The Early Returns

Following the wave of cities including Chicago raising their minimum wages, some to $15 per hour, the returns are starting to come in and they’re very much as predicted. Seattle, the first mover, is seeing some results:

As the notion of a $15 minimum wage spreads and gains popularity, some new data of possible relevance out of Seattle via the American Enterprise Institute:

In June of last year, the Seattle city council passed a $15 minimum wage law to be phased in over time, with the first increase to $11 an hour starting on April 1, 2015. What effect will the eventual 58% increase in labor costs have on small businesses, including area restaurants? It’s too soon to tell for sure, but there is already some evidence that the recent minimum wage hike to $11 an hour, along with the pending increase of an additional $4 an hour by 2017 for some businesses, has started having a negative effect on restaurant jobs in the Seattle area. The chart above shows that the Emerald City MSA started experiencing a decline in restaurant employment around the first of the year (when the state minimum wage increased to $9.47 per hour, the highest state minimum wage in the country), and the 1,300 job loss between January and June is the largest decline over that period since 2009 during the Great Recession (data here). The loss of 1,000 restaurant jobs in May following the minimum wage increase in April was the largest one month job decline since a 1,300 drop in January 2009, again during the Great Recession. In contrast to the January-June loss of restaurant jobs in the Seattle area: a) restaurant employment nationally increased by 130,700 jobs (and by 1.2%) during that same period (data here), b) overall employment in the Seattle MSA increased 1.2% and by 21,800 jobs (data here) and c)non-Seattle MSA restaurant employment in Washington increased 3.2% and by 2,800 jobs (data here).

I reported back in March about restaurateur fears of the hike and looming further hikes in Seattle, then about some counterdata noting that, well, permits for new restaurants hadn’t seemed to slow down.

The loss of potential jobs to specific individuals on the margin need not show up in overall macro data about total employment post minimum wage. Still, the data AEI presented provides still further suggestive empirical evidence that the laws of supply and demand that underlie the entire logic of the science of economics might not disappear when it comes to labor, just because people think it would be cooler if lower wage people got paid more, as long as it isn’t at their clear and direct expense.

Fast food companies are behaving much as would be expected as well. I reported earlier how McDonalds has decided to get rid of most of its company-owned stores, thereby dodging the bullet of paying the higher wages it promised to pay to its minimum wage employees. Its franchise fees come out of the gross rather than the net. They’re indifferent to whether their franchisees can make a profit while paying the higher wages that are being mandated. At least they’re indifferent now. We’ll see what happens next quarter or next year.

Now Wendy’s has chimed in:

Last week the Wendy’s Company did a public service on its second-quarter earnings call by explaining how mandated wage hikes will lead to fewer jobs for the low-skill workers that progressives claim to be helping.

First, CFO Todd Penegor talked about the pressure to pay higher wages and said that “we continue to look at initiatives and how we work to offset any impacts of future wage inflation through technology initiatives, whether that’s customer self-order kiosks, whether that’s automating more in the back of the house in the restaurant. And you’ll see a lot more coming on that front later this year from us.”

So the company will now use machines to do jobs that used to be done by people who have become too expensive to employ. We keep hearing that these minimum-wage laws benefit restaurant workers. But since many will no longer be working in restaurants at all, the reasonable conclusion is that the activist campaigns to raise the minimum wage are mainly intended to benefit the unions that back them.

The beauty of the minimum wage as a mechanism for demonstrating your philanthropy is that it enables compassionate upper middle income city dwellers to feel good about themselves without leaving the comfort of their armchairs or shouldering higher taxes. That it might actually harm the people they purport to want to help is a mere detail.

You cannot outmaneuver supply and demand or profit and loss. A frequent topic in this blog is how to increase the wages of the lowest income earners without throwing them out of work but I advocate recognizing the ineluctable power of supply and demand rather than ignoring it. What is need among non-skilled and semi-skilled workers is a tighter labor market or, alternatively, wage subsidies.

But wage subsidies cost money and for cities that would mean higher taxes. Chicago can’t afford to pay the commitments it’s already made let alone make more. Much better to enact a higher city minimum wage and throw a few thousand more poor people out of work. At least the mayor and the City Council can feel good about the benignity of their intentions.

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