Thursday, May 21, 2015

$15 Minimum Wage Will Hurt Workers

You think?

From Megan McArdle, at Bloomberg":
So Los Angeles is raising its minimum wage to $15 an hour by 2020, and then indexes the wage to inflation, so that it will never fall below this level in real terms. The politicians who have passed this law are understandably very excited that many low-wage workers -- perhaps almost half of the city's labor force -- will be getting raises, some from the current minimum of $9. I'm sure the workers themselves are pretty excited about having more money in their pockets. What's less clear is what happens next.

As I've written before, the existence of studies that seem to show minimal economic impact from minimum wage increases has caused many policy advocates to act as if we can assume that very high increases, like this one, can transfer money from the pockets of the affluent into the pockets of the poor without causing big disruptions. This is wildly beyond what that evidence shows, or could show. The studies in question covered small increases in the minimum wage, over short time frames. They cannot tell us what will happen with big increases over longer time frames (and neither can flat international comparisons, which get influenced by local economic conditions--for example Australia, frequently cited by proponents of the minimum wage, has been having a decades-long commodity boom that is now ending). This matters. It is over longer periods that a minimum wage hike is likely to be most disruptive.

When the minimum wage goes up, owners do not en masse shut down their restaurants or lay off their staff. What is more likely to happen is that prices will rise, sales will fall off somewhat, and owner profits will be somewhat reduced. People who were looking at opening a fast food or retail or low-wage manufacturing concern will run the numbers and decide that the potential profits can't justify the risk of some operations. Some folks who have been in the business for a while will conclude that with reduced profits, it's no longer worth putting their hours into the business, so they'll close the business and retire or do something else. Businesses that were not very profitable with the earlier minimum wage will slip into the red, and they will miss their franchise payments or loan installments and be forced out of business. Many owners who stay in business will look to invest in labor saving technology that can reduce their headcount, like touch-screen ordering or soda stations that let you fill your own drinks. These sorts of decisions take a while to make. They still add up, in the end, to deadweight loss -- that is, along with a net transfer of money from owners and customers to employees, there will also simply be fewer employees in some businesses. The workers who are dropped have effectively gone from $9 an hour to $0 an hour. This hardly benefits those employees. Or the employee's landlord, grocer, etc.

Leftists are idiots. Los Angeles has already had businesses move out of town with the threats of higher costs.