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How we are getting minimum wage wrong locally and nationally

Guest Opinion: Power politics fails to serve workers nationally. In Seattle, the same factor creates business and job risks.
Maryland Gov. Martin O'Malley, right, at a rally to raise the state's minimum wage. He recently signed legislation that will increase the wage to $10.10 per hour by 2018.

Maryland Gov. Martin O'Malley, right, at a rally to raise the state's minimum wage. He recently signed legislation that will increase the wage to $10.10 per hour by 2018. Maryland Governor's Office

Politicians love to play power politics but are their games good for our city, state and nation? In Washington D.C., Republicans who control the U.S. House of Representatives blocked a bill to increase the federal minimum wage above $7.25 per hour. Meanwhile in Washington state, Democrats on the Seattle City Council decided to increase the minimum wage to $15 per hour in stages.

Is there a reasonable explanation why $15 per hour is good for Seattle while $7.25 is good enough for Boise? Is there a reason why $15 an hour is the right number and not $13 of $17 or even $20? The simple answer is: No, it’s all just politics.

Is one party right and the other wrong?

Let's examine some of the nuances of this partisan discussion. Democrats claim that increasing the minimum wage will reduce poverty and increase prosperity with little or no cost to anyone. Republicans claim that small businesses will go bankrupt in droves and millions of jobs will be lost in the process. There is some truth and some fiction to both claims, so let’s evaluate both the rationale and the evidence for the conflicting claims.   

Let’s start by looking at the historical value of the federal minimum wage. Between 1956 and 1984, the inflation adjusted minimum wage varied between a low of $7.67 and a high of $10.86, in today's dollars. During this period, income disparity remained relatively constant with the top 1% of Americans earning a little less than 10% of total income.

Since 1981, the inflation adjusted minimum wage has declined, varying between $5.87 and $7.99. During that period, income disparity more than doubled. For the first time in history, the richest 10% of Americans are now earning more than the remaining 90%. As a result, it becomes increasingly difficult for the next generation of great American entrepreneurs to get an education, raise capital and bring inventions to market.

Meanwhile a billionaire earns $50 million a year by simply hiring an investment counselor to make investments that return only 5% a year. America has prospered by allowing its people to realize their potential. Without a reasonable wage, more and more Americans opt out and act as a drag on the economy rather than work to drive it and spend to sustain it. A wage increase to $10.10 seems consistent with historical norms and would likely benefit the economy at large.

Now, let’s look at the minimum wage from a small-business person’s perspective. If a small business has 10 full-time employees working at the minimum wage, then the $5 Seattle increase will reduce profits by over $100,000. If the business is only making $50,000, then the minimum wage increase will definitely jeopardize the viability of the business. Some businesses will indeed go bankrupt, leaving their business owners broke and their employees out of work. More prosperous companies will look for ways to automate their operations and reduce headcount. The result could be, for instance, half the workers earning $15 per hour and the other half on unemployment. Automation becomes increasingly viable as the cost of labor increases. 

A danger for a municipality like Seattle is how easy it is for competitors outside the city limits to underprice their city rivals because of the labor cost advantage an inflated minimum wage provides. In some cases a competitor across the street may suddenly enjoy a huge cost advantage. Many service jobs are protected because they are tied to the location the service is provided, thereby limiting competition from outside city limits. Manufacturing operations are more vulnerable however. Most manufacturers ship their products to remote locations. If a Seattle manufacturer competes with one in Boise, or even one in Bellingham, the playing field will be tilted dramatically in favor of the lower-cost location. A $15 minimum wage may therefore be expected to do significant harm to Seattle’s manufacturing sector. 


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Comments:

Posted Tue, Jul 1, 6:37 a.m. Inappropriate

All I needed to read was the byline. Same tired crap. I don't mind opinions that differ from mine. in fact, I seek them out, to see if I might be missing something. But these are old arguments, rehashed ad infinitum for months now. At least try to be original.

ivan

Posted Thu, Jul 3, 1:55 a.m. Inappropriate

You're a Seattle "progressive" who despises opinions that differ from yours, but who's too chickenshit to say even that much. At least try to be less tired and predictable in your knee-jerk dishonesty.

