And what cities can do instead.
Seattle and Los Angeles will phase-in a $15 minimum wage over the next five to six years. The mayors of St. Louis and Kansas City appear poised to follow suit. Though not all cities have the authority to set their own wage floors, those that do should think carefully before jumping on the $15 bandwagon.
The disemployment risks from setting the minimum wage too high are real. However well intentioned, large minimum wage hikes can end up limiting economic opportunities for the low-income workers they’re supposed to help. Mayors and council members eyeing the $15 movement should ask themselves two questions.
1) Is the $15 minimum wage right for my city?
There’s nothing magical about $15. Different cities have different median incomes and different costs of living. A $15 minimum wage may carry with it a relatively low risk of job loss in one city and an unacceptably high risk of job loss in another.
Consider the minimum wage phase-in in L.A. The value of L.A.’s minimum wage will rise from $9 this year to $15 in 2020. But because the prices of goods and services tend to rise over time, $15 in 2020 will buy fewer goods and services than it does today. To compare the buying power of dollar figures from two different years, we have to adjust for inflation. Let’s assume that the Federal Reserve hits its implicit inflation target of 2 percent per year for the foreseeable future. Adjusting for inflation, the value of L.A.’s $15 minimum wage in 2020 will be worth $13.59 in today’s dollars. Over a five year period, that’s a 51 percent increase in what economists would call the real value of the minimum wage.
This sort of increase would be fantastic if L.A. could guarantee that its impact would be positive for everyone. In practice though, employers do adjust their behavior in response to higher labor costs over time. For example, if labor costs rise enough, some firms might automate certain tasks that were previously performed by low-wage workers. Others might eventually decide to move to a jurisdiction with a lower minimum wage. Others still might raise prices to cover the higher costs. Price increases might not seem terrible for high-end restaurants or luxury retailers, but to the extent that low-income people consume goods and services produced with low-wage labor, price hikes could represent a non-trivial hit to household budgets.
Meta-analysis of the economics literature suggests that the job losses associated with modest increases in the minimum wage range from small to non-existent. But the hikes currently under consideration aren’t all that modest. L.A. and Seattle are going big by traditional standards. Though tentatively supportive of L.A.’s $15 minimum wage, Jared Bernstein—the former chief economic advisor to Vice President Biden—characterizes it as “out-of-sample.” Read: we’re not exactly sure what an increase of this magnitude will do to employment and job growth.
The University of Massachusetts economist Arindrijat Dube, a strong proponent of minimum wage policies, suggests that states and cities should use a threshold of about half of the median wage when setting wage floors. By Bernstein’s estimate, the L.A. minimum wage in 2020 will be about 60-65 percent of the city’s median wage—a full 10 to 15 percentage points above Dube’s recommended threshold. This is uncharted territory, which may be one of the reasons that some L.A. unions asked for an exemption to the $15 minimum. In a city like St. Louis, where both the median wage and the cost of living are lower by comparison, the $15 minimum is even riskier.
Living costs and incomes vary across cities in the United States and minimum wage policies should reflect this. Given the uncertain impacts of a $15 minimum wage, most cities would be wise to wait and see how the experiments play out in cities like L.A. and Seattle over the next several years. At the very least, they should heed Dube’s call to observe the half-of-median wage threshold, keeping in mind that even this comes with disemployment risks that should be monitored closely.
Still, “wait and see” isn’t exactly a compelling alternative to “Fight for $15.”
2) What else can cities do to improve the living standards of low-income workers?
Generally speaking, there are two ways to help a low-wage worker’s paycheck stretch further: increase the size of the paycheck, or lower the cost of the goods and services that it can purchase.
When it comes to boosting take home pay, the earned income tax credit (EITC) has advantages over minimum wage hikes: all of the earnings upside without the disemployment risk. The EITC is a refundable credit that boosts the earnings of low-income workers by both reducing their tax burden and supplementing their pay. But because the EITC is a federal program, cities can’t do much to directly extend its benefits. That said, city officials can and should pressure the elected federal officials from their state to increase the size and coverage of the EITC. Cities should also help to ensure that residents who are eligible for EITC benefits actually claim them. Cities that levy their own personal income taxes, like New York, also have some limited ability to improve the payoff of the EITC. New York City’s earned income credit is refundable, but at 5 percent of an individual’s allowable federal earned income credit, it could be more generous.
In addition to tax policies that reward work, cities can think creatively about ways to lower the costs of goods and services sold within their jurisdictions. In most of the cities that Americans would characterize as expensive, for example, housing is especially unaffordable because regulatory bottlenecks keep enough of it from being built. For many cities, easing constraints on the supply of housing could help paychecks stretch further. When it’s allowed to keep up with demand, new housing development—market rate or otherwise—helps put downward pressure on prices and rents. Indeed, cities that raise the minimum wage but continue to block residential development will only put additional upward pressure on prices.
There’s still more that cities can do on the supply-side of the housing market. I’ve written previously about options for New York City—ideas that may be beneficial in other cities as well: relax minimum unit size regulations and let micro-units flourish in high-demand areas; work with residents of tower-in-the-park style public housing developments to allow for infill; enact a zoning budget; and legalize accessory-dwelling units and basement conversions in neighborhoods with single-family detached homes. Other policies, such as scrapping minimum parking regulations or loosening arbitrary height restrictions, would encourage additional price-dampening development as well.
These aren’t the only policies that mayors and city councils could pursue in lieu of raising the minimum wage to $15. The point here is to frame thinking about what else can usefully be done. To take a lesson from another timely policy debate, a city’s approach to regulating so-called ride-hailing services should hinge less on the concerns of the taxi lobby and more on whether, compared to traditional options, such services provide better or cheaper access to transport in low-income neighborhoods. Cities that identify creative ways to provide households with budget relief—whether by expanding the supply of housing or providing public services more efficiently—can have a meaningful impact on the purchasing power of the working poor.