Yes, A $15/Hour Minimum Wage Will Hurt Workers, But Not Republicans

Matt Vespa
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Posted: May 29, 2015 3:15 PM
Yes, A $15/Hour Minimum Wage Will Hurt Workers, But Not Republicans

We’re back to the minimum wage, with Los Angeles voting to increase their wage law to $15 per hour, which proponents say will help workers and boost the local economy. It should come to no one’s surprise that neither of those things will happen. In fact, FiveThirtyEight noted that the real increase for workers from raising LA’s minimum wage from $9 to $15 is a whopping $10. Bloomberg’s Megan McArdle noted that there won’t be a tsunami of business closures, but the law could prolong unemployment for many Americans:

When the minimum wage goes up, owners do not en masse shut down their restaurants or lay off their staff. What is more likely to happen is that prices will rise, sales will fall off somewhat, and owner profits will be somewhat reduced. People who were looking at opening a fast food or retail or low-wage manufacturing concern will run the numbers and decide that the potential profits can't justify the risk of some operations. Some folks who have been in the business for a while will conclude that with reduced profits, it's no longer worth putting their hours into the business, so they'll close the business and retire or do something else. Businesses that were not very profitable with the earlier minimum wage will slip into the red, and they will miss their franchise payments or loan installments and be forced out of business. Many owners who stay in business will look to invest in labor saving technology that can reduce their headcount, like touch-screen ordering or soda stations that let you fill your own drinks.

These sorts of decisions take a while to make. They still add up, in the end, to deadweight loss -- that is, along with a net transfer of money from owners and customers to employees, there will also simply be fewer employees in some businesses. The workers who are dropped have effectively gone from $9 an hour to $0 an hour. This hardly benefits those employees. Or the employee's landlord, grocer, etc.

There are secondary effects beyond the employment market too. Proponents of a higher wage are claiming that this will boost the local economy by putting more money into the pockets of workers. This is the same sort of argument you frequently hear for the construction of massive new sports complexes. But of course, the money has to come from someone else's pocket -- the customer and the employer. What were those people doing with it? If the answer is "buying stuff from Amazon," then maybe diverting more money to wages is a net gain for the Los Angeles economy. But if the answer is mostly "buying stuff produced in LA" -- for example, paying rent, or buying services performed by low-wage workers -- then this is like trying to get rich by picking your own pocket.

There's no question that the wage increase will transfer money around within the economy -- out of the pockets of commercial landlords, for example, and into the pockets of folks who own real estate in low-rent districts. But little evidence has so far been offered that any boost in local spending will cancel out the deadweight loss, much less exceed it.

The long-term result will be higher wages for many low-wage workers, but the desperation of unemployment, or a forced relocation, for many others.

More from FiveThirtyEight:

Oh, sure, the headlines in Wednesday’s papers all said the council raised the wage floor to $15 an hour. That’s what the actual ordinance says, too. But $10 is a more accurate reflection of what low-wage Angelenos will actually experience.

There are two reasons for this. The first is inflation: Los Angeles’s minimum wage won’t go up to $15 tomorrow. Instead, the hike will be phased in over the next five years. Assuming inflation holds more or less steady, $15 an hour in 2020 will be worth the equivalent of about $13.75 today.

But the bigger issue is that $15 doesn’t go as far in Los Angeles as it does in most of the rest of the country. Not even close. According to data from the Council for Community and Economic Research, it costs workers about 40 percent more to live in Los Angeles than in the average American community. That means that $15 in LA is the equivalent of less than $11 in the U.S. overall.

Put the two together and LA’s new minimum wage of $15 in 2020 is worth about $9.75 to the typical American worker today.

Besides the obvious counterpoint that minimum wage increase proposals are nothing but liberal window dressing aimed at mobilizing their bloc of voters who earn less than $49,000, that, in turn, does little to help their current economic situation; do Republicans need to think about the ramifications of opposing such measures?

Some have argued that then-Sen. Jim Talent’s (R-MO) response to such a question cost him votes–and a new term–in his tight re-election bid against Claire McCaskill in 2006. That year, Missouri had a ballot initiative aimed at increasing the minimum wage; it passed with 76 percent of the vote.

Yes, these policy positions are incredibly popular with people across the socioeconomic and political spectrum–Rick Santorum is in favor of increasing the minimum wage.

It’s also one of the few issues, where white working class men actually side with Democrats on a policy issue. They represent a substantial share of the electorate, which has been tilting towards the GOP, and Democrats might see the minimum wage as an avenue to bring at least some of these voters back into the fold. So, the fallout would be immense, right?

No, not really (via NYT):

Here’s the thing about the minimum wage: Most voters don’t live in households where anyone earns it, or are even close enough to it to get a raise when it goes up. If you ask people whether they favor a higher minimum wage, most will say yes, and even vote that way on a binding referendum. But if a politician opposes raising it, middle-class voters won’t necessarily get angry, and their votes may not be moved.

The lesson of Tuesday’s minimum wage votes is that Democrats can do more on the minimum wage, not that they can help themselves politically by talking about it more. Just because a proposal is popular does not mean it can be a keystone in your economic agenda. As Kevin Drum of Mother Jones has noted, Democrats have an economic agenda that is heavily attuned to the poor; it’s much less clear what they would do for the middle class.

Many policies that help the poor are favored by the middle class. But if politicians want to win the votes of the middle class, they have to campaign on issues that affect them directly. Minimum wage increases do not serve that political end.

At the same time, Republicans should craft a cogent narrative against such minimum wage increase talking points (hurts workers, doesn’t energize local economy, etc.) since this issue isn’t going away. After all, the thing that improves the economic future for any American is a good education–and school choice is part of that discussion. It’s also an issue that has 70 percent of Americans’ support.