In the Minimum Wage Debate, There Is Still No Such Thing as a Free Lunch

The City Club, a progressive advocacy group in Portland, Oregon, recently published a report arguing that the city needs a higher minimum wage than the current state minimum wage of $9.25 an hour.  This will stimulate consumer spending, they say, by putting more money in the pockets of workers.  Additionally, they find that most businesses will be able to absorb the wage hike without laying off workers.

Meanwhile, voters in Tacoma, Washington will decide next week on two competing ballot initiatives to raise minimum wages in next week’s elections.  The first initiative, placed on the ballot by a grass roots activists group, would raise the minimum wage to $15 an hour effective in December of this year for most businesses.  The second initiative, sponsored by the Tacoma City Council,  would require all businesses to raise their minimum wage to $12 an hour by 2018, phased in in increments.

These measures have been discussed and debated for some time in cities around the country, particularly “left-coast” cities.  One can argue that cities that have hiked their wages with no economic or employment changes.  SeaTac’s unemployment rate, for instance, has generally fallen over the past year, except for an increase in September 2015.  that also means that the economic boost resulting from workers having more money in their pockets has not materialized either.

A recent study of Georgia and Alabama restaurants, however, finds that employers respond to minimum wage increases in less obvious ways.  Authors Barry T. Hirsch, Bruce E. Kaufman and Tetyana Zelenska examined the effect of the three-step federal minimum wage increase from 2007 to 2009 using electronic payroll data and employer/employee survey data from 81 Quick-Service restaurants.  Among their findings:

  • Minimum wages are passed along through an increase in product prices.
  • Employees are held to higher productivity and performance standards, including cross-training and multi-tasking.
  • Wage compression occurs, meaning there is less of a wage differential between less and more experienced employees.
  • While there was no clear-cut effect employment effect, although managers expressed interest in hiring more experienced workers and fewer teenagers.

In other words, employers expect more for paying more.  But this creates somewhat of a dichotomy.  On one hand, minimum wage recipients must be more productive, and employers will look for more experienced workers in their hiring process to match the higher wage.  On the other hand, due to wage compression, experienced workers or those who outshine their cohorts will not likely get the pay raises they would expect for stellar performance.  So does that mean there will be a new category of employees who will simply earn said minimum wage with no opportunity for pay increases?  Will employees be happy with this arrangement?

In the world of government mandates, all meals are free.  But in the dismal science that is economics, there is no such thing as a free lunch.

 

 

 

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