David R. Henderson  

Los Angeles Unions' Two-fer on Minimum Wage

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When the U.S. minimum wage law was put into effect in 1938, northeastern labor unions gained from it by pricing out their competition. Unions in the textile industry were seeing textile firms move from New England states to southern lower-wage states and wanted to hobble the competition. This motive was present in the 1950s and 1960s also. I have previously reported Senator John F. Kennedy's racist grounds in 1957 for favoring a minimum wage increase.

Now the Los Angeles City Council has taken this union strategy and raised it. The city fathers--or maybe we should call them stepfathers--have passed a law requiring that hotels pay a minimum wage of $15.37 per hour. That would hobble competition from hotels that currently pay less than $15.37 an hour.

But wait; there's more. Not content to hobble competition that way, the City Council has an exemption for unionized workers if these workers "agree in their contract to relinquish that opportunity." This is pretty brazen. Of course, it gives employers an incentive not to fight the unionization of their labor force. It's an incentive on the margin, of course. Employers will need to take account of all the other costs of having a unionized labor force. But this exemption will, for some of these hotels, cut one of those costs.

In short, the Los Angeles City Council has done a two-fer for unions.

That gives the lie to the claim by backers of this measure. According to the Los Angeles Times news story, "Backers of the measure said it would prevent hotel workers from having to take on second jobs that keep them from seeing their families." But if that were their goal, they would not have the special exemption for unionized workers. One could argue that they would exempt unionized workers because they understand that the minimum wage would reduce employment of such workers. But if they understand that, then they would also understand that the minimum wage reduces employment of non-union workers. They can't have it both ways.

It's true that the measure exempts hotels "that face severe financial hardships." My strong guess would be, though, that a Los Angeles city government official gets to decide what constitutes severe hardship in each case and that the city government will use this power to shake down the hotels that apply for a hardship exemption.

HT2 Scott Shackford.


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COMMENTS (13 to date)
Bostonian writes:

An Open Borders argument is that global utility is increased when even unskilled people who would earn $1/hour in their home countries move to the U.S. and earn say $6/hour. But what if the minimum wage is raised high enough that they become unemployed here or work few hours and subsist on government benefits? Libertarians oppose the minimum wage, as do I, but that does not change the fact that increasing it is politically popular.

Tom West writes:

I support minimum wage, but this does not seem like good legislation.

One, at $15 I think the costs of disemployment outweigh the benefits of poorer worker capturing more of their surplus. Two, the whole bit about politicians deciding what is hardship (and the expectation that they'd be nimble enough to deal with changing conditions) is *highly* problematic.

john hare writes:

Hopefully there will be enough data published by enough credible sources that people will begin to understand what happens when minimum wage is increased well beyond what most of us would consider rational.

Even if it proves me wrong about the unfortunate effects of a high minimum wage. Data for the discussion, good.

Eric Rall writes:

Assuming for the sake of argument that the monopsony model of the effect of minimum wages on employment is substantially correct, the LA city council's actions may make a certain degree of sense.

As I understand it, the monopsony model holds that employers of low-skilled workers have much more bargaining power than their employees, which they use to keep both wages and employment levels below what would be the equilibrium point in the absence of monopsony power.

Taking this situation as a market failure, the city council seeks to remedy the situation and move wages and employment levels as close as possible to the market-clearing rates. A conventional minimum wage law would require guessing at the proper wage, risking artificial unemployment if they guess too high and risking leaving the problem partially unresolved if they guess too low.

Instead, the council sets a basic rate that they think is probably a bit too high, and provide an escape hatch for unionized firms, where the union would counteract the monopsony power by establishing a cartel on the employee side.

Ethan Roberts writes:

Tom, what makes you think that it is morally acceptable for you or anyone else to determine that the costs to other people outweigh the benefits to other people?

Hannah Krishna writes:

If union workers have previously agreed to forgo their right to minimum wage and have a separate contract concerning their wages, I don't see why the increase to $15.37 should apply to them in the first place. The exemption placed by the LA City Council seems to just be reiterating what these union workers have already signed off on.

And as for the clause which states that hotels in a hard financial state do not have to adhere to this increase, while it may be hard to qualify as one of these hotels, it's beneficial to have the option there in the first place.

Jay writes:

@Hannah Krishna

It isn't a grandfather clause, it is for all future union contracts as well.

Does your logic also apply to non-union individuals who have previously agreed in writing to a wage below the new minimum or just union contracts?

Brian writes:

While I'm opposed to the minimum wage in principle, I will say that a local minimum wage is the only one I'm willing to support. The main goal of minimum wage legislation is to provide a so-called living wage for people who work full time. In cities like LA, where the cost of living is higher, the minimum wage can likely be raised significantly without causing large disemployment effects. By contrast, a national or state minimum wage law puts a hardship on (low-cost-of-living) rural areas.

The other benefit of keeping the minimum wage local is that it becomes much easier to see the effects. If the effects are sufficiently negative, the locality can easily change the law to reduce it again.

That said, your analysis, David, is dead on. This particular legislation looks like a feel-good sop to the unions rather than a principled stand on the goodness of the minimum wage.

Tom West writes:

Ethan, the concept of government automatically involves decisions that benefit some over others. And since the success rate of bodies of people without a government is essentially zero, I accept that such decisions are simply part of the human condition.

David R. Henderson writes:

@Jay,
Good answer to Hannah Krishna. Thanks.
@Hannah Krishna,
To Jay’s answer, I would add that there’s nothing magical about collective decision making. When a majority of union members vote that they want to be paid less than the minimum wage, they don’t necessarily make a better decision than when an individual decides that he wants to be paid less than the minimum. Indeed, the presumption is that the individual will make a better decision for himself than the group would make for him.

Jay writes:

What is the proponent's logic for only including hotels in the law other than to eliminate larger hotels' non-union, smaller competitors on their behalf? If its a "LA is an expensive place therefore higher MW" then it should apply to all establishments, why limit this to hotels?

LD Bottorff writes:

Brian,
Thank you for your post. I am dismayed by how few people take into consideration that the effect of a higher minimum wage will be different in New York City than in Owsley County Kentucky.

Jay,
I suspect that the proponents want us to believe that hotels largely take money from tourists and business travelers. They want us to assume that the increased cost of hotels will not be a large factor in the decision to travel.

michael pettengill writes:

A higher wage across the board reduces the number of businesses profiting from government subsidies of welfare.

Let's say the government taxed businesses for part of the cost of welfare for its employees up to a total wage equivalent of $15 per hour; would that be a better alternative to a $15 minimum.

Or take it in a different direction, the government paid part of the wages of selected workers for selected employers as a matter of government picking the winners and losers. Employers that are in business producing things no one wants to pay for get propped up by government wage subsidies.

If workers were businesses, the idea that a business would be encouraged to sell things at a loss and then get propped up by government so they are not liquidated as insolvent would be seen as a bad economic policy.

So, why not treat workers like businesses - if you can't sell your product (labor) for enough to pay all operating costs, then you get liquidates and any assets you might have are sold off to cover debts? Euthanasia and organ sales is simply creative destruction applied to excess labor just like liquidation of a business leaving a vacant lot in a depressed area is seen as virtuous creative destruction.

And remember, Federal bankruptcy is redistribution of wealth where a technocrats gives the money those who saved it had to those who borrowed it and could not pay it back.

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