Cash, Crime, Minimum Wage, and Unintended Consequences

By Anthony Gill. He is a professor of political economy at the University of Washington. Excerpts:

"The increase in the minimum wage is another reason retailers are turning towards cashless payment systems. This connection isn’t obvious, so allow me a personal story to explain how I discovered this. (While I understand that anecdotes are poor social scientific data, they nonetheless can lead down the path of discovery if one is sufficiently curious and observant.)

Back in 2014, Seattle passed a minimum wage increase that would move all businesses to $15 per hour by 2021, with large-scale employers needing to meet that requirement by 2017. My university, which resides in Seattle, is considered a large employer, thus student workers were boosted to the higher wage quickly. Indeed, given our concern for student welfare, we paid an even higher minimum. (The current minimum wage in Seattle is $18.69!)

About eight years ago, I went to purchase a cup of coffee before class at one of the small bodegas on campus. The purchase was under $3.00 so I pulled out a five-dollar bill. I was immediately informed that the shop no longer accepts cash.

“Why?” I inquired.

The student cashier responded perkily, “Because we want to serve all of our customers better.”

That made no sense to me. I pointed out that I was part of the “all customers” and that I rarely used a card for anything under $20. The student dutifully responded that since more people were paying with cards, they could better serve their customers by not accepting cash. (Note the tautology.) It was clearly a line that employees had been asked to memorize.

Being the principled person I am, I refused the coffee and walked away without paying. Deadweight loss was poured down the drain. Nonetheless, I continued my crusade for several days and always received the same response: “We’re here to serve you better.” (If this makes me sound like a jerk, I am willing to accept that label for the benefit of economic education.) The cashiers got to know my schtick and would not pour any coffee until I had paid. 

Finally, after several futile attempts to trade cash for coffee, one of the employees noted that the reason for only accepting electronic payment was because their managers didn’t want them counting cash at the end of the shift. Eureka! An honest answer.

I followed up with management. As it turns out, having employees count out their register adds work time to their shift. Given that hourly employees are paid by rounding up to the quarter hour after punching out, just spending a few extra minutes counting cash added 15 minutes to the payroll. During particularly busy shifts with lots of cash transactions, this closing out procedure might add up to a half hour of extra pay. (Employees also have an incentive to “slow count” their register for a few extra dollars. If you ask how I know this, I will plead the Fifth Amendment.)

While a quarter hour of pay may seem trivial, it adds up. Hundreds of employees working an extra 15-30 minutes across seven days a week and across twelve months accumulates to significant costs for the employer. Any effort to reduce costs so as to keep consumer prices low will be considered. 

The solution chosen by the campus food service was to eliminate cash transactions so as to eliminate the fractional hourly wages needed to cash out an employee’s register. With electronic payments, all an employee has to do is push a few buttons to report sales made during shift. (There is the added benefit of minimizing cashier error or theft, which is more common with cash.)

This should not be surprising given that a University of Washington study (conducted by scholars in the same building where I was buying my coffee) found that Seattle’s minimum wage increase led employees to reduce the average number of hours worked by employees, ironically lowering their total monthly take-home pay. Higher hourly labor costs? Shorten the hours worked !

[Side note: While scholars such as Card & Krueger argue that minimum wage increases have little impact on overall unemployment, they miss the fact that employers will not necessarily lay off employees, but instead reduce their work hours. This may result in less take-home pay, as it did in Seattle, and worse customer service as businesses become understaffed.]

In short, a government-mandated wage increase set employers on a course of trying to minimize labor costs, which included eliminating the hassle of employees counting cash."