NotFan

Posted Sat, Jul 5, 2:06 p.m. Inappropriate

Tired and predictable? Hmmmmmmm....

simorgh

Posted Tue, Jul 1, 8:40 a.m. Inappropriate

Sounds like the author both recognizes that our current economic system is a "race to the bottom" for the vast mojority of Americans, and yet espouses doing nothing.

psj

Posted Tue, Jul 1, 8:40 a.m. Inappropriate

Gah! "majority". wtb edit button.

psj

Posted Tue, Jul 1, 2:40 p.m. Inappropriate

How this example of elemental rationalizations passes for objective journalism defies comprehension. Relying on grossly simplified "examples" of how some undefined "small business" will be affected by Seattle's minimum wage increase demeans the subject. Is it the authors self described standing as a "social moderate" that we are suppose to accept this dumbed down fiction as serious analysis? If the reader would like a serious look at the economic impact of minimum wage increases one should look to the City of Seattle's minimum wage web site where studies by the Universities of Washington and California can provide real, research based, analysis. http://www.seattle.gov/council/issues/MinimumWage/default.html

Posted Thu, Jul 3, 1:45 p.m. Inappropriate

While acknowledging that the federal minimum wage has eroded and that increasing income disparity is a threat to the middle class (and by extension, the entire country as we know it), the author uses the standard Republican argument against any minimum wage; that a minimum wage kills jobs.

It may well be true that increasing the minimum wage will cost some jobs. Show me any social or political change that comes without any negative consequences. The author mentions Boise but never makes explicit that it's much cheaper to live in Boise than Seattle and that local conditions should play a role in local economic decisions.

It's good to hear the author supports a higher federal minimum wage but it's an easy position to take given that there is zero chance of an increase in the face of Republicans who favor elimination of all minimum wage laws. Local action is the only possible action.

Mr_Jones

Posted Mon, Jul 7, 4:18 p.m. Inappropriate

thanks mr ned witting for your words of wisdom. I like Ms Kshama Sawant's argument for a $15 an hour minimum wage better. Her doctorate in economics probably helps her to form a more rational argument. "Sawant was born to Vasundhara and H. T. Ramanujam in Pune, India in a middle-class family. Sawant's mother is a retired principal and her father, a civil engineer, was killed by a drunk driver when she was 13. Sawant's observations of poverty in her native country and her unhappiness with the Indian caste system helped shape her political views before her adoption of socialism. Sawant grew up in Mumbai where she later studied computer science and graduated with a B.Sc from the University of Mumbai in 1994. Sawant married her husband Vivek, an engineer at Microsoft, and moved to the United States. Sawant was shocked by the level of poverty she saw and decided to abandon the computer engineering field. She began to pursue studies in economics due to what she described as her own "questions of economic inequality." She entered the economics program at North Carolina State University where she earned a PhD. Her dissertation was titled Elderly Labor Supply in a Rural, Less Developed Economy. Sawant moved to Seattle in 2006 and, after hearing a speech by a Socialist Alternative organizer, became a socialist. She became a United States citizen in 2010. http://en.wikipedia.org/wiki/Kshama_Sawant

Posted Thu, Jul 10, 8:48 p.m. Inappropriate

The logic makes sense, which is: raising the national minimum wage is helpful, raising the minimum wage in a single city can have negative impacts.

Already, we are seeing some of those negative impacts, and I suspect that we'll see more now that the law has passed. No doubt, some folks didn't believe that it would pass.

The negative impacts, among others: visible surcharges on customer's bills; invisible price hikes; reduced hours; reduced tips; companies moving. What I haven't seen yet is an obvious sales pitch from adjacent communities. On a national level, we're hearing of Texas leaders traveling to California to attempt to convince California businesses to move to Texas. It's like that, but on a much smaller scale.

While there are some businesses where it won't be practical to move, such as a restaurant, they may see some reduction in sales should their prices be noticeably difference for any of their price-sensitive customers than a restaurant outside the city. In one scenario, the consumer might choose to go out to dinner outside of the city rather than dine in-city before heading home.

It's an interesting move by Seattle that I suspect will have consequences that they hadn't thought through. The negative impact that I worry about the most is the worker who's trying to get their first job; it may end up not being in Seattle.

bricsa

Posted Thu, Jul 10, 8:54 p.m. Inappropriate

You've hit on some basics here bricsa. What will happen is that current minimum wage earners will be displaced when people who don't live in Seattle start applying for those $15 per hour jobs, and employers see that the caliber of employee can be raised.

Employers always will choose the more qualified/better employee, even if they don't live in Seattle.

So many minimum wager earners will have to go outside of Seattle to find work.

Some balance this circle exchange is.

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