View source for No, raising the local minimum wage doesn’t hurt local businesses

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[[Category:Jared Bernstein]]
[[Category:Ben Spielberg]]
[[Category:Minimum Wage]]
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{{DES | des = "Businesses don’t appear to relocate in response to local minimum-wage increases (at least not enough to create significant job losses) for several reasons." | show=}}
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In 1938, President Franklin D. Roosevelt signed the nation’s first minimum-wage law. It set the wage at $0.25 an hour and covered only a fifth of the workforce. Speaking to the country the night before he signed the bill, Roosevelt told listeners to “not let any calamity-howling executive with an income of $1,000 a day” tell them “that a wage of $11 a week is going to have a disastrous effect on all American industry.”

Last August, almost 80 years later, the city council of Birmingham, Ala., voted 7 to 0 (with one abstention) to become the first city in the Deep South to enact a minimum wage above today’s federal level of $7.25. The ordinance planned an increase to $8.50 per hour by July 2016, with a second increase to $10.10 set for July 2017.

In response, state lawmakers leapt from “calamity-howling” to obstructionism. The Alabama legislature this past week passed a bill designed to block Birmingham and other cities not just from raising the local wage floor but also from mandating benefits such as paid sick leave. Alabama House Speaker Mike Hubbard (R) insists that the bill isn’t about the policies themselves but about preventing “all sorts of problems” that arise when cities are allowed to set their own minimum wages, presumably because there’s nothing preventing local businesses from relocating to avoid the higher labor costs engendered by an increase.

It’s not a crazy concern. When the national minimum wage goes up, no business is at a competitive disadvantage — they all face the same wage floor. It’s fair to wonder whether sub-national minimum wages might encourage businesses to avoid an increase by moving, a question with implications for people all over the country — from Olympia, Wash., to Lexington, Ky., to Bangor, Maine — who are trying to secure a raise. The geographical variation that has sprung up over time, however, has allowed economists to test Hubbard’s claims, and the evidence supports the actions of the Birmingham city council.

Partly because of federal inaction, 29 states, plus the District of Columbia, have set minimum wages above the federal level, with floors ranging from $7.50 in Maine and New Mexico to $10 in Massachusetts and California to $10.50 in Washington, D.C. (rising to $11.50 in July). Southern states are the least likely to be in this group. City lawmakers began to adopt higher wage floors at the local level more than a decade ago. Four counties and 19 cities have minimums above their state’s level, including Santa Fe, N.M., ($10.84), San Francisco ($12.25) and SeaTac, Wash. ($15.24). Several more have either proposed or passed higher minimum-wage laws that have yet to take effect.

This variation has provided opportunities for something rare in empirical economics: quasi-experimental studies. In one famous paper, economists Alan Krueger and David Card compared fast-food employment in New Jersey, which raised its minimum wage in 1992, with that in Pennsylvania, which did not. “We find no indication that the rise in the minimum wage reduced employment,” they concluded.

Are sub-state localities different from states? Another important study gets at this question by looking at county-level data, comparing every contiguous county across state borders where minimum wages differed over the course of 16 years. Instead of “all sorts of problems,” the researchers found “no evidence of job losses for high impact sectors such as restaurants and retail.”

Case studies of cities with higher wage floors are less common, but those that have been done support the findings of the state and county research. Studies of San Francisco and Santa Fe, the two cities with the longest track records of higher minimums, reveal “no statistically significant negative effects on employment or hours (including in low-wage industries such as restaurants).”

Businesses don’t appear to relocate in response to local minimum-wage increases (at least not enough to create significant job losses) for several reasons. First, restaurants and other retailers, which are disproportionate employers of low-wage labor, must stay near their customers. Second, there are other ways to absorb higher wage costs than by laying off workers. Some evidence, for instance, suggests that companies raise prices, generally by less than 1 percent per every 10 percent increase in the wage. They may also become more efficient. The prospect of higher labor costs can incentivize employers to eliminate waste and to raise performance standards, while at the same time higher wages enhance workers’ motivation. Companies end up with less turnover and shorter vacancy periods when filling job slots.

Finally, companies can cut profit margins or top-level salaries to meet higher wage mandates. This last mechanism is one reason such policies get so much pushback from business, and it is particularly germane in an economy where income inequality stands at historically high levels. According to data from the Economic Policy Institute, the real earnings of low-wage workers in Alabama are down 6 percent compared with 1979, while those of the state’s highest-paid workers are up 17 percent.

Those low-wage workers have been left behind. And now the Alabama political establishment has blocked action to help them.

This is the same political establishment that professes to support “local control” when it finds it convenient. For example, dozens of Alabama state representatives who voted to preempt Birmingham’s minimum-wage ordinance were all for “necessary freedoms to address . . . issues at the local level” when voting on a school reform bill in 2013. The preemption bill’s sponsor, state Rep. David Faulkner, even acknowledged the contradiction: “While we say that we want local control of certain things, I don’t believe the minimum wage is one of those.”

No wonder Birmingham’s citizens and city council fought back. The council voted earlier this past week to raise the minimum wage to $10.10 immediately to try to preempt the preemption bill, and Raise Up Alabama, a coalition including workers, unions and clergy members, has formed to fight the state’s decision. If they lose the battle, it won’t be because the facts weren’t on their side.
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