Minimum Wages And Unintended Consequences
If you’ve been following our twitter account, you know that I’ve been on a bit of vacation in San Francisco for a wedding of a close friend. And I’ll write about how I saved some money on this vacation later, but I happened to arrive in town the day before a new $14 per hour minimum wage law went into effect.
One Business Owner’s Take
My daughter had some decent jet lag, so we were up a bit before 6 local time and was hungry. We decided to let mommy get some extra sleep so out to a diner the two of us trekked. We found one a couple blocks away that was just opening (sidebar: his city certainly isn’t New York! A diner just opening at 6 AM? Crazy!!!!) and ordered some pancakes to share. In the diner, it was only my daughter and I and the owner and his adult daughter.
The TV over the counter had the news on and the topic du jour was about the new minimum wage going into effect. I couldn’t resist – I asked the owner and his daughter how they felt about it. They told me they didn’t care, which surprised me, I figured as a business owner they would want to pay their people what the market actually dictates, instead of a pre-determined wage. So, of course, I pressed – I told them I was surprised – to which the owner then answered as I had predicted: “Oh, it doesn’t bother me! I just cut their hours. They [the laborers] want more, but they end up with less at the end of the month.” He made a couple other statements about cheating taxes a bit (I think he meant that he’d just pay his workers at their old wage but in cash / under the table). His daughter added it wasn’t a big deal since they also combat the wage hike with higher menu prices and it’s their customers who end up paying for it.
Now, of course, I see two obvious problems with the owner’s statements. The first is, he actually does care about the wage change – if he didn’t – he wouldn’t cut hours (and presumably have to do more work for himself, or accept lower revenue from reduced hours of being open). The second is probably the most harmful to the society – unreported money. Not only do the city, state, and federal governments lose out from lost tax revenue, but the worker his/herself loses out on their overall social security credits which will lead to lower income in retirement for that worker. The worker now can also claim unemployment or other welfare benefits with no reported income, causing the already-lowered tax base to be drained even more. (We are not saying all cash-paid workers do this – just that they could – and certainly some do.) Ultimately, what the owner did is consistent with the findings of a recent study from Seattle, which recently had similar minimum wage increases.
The University of Washington studied the effect of Seattle’s minimum wage increases over the past couple of years. The results shouldn’t really surprise anyone. They found that employers adjusted just like aforementioned business owner did: cutting hours and cutting positions. On average, the typical “low wage” (not just minimum wage) employee (they did this smartly, because, if someone was already earning the new minimum wage, they would likely demand a raise to be paid above it like they had been) ended up losing $125 per month from what he/she was previously earning. Much more information about the study can be found by clicking here. A synopsis of the findings can be found here. Those in opposition to these findings point to a UC Berkeley study released earlier in the year that show that restaurant employees did not lose any jobs over minimum wage increases. However, the UW researches are quick to point out their study matches the UC Berkeley one – they don’t believe restaurant jobs were lost either – but work hours were cut by roughly 11% from what they should have been (using nearby cities that have similar structures to Seattle but without the minimum wage hikes as a “control” type model).
Don and I generally think minimum wages are a silly idea. Consider saying that wood is too inexpensive. “Oh, that tree worked so hard to form that perfect 2″x4″! You can’t pay that little for it!” Well, unfortunately for that tree, there were millions more who did the same exact thing and only so many people who needed 2″x4″ cuts of wood that week. It’s tough to admit that we are all just commodities – a commodity who can provide a certain amount of labor per hour. Some of the labor is very valuable, and some isn’t as valuable. Sometimes, lots of people can do the exact same job as you, and other times, people learn skills or trades that only a select few people are good at. Even if you work for yourself as a business owner, you’re only providing so much. That owner I met before? He was cooking and his daughter was doing the waiting, busing, and manning the cash register. Guess what? If he didn’t cook enough hash browns, pancakes, and eggs to sell at his diner, he’s not getting the $14 per hour. (You’ll also note the owner was doing the cooking instead of a hired chef… I suspect his hours were cut already?). When he goes home for the day, unless he hires a chef who is creating and selling $14 worth of food per hour, that owner isn’t making any more money because he isn’t generating any more labor. If he does hire a chef, the chef needs to churn out at least $14 worth of food per hour that gets sold, or else the owner loses money on him too. So, this begs the question: did that chef do any better with the minimum wage? The UW researchers answer what should be a fairly logical economics question: No, especially given how quickly the wages were implemented. The price “elasticity” (think of this of how easy it is for people to accept a sudden price change, in this case, for labor) for their wages was not something the employers were able to embrace quickly enough without having a loss of about $125 per month in wages to each worker. So, in this case, the lowest paid workers have been hurt by an increased minimum wages. Perhaps if the wage increases were phased in more gradually they could have been more effective, but in this case, politicians with good intentions ended up hurting their constituents.