David R. Henderson  

Raise Minimum Wage: Reduce Benefits

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At the start of this year, the minimum wage in SeaTac, a city in Washington state, was raised by a whopping 63 percent--from $9.19 an hour to $15.00 an hour. If we critics of the minimum wage, including the late economists Paul Samuelson, James Tobin, Gunnar Myrdal, and Milton Friedman, and a large percent of the economics profession--are right about our economic analysis, then we should certainly expect some of the negative results to show up in SeaTac, a small city surrounding the Seattle/Tacoma International Airport.

One could argue that you won't see many effects because wages were already close to that level in high-wage metropolitan Seattle. Still, there had to be a fair number of people with wages substantially below $15 an hour.

So what have been the effects? Here, from the Seattle Times, are a few that were reported within the first 6 weeks of the new minimum wage:

At the Clarion Hotel off International Boulevard, a sit-down restaurant has been shuttered, though it might soon be replaced by a less-labor-intensive cafe. The nearby Cedarbrook Lodge, by contrast, is undergoing a $16 million expansion.

Other businesses have adjusted in ways that run the gamut from putting more work in the hands of managers, to instituting a small "living-wage surcharge" for a daily parking space near the airport.

Meanwhile, workers are flocking to SeaTac to apply for minimum-wage jobs, and recipients of the mandatory pay raise say they're enjoying the freedom of having extra money to spend or save.

There's a lot packed into those 3 paragraphs.

First, note that one restaurant did close. We're not sure why but it might have been due to the higher minimum wage. Notice also that it might be replaced by a less-labor-intensive cafe. One thing that doesn't appear to fit is the expensive expansion of the Cedarbrook Lodge. But, given how hard it is to get permission on the urban West coast to build anything, it's highly doubtful that this expansion was planned after the minimum wage law passed in November 2013. It's almost certain the expansion was planned well before that. So the costs of getting permission are sunk. An increase in the wage rate of part of the labor force that would work in Cedarbrook Lodge, even if it does result in loss of jobs, is not enough to cause the expansion to stop.

Second, notice the shift of work to managers. With managers doing more work, there will be fewer other workers doing the work. In other words, fewer jobs.

Third, notice the displacement of workers. The $15 an hour wage is a draw for workers from other areas, who will displace some of the workers working previously. Reasonable guess: the workers drawn in who actually get hired will be, on average, more skilled than the workers displaced.

The other parts of the Seattle Times article are worth reading also. Notice that one reason to expect less of a job loss than otherwise is that the new $15 minimum wage applies only to non-union workers. Unions have traditionally advocated using the minimum wage as a way of pricing out their competition, and this is usually easy for them to do without exempting themselves because union jobs typically pay more than the minimum. But this is a particularly blatant example that shows the unions' real motive: price out the competition without threatening their own sub-$15 jobs.

More recently, there has been evidence that employers respond to the higher minimum wage by cutting other parts of the compensation package, namely benefits. Assunta Ng writes:

While attending an event at a SeaTac hotel last week, I met two women who receive the $15/hour minimum wage. SeaTac has implemented the new law on Jan. 1. I met the women while they were working. One was a waitress and the other was cleaning the hallway.
"Are you happy with the $15 wage?" I asked the full-time cleaning lady.
"It sounds good, but it's not good," the woman said.
"Why?" I asked.
"I lost my 401k, health insurance, paid holiday, and vacation," she responded. "No more free food," she added.
The hotel used to feed her. Now, she has to bring her own food. Also, no overtime, she said. She used to work extra hours and received overtime pay.
What else? I asked.
"I have to pay for parking," she said.
I then asked the part-time waitress, who was part of the catering staff.
"Yes, I've got $15 an hour, but all my tips are now much less," she said. Before the new wage law was implemented, her hourly wage was $7. But her tips added to more than $15 an hour. Yes, she used to receive free food and parking. Now, she has to bring her own food and pay for parking.

HT to Steve Horwitz.

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COMMENTS (9 to date)
blink writes:

There is another reason not to expect much: The minimum wage only applies to a small number of workers. First, Seatac is tiny -- mainly just the airport -- and courts have ruled that airport workers are exempt. Only 1,600 are actually covered by the new minimum wage. (The numbers are mentioned in the linked article; see here for more on the original ruling.)

Also, the more important effects are likely to be of the "unseen" variety. The most important effects may be new businesses choosing to locate or expand elsewhere.

Mark V Anderson writes:

Yes, I don't think this is a good test of minimum wage because it is a suburb, so easy to commute and shop in neighboring towns. I don't know about "tiny," wikipedia says 27k people and 10 square miles. The only effect that might be telling will be the likely abandonment of fast food places from the city over the next couple of years.. The residents will just go to the next town over to eat. Unless Seatag doesn't have any such places already?

This article is from February, a mere 6 weeks after the new law took effect. Even with only that short period, there are clear disemployment effects at work, according to the reporter.

But, I have to say this is truly odd language;

...enjoying the freedom of having extra money to spend or save.

The last thing this is about is 'freedom'.

Even Seattle lefties are concerned, as this piece from KUOW radio last week makes clear. In Seattle the new law isn't even in effect and it's already got businesses shelving plans to expand or start new ventures.

There's a reason they don't call it the Theory of Supply and Demand.

Tom writes:

David- shouldn't the title of this be "there is no free lunch"?

ThomasH writes:

Of all the departures from perfect competition induced by policy, I continue to be amazed at the prominence that Minimum Wage laws get, especially when the attention is in the form of discovering that some workers do NOT benefit from them. I believe the expression for this is "discovering the Mediterranean." It would still not merit much attention but if the post had evidence that the losses of some low-wage workers exceeded the gains of others there would at least be some novelty.

David R. Henderson writes:

I continue to be amazed at the prominence that Minimum Wage laws get, especially when the attention is in the form of discovering that some workers do NOT benefit from them.
It’s not just that some workers do not benefit; it’s that some workers lose.
I believe the expression for this is "discovering the Mediterranean."
I like that expression and it is apt. That minimum wage increases will cause some workers to lose their jobs, will cause some workers to lose benefits, and will result in price increases is like pointing out that the Mediterranean exists. It's especially important to point out the existence of the Mediterranean when so many people deny the existence of the Mediterranean.
It would still not merit much attention but if the post had evidence that the losses of some low-wage workers exceeded the gains of others there would at least be some novelty.
Actually, that would merit a good deal of attention and I’m surprised that you don’t agree, ThomasH. But I doubt that the losses of some low-wage workers exceed the gains of others. What I’m confident about is that the losses of some low-wage workers plus the losses to others from a higher minimum wage exceed the gains to the gainers. Easiest way to see: lower employment implies lower output. In short, a higher minimum wage causes a deadweight loss.

Dan writes:

I'm not sure I understand the linked info from the "Ng blog". For example, labor laws dictate a certain amount of vacation time every year for full-time employees, such as the cleaning lady. Also, you cannot 'lose' a 401K. You might lose some or all of the matching funds from the company.

Even worse, catering staff don't get cash tips. Their tips are pre-set (usually around 18%) and included in the contract between the customer and the hotel. Plus, the catering manager and head chef usually receive a cut of the tips anyway, so it's not like they are going to cut their own income because of this issue. So that claim also makes no sense whatsoever.

I think Assunta Ng has a lot of explaining to do.

William writes:

I see the future of contracting services getting brighter in the Seattle area. A company based outside the $15 area can send in contracters to work in the area. Double benefit if they were unionized. Things always go aschew when the guberment sticks it's impressive snoze into the economy.

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