Dire predictions

All Economics Is Local

By MICHAEL REICHand KEN JACOBS

In the face of congressional inaction, the debate on raising the minimum wage is moving to the local level. As more cities and counties consider setting their own wage standards, they can learn from the policy experiments already underway.

Since the mid-1980s, states in every region of the country have raised the local minimum wage, often numerous times. Twenty-one states (and Washington, D.C.) currently have wage floors above the federal level ($7.25), and 11 of these raise them every year to account for inflation. Washington State currently has the highest, at $9.32; California’s is set to increase to $10 on July 1, 2016.

More than 120 cities and counties have adopted living wage laws that set pay standards, many of them in the $12 to $15 range. These higher standards usually apply only to employees of city service contractors, like security guards, landscapers and janitors. In some cities, living wage laws cover workers at publicly owned airports or stadiums, as well as at shopping malls subsidized by local development funds. While the impact on the individual workers covered under these laws is often quite significant, their reach is rarely broad enough to affect the local low-wage labor market as a whole.

For this reason, cities and counties are now enacting higher local minimum wage policies that cover all work performed in the area. Cities as varied as Albuquerque, San Francisco, San Jose, Calif., Santa Fe, N.M., and Washington, D.C., have minimum wages ranging from $8.60 in Albuquerque to $10.74 in San Francisco. The District of Columbia, which is raising its minimum wage to $11.50 in 2016, wisely joined with two neighboring Maryland counties to create a regional standard.

Many more cities are getting ready to follow suit. Richmond, Calif., Oakland and Seattle are seriously considering setting their own minimum wage. The Richmond City Council just voted an increase that will go to $12.30 by 2017. Advocates in Oakland are aiming for $12.25. Seattle is discussing $15. Prodded by its new mayor, New York City is seeking the right to set its own minimum wage rate, instead of using New York State’s.

With the national debate stuck in the same old rut, states and cities have again become laboratories of democracy. Are they on the right path? For the last 15 years we have been doing research on just this question.

One city we have studied in detail, San Francisco, has passed a dozen labor standards laws since the late 1990s. After adding the effects of other local laws mandating employers to pay for sick leave and health spending, the minimum compensation standard at larger firms in San Francisco reaches $13. Our studies show that the impact of these laws on workers’ wages (and access to health care) is strong and positive and that none of the dire predictions of employment loss have come to pass. Research at the University of New Mexico on Santa Fe’s floor (now $10.66) found similar results.

These are not isolated cases. Research on the effects of differing minimum wage rates across state borders confirms the results of the city studies. But how can minimum wage increases not have negative effects on employment? After all, according to basic economic theory, an increase in the price of labor should reduce employer demand for labor.

That’s not the whole story, though. A full analysis must include the variety of other ways labor costs might be absorbed, including savings from reduced worker turnover and improved efficiency, as well as higher prices and lower profits. Modern economics therefore regards the employment effect of a minimum-wage increase as a question that is not decided by theory, but by empirical testing.

Our research and that of other scholars illuminates how businesses actually absorb minimum wages at low-wage industries. Higher standards have an immediate effect in reducing employee turnover, leading to significant cost savings. Minimum wage increases do lead to small price increases, mainly in restaurants, which are intensive users of low-paid workers. How much? A 10 percent minimum wage increase adds 0.7 cents on the dollar to restaurant prices. Price increases in most other sectors, like retail, are too small to be visible, partly because retail pays more than restaurants.

Even if Congress finally acts to raise the federal minimum wage, higher standards at the state and local level still make sense. It will surprise no one that living costs are generally higher in cities than in rural areas. They often vary among cities in the same state. The New York City metro area is 26 percent more expensive than upstate Utica; costs in the San Jose metro area are 30 percent higher than in El Centro, in southeastern California. Policy makers need to take these variations into account. This is not just a theoretical idea. It has long been policy in Japan. Minimum wages in Tokyo and Osaka are as much as 30 percent higher than they are in regions with the lowest cost of living.

Here’s another way to think about it. One measure of employers’ latitude to absorb higher wages compares the minimum wage to the median wage. From the 1960s into the 1970s, the minimum-median ratio in the United States varied between 41 and 55 percent. Since the mid-1980s, it has been much lower, varying between 33 and 39 percent. A minimum wage increase to $10.10 by 2016, as President Obama proposed earlier this year, would restore the national ratio to 50 percent. By comparison, San Francisco’s $10.74 minimum wage is 40 percent of the city’s median wage. In other words, although some of the proposed rates may seem high by national standards, they look more reasonable when measured against local wage levels.

Local minimum wages also represent a response to growing inequality within cities, in too many of which a growing army of low-paid workers — maids, gardeners, janitors, restaurant and security workers — provide personal services to an increasingly well-heeled minority.

The record is clear. Employers can afford to pay higher wages that raise families out of poverty and bear a closer relation to local living costs. And there’s a moral value, too. An increase in the local minimum wage restores, on a very personal level, some of our notion of fairness.

Michael Reich is a professor of economics at the University of California, Berkeley, and the director of the Institute for Research on Labor and Employment; Ken Jacobs is the chairman of the Center for Labor Research and Education at Berkeley; together with Miranda Dietz, they are the authors of “When Mandates Work: Raising Living Standards at the Local Level.”