Some cities have raised minimum wages dramatically. They may regret it

From the Economist. Excerpt:

"Minimum-wages, then, are best viewed as one route to helping the lowest earners. Since nobody thinks that low pay is desirable, the argument against minimum-wages is that they destroy jobs. Campaigners deny this, with some justification. A canonical study in 1993 found that employment in New Jersey restaurants increased, rather than fell, in response to a minimum wage rise. More recent research, from 2010, examined all county-pairs that straddle a state border and found that, for the period from 1990 to 2006, differences in minimum wages had no effect on employment in low-wage sectors.

Other economists dispute these findings. But some jobs clearly can survive higher minimum wages. In 2015 more than half of workers earning at or below the federal minimum wage worked in restaurants, bars and the like. Such service jobs cannot be moved overseas, and many, such as cleaning the floor of a McDonalds, are hard to automate. These jobs will survive if firms can tolerate lower profits or raise their prices sufficiently. Soaring demand for services in fast-growing, high-income areas like New York and San Francisco typically enables them to do so. Seattle began raising its minimum wage in April 2015, initially from the state minimum, $9.32, to $11 for large firms. Yet the proportion of jobs in the Seattle area in the food service and preparation industry has grown from 7.2% in April 2015 to 7.4% today.

But in other industries, raising prices is harder. Match Analysis, an Emeryville business with around 35 local staff, collects data on soccer matches, which it sells globally alongside analytical software. The firm’s competitors hire exclusively in countries with lower wages, such as India and Russia, says Mark Brunkhart, who founded the business in 2000. That means it cannot raise prices; instead, the higher minimum wage has forced the firm to shed 13 data-collection jobs. This has mainly been achieved with a hiring freeze, but this month Mr Brunkhart had to lay-off six staff. These were the first redundancies in the firm’s history.

Some retail workers, who make up 13% of workers whose pay is at or below the federal minimum wage, are also under threat because of automation. Big shops are unlikely to speak out against minimum-wage changes because of the bad press it generates. But they are not immune to incentives. Target, one of the retail behemoths in Emeryville, has in the past month installed self-service checkouts, perhaps because of higher labour costs.

Caution is warranted because economists’ experience with minimum wages is limited to where they have been set modestly, relative to incomes. The average minimum-wage to median-income ratio in the OECD, a club of mostly-rich countries, is 50%. The highest, 68%, is in Turkey. Median hourly wages vary hugely by state, from less than $14 in Mississippi to over $22 in Alaska. That means even Hillary Clinton’s proposed $12 federal minimum-wage exceeds 75% of the median hourly wage in fully 16 states—well beyond the rates that have been well-studied.

Decentralised minimum-wage setting might therefore be desirable. But 19 states ban cities from raising minimum wages on their own; in February this stopped Birmingham, Alabama, from raising its rate to $10.10. In Emeryville, the minimum-wage to median-income ratio is around 85%, according to our calculations (see chart). Ms Martinez promises an economic impact study, but says “there are times where you have to take a leap of faith”.

A further claim campaigners make is that minimum wages will reduce welfare payments. These currently subsidise firms like McDonalds, the argument goes, because the only reason such firms can only pay so-called “poverty wages” is because the government picks up the rest of the tab for housing, feeding and clothing their employees. Research suggests that about a third of the Earned Income Tax Credit (EITC) bill does indeed flow to firms’ coffers, by lowering pre-tax wages. The minimum wage stops the leakage. Yet this is not necessarily good: subsidising firms to hire unskilled workers might be desirable if their jobs are under threat from automation and outsourcing.

The Fight for $15 campaign is often guilty of a bait-and-switch, justifying much higher minimum wages with reference only to food-service giants like McDonalds, but then endorsing them across the whole economy. Unlike the campaigners, those unskilled workers who lose out, through redundancies or slower hiring, do not have loud voices. Politicians, at all levels of government, must remember that."