It seemed like a done deal that Baltimore would make it illegal to work for or offer a job for less than $15 per hour. The city’s new mayor, Catherine Pugh, had campaigned as a supporter of raising the minimum wage, and the city council passed the measure to require wages in the city 50 percent higher than those in the rest of Maryland. But on March 31, in what many activists are denouncing as a betrayal, Pugh vetoed the measure.
“I want people to earn better wages,” Pugh told the Wall Street Journal, which recently took an interesting local look at the issue. “But I also want my city to survive.”
Pugh is a liberal Democrat. So is Ike Leggett, nearby Montgomery County’s executive, who in January blocked a similar minimum wage increase in his famously liberal suburban Washington jurisdiction. What are these left-leaning politicians seeing that eludes so many of their comrades?
The problem is that in the real world, there are inevitably trade-offs to making labor artificially expensive through law. That’s because a minimum wage law does not magically make labor more valuable, it brings not increase in wealth or productivity, so something else has to give. And that something is demand side of the labor market.
When the government decides an employer must pay more for the same amount of work and production as before, the laws of economics kick into action. Businesses with few low-wage workers may be unaffected, but in certain specific fields it will mean higher consumer prices, lower profits (and therefore less business formation), forgone business expansion, less hiring, greater comparative value in finding alternatives to hiring (such as robots), or all of the above.
The trade-offs may not always be large, but they are inevitable. There’s no way to cheat the system of people acting from rational self-interest. Smaller businesses with smaller profit margins are hurt disproportionately by such government add-ons.
Take, for example, the Baltimore brewery whose owner the Journal interviewed, whose labor costs would have increased by more than its annual profit margin if the minimum wage had gone to $15 per hour. Incidentally, the damage that excessively high minimum wage laws inflict on small business is one reason larger companies are usually the first to support them. Denizens Brewing Company’s loss might well be a gain in market share for Anheuser-Busch or Applebees.
The public generally likes the idea of a minimum wage, whatever its merits, and are willing to accept some trade-offs for it. In ballot referenda, even conservative jurisdictions have voted overwhelmingly for modest increases to the minimum. But that doesn’t mean these laws actually improve the lot of low-wage workers, or represent a serious strategy for ending poverty.
One study of Seattle, which has raised its wage from $9.96 to $11 (or $13 for larger firms) on its way to $15 per hour, offers some hints. Comparing Seattle wage trends to those in surrounding jurisdictions that did not raise their minimum wage, University of Washington researchers estimated that the median low-wage worker who remained employed made approximately 73 cents per hour more than he would have without the new law. But in “businesses that rely heavily on low-wage labor” — that is, the industries most acutely affected — the average employee also lost one hour of work per week, and their employment rate declined. “The effects of disemployment,” the study’s authors wrote, “appear to be roughly offsetting the gain in hourly wage rates, leaving the earnings for the average low-wage worker unchanged.”
This early study is not the last word, as its authors note, but it should cast serious doubts on minimum wage hikes as some sort of panacea for low-wage workers. The benefits are minimal even before long-term effects are considered. This should prompt everyone to pay more attention to the drawbacks that come with the $15 wage. And it shouldn’t come as a surprise if more mayors and local officials, who depend on businesses thriving for the “survival” of their cities, decide it isn’t a great idea to make it illegal to work for less than $15.
