Saturday, March 05, 2016

No, raising the local minimum wage doesn’t hurt local businesses

By Jared Bernstein and Ben Spielberg February 26


Last August, almost 80 years later, the city council of Birmingham, Ala., voted 7 to 0 (with one abstention) to become the first city in the Deep South to enact a minimum wage above today’s federal level of $7.25. The ordinance planned an increase to $8.50 per hour by July 2016, with a second increase to $10.10 set for July 2017.

In response, state lawmakers leapt from “calamity-howling” to obstructionism. The Alabama legislature this past week passed a bill designed to block Birmingham and other cities not just from raising the local wage floor but also from mandating benefits such as paid sick leave. Alabama House Speaker Mike Hubbard (R) insists that the bill isn’t about the policies themselves but about preventing “all sorts of problems” that arise when cities are allowed to set their own minimum wages, presumably because there’s nothing preventing local businesses from relocating to avoid the higher labor costs engendered by an increase.

It’s not a crazy concern. When the national minimum wage goes up, no business is at a competitive disadvantage — they all face the same wage floor. It’s fair to wonder whether sub-national minimum wages might encourage businesses to avoid an increase by moving, a question with implications for people all over the country — from Olympia, Wash., to Lexington, Ky., to Bangor, Maine — who are trying to secure a raise. The geographical variation that has sprung up over time, however, has allowed economists to test Hubbard’s claims, and the evidence supports the actions of the Birmingham city council.

Partly because of federal inaction, 29 states, plus the District of Columbia, have set minimum wages above the federal level, with floors ranging from $7.50 in Maine and New Mexico to $10 in Massachusetts and California to $10.50 in Washington, D.C. (rising to $11.50 in July).


This variation has provided opportunities for something rare in empirical economics: quasi-experimental studies. In one famous paper, economists Alan Krueger and David Card compared fast-food employment in New Jersey, which raised its minimum wage in 1992, with that in Pennsylvania, which did not. “We find no indication that the rise in the minimum wage reduced employment,” they concluded.


Case studies of cities with higher wage floors are less common, but those that have been done support the findings of the state and county research. Studies of San Francisco and Santa Fe, the two cities with the longest track records of higher minimums, reveal “no statistically significant negative effects on employment or hours (including in low-wage industries such as restaurants).”


Finally, companies can cut profit margins or top-level salaries to meet higher wage mandates. This last mechanism is one reason such policies get so much pushback from business, and it is particularly germane in an economy where income inequality stands at historically high levels. According to data from the Economic Policy Institute, the real earnings of low-wage workers in Alabama are down 6 percent compared with 1979, while those of the state’s highest-paid workers are up 17 percent.


This is the same political establishment that professes to support “local control” when it finds it convenient. For example, dozens of Alabama state representatives who voted to preempt Birmingham’s minimum-wage ordinance were all for “necessary freedoms to address . . . issues at the local level” when voting on a school reform bill in 2013. The preemption bill’s sponsor, state Rep. David Faulkner, even acknowledged the contradiction: “While we say that we want local control of certain things, I don’t believe the minimum wage is one of those.”

No wonder Birmingham’s citizens and city council fought back. The council voted earlier this past week to raise the minimum wage to $10.10 immediately to try to preempt the preemption bill, and Raise Up Alabama, a coalition including workers, unions and clergy members, has formed to fight the state’s decision. If they lose the battle, it won’t be because the facts weren’t on their side.

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