $15 minimum activists are pushing for nationwide.
But the Employment Policies Institute — a conservative Washington D.C. think tank funded by the restaurant business — disagrees. It published a survey of 300 small Chicago businesses who until Wednesday paid workers less than the new minimum wage of $10 an hour.
A third of the businesses surveyed said their small profit margins mean they have or will reduce their employees’ hours in response to the increased minimum wage. Half said they would raise prices. Nearly a quarter said they would let staff go and halt expansion plans. And more than a fifth it is very likely they’ll close when Chicago’s minimum wage rises to $13 in 2019.
The article goes on to cite the opinions and studies of a variety of other economists.
My take? If you want to help poor people, there are a dozen better ways to do so than by increasing the minimum wage. You can offer wage subsidies, more services, tax breaks, and on and on almost indefinitely. To the best of my knowledge none of the published studies take into account run-on effects of the minimum wage.
For example, there are such things as minimum wage plus or minimum wage multiple contracts. Under such a contract the wages paid to workers, are boosted by either a fixed amount or a multiplier applied to the minimum wage. The economic consequences of such contracts go well beyond the workers making the lowest wages, fanning out through the whole economy.
But the main reason to rely on devices other than increasing the minimum wage is that, at least at the margins, you’re almost certain to hurt someone by it. Someone will have his or her hours cut or lose her or his job over it. Arguing for the greater good is cold comfort under such circumstances.
I’m not saying “do nothing”. I’m saying “try another way”.
I entirely agree that raising the minimum wage isn’t the best way to help poor people (especially since with the un- and under-employment rates, the poorest don’t even have jobs), but playing devil’s advocate it’s worth noting that most of the alternatives you propose are either difficult or impossible to enact at the city level, which is what this article is about: Wage subsidies like the EITC are great, but the admin costs for a city implementing them would be prohibitive (and possibly not legal?), the city almost exclusively taxes at flat rates (and maybe it shouldn’t, but that again would be a major change), so tax breaks are hard to do, and increased services is a wonderful idea if the city wasn’t already in such a dire financial position.
Second, I really wouldn’t read too much into the survey (for good or ill): Small businesses aren’t running a charity now; when they pay workers to be there it’s because they have work for them to do. If they reduce hours or headcount and their sales don’t go down, they’ll either have to increase hours or headcount to make up for the difference, or pay their remaining workers above minimum wage since obviously they’re productive enough for a wage premium and they might leave. Raising prices is exactly how you’d expect businesses to respond, the question is by how much. If a $5 latte becomes a $5.20 latte, the minimum wage costs will be born by the (affluent-ish) consumers of coffee in the city, making the increase progressive.
The fact is, that survey is asking small businesses to peer into a crystal ball and look into the future, and some are better at it than others, but the businesses that will survive are the ones that keep their ear to the ground and adapt to what’s working (price increases, decreased hours, etc.)
Employer-level wage subsidies are certainly possible for the city but, as you say, the city has limited resources. The city taxes at flat rates because that’s what it’s empowered to do by the state. However, it could effectively graduate, for example, its sales tax through a system of tax rebates. Sure, it would be complicated but it would also be much more efficient than the minimum wage.
I think using the minimum wage is a cheap, cynical way to help some people and injure others, gaining political support while mitigating political risk. It doesn’t have direct costs for the city in that the city doesn’t pay for it so it doesn’t directly affect the budget and it always has plausible deniability. Win-win!
I know that for some businesses this subject has already been studied. So, for example, IIRC a McDonalds franchisee can re-capture about 30% of an increase in the minimum wage to $15 by increasing prices. The point is the degree to which a business can offset an increase in the minimum wage depends on the business.
St. Louis is backing off a proposal to increase the minimum wage to $15 in an interesting context, if it doesn’t pass it soon, a state law will come into effect that will bar all cities from raising the minimum wage past the state minimum wage.
One response to that deadline would be to hurry up, but it looks like they are slowing down to thoroughly study the issue. I wonder if the state law has significantly changed the optics from the city’s p.o.v.
I generally see sales taxes as attempting to capture some of the income from commuters and travelers.
The best thing for minimum-wage opponents to do would be to promote raising the minimum wage to $100/hour in order to make us all rich. How are the socialists going to oppose that?