June 10, 2014

Minimum Wage Hike Backfires In Seattle Suburb

By: Alex Bolt

The New York Times reports that New York governor Andrew Cuomo may raise the New York minimum wage to $15 an hour. If New York ends up going through with that kind of minimum wage hike, they would be following suit with SeaTac, a suburb of Seattle, which recently decided to raise the minimum wage to $15 an hour.

New York is just one of the many local governments calling for higher minimum wages. The Competitive Enterprise Institute’s Trey Kovacs reports that 21 Chicago aldermen are considering a $15 minimum wage as well, and Bloomberg tells us that California’s Senate has passed a measure to raise the minimum wage to $13 an hour.

But local governments would benefit from a more cautious approach to minimum wage hikes, considering how SeaTac is already struggling with their new policy.

United Liberty says that employers in SeaTac have had to cut employee benefits to stay in business after the dramatic wage hike. In an interview with a publisher from Northwestern Asian Weekly, one employee describes how her company had to cut her benefits to counter the skyrocketing cost of wages: “I lost my 401k, health insurance, paid holiday, and vacation,” she responded. “No more free food,” she added. The wage hike is already hurting Seattle businesses, even though it has not been implemented yet.

The Washington Policy Center chimes in as well, showing how the minimum wage hike has discouraged small business expansion and kept small business owners from opening new businesses or hiring new workers.

The Seattle Times also notes, “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 café.”

Interestingly enough, Amy Martinez starts the article off by declaring that, “For all the political uproar it caused, SeaTac’s closely watched experiment with a $15 minimum wage has not created a large chain reaction of lost jobs and higher prices…”

She justifies this claim by noting that, while a small sit-down restaurant has closed, “…the nearby Cedarbrook Lodge…is undergoing a $16 million expansion.”

That justification is problematic because the Cedarbrook Lodge is 4.5 star luxury hotel and a minimum wage hike affects a 4.5 star luxury hotel very differently than a mom and pop restaurant.

This fact represents one of the main arguments used by opponents of minimum wage hikes: big businesses can shrug off minimum wage hikes but smaller businesses with lower revenues find it harder to stay profitable when the minimum wage is raised. The argument can even be made that a minimum wage hike is an indirect form of corporate welfare, since it constitutes an exclusive disadvantage to small business competitors.

Another argument that minimum wage opponents make is that minimum wage hikes hurt the very people they are supposed to help: by increasing the cost of wages for minimally skilled workers, minimum wage laws discourage companies from hiring a society’s least competitive workers – the poorest of the poor – in favor of more educated workers. This comes as no surprise, since companies will try to get the most bang for their buck if minimum wages are raised, causing hiring of uncompetitive and uneducated workers to diminish.

“[i]t used to be that economists across the board—whether left, right, or center—generally agreed that the minimum wage was ill-suited to help the poor,” Robert P. Murphy wrote in summary of this classic argument. “As we still teach introductory students in Econ 101, a price floor on low-skilled labor will (at least in the textbook diagrams) lead to unemployment among the very people minimum wage legislation allegedly helps.”

Aloysius Hogan of the Competitive Enterprise Institute notes that support for minimum wage hikes from a few economists comes from the existence of a few revisionist studies which supposedly demonstrate inconsequential effects of minimum wage hikes to unemployment. However, Aloysius reports that the vast majority of econometric studies (85%) still hold minimum wage hikes to be detrimental.

This economic evidence against minimum wage hikes should at least be considered before states rush to adopt higher minimum wage rates.

Alex Bolt is a labor policy intern at the Competitive Enterprise Institute. Image of ‘The Hammering Man’ outside Seattle Art Museum courtesy of Big Stock Photo.