Raise Minimum Wage: Reduce Benefits By David Henderson

At the start of this year, the minimum wage in SeaTac, a city in Washington state, was raised by a whopping 63 percent–from $9.19 an hour to $15.00 an hour. If we critics of the minimum wage, including the late economists Paul Samuelson, James Tobin, Gunnar Myrdal, and Milton Friedman, and a large percent of the economics profession–are right about our economic analysis, then we should certainly expect some of the negative results to show up in SeaTac, a small city surrounding the Seattle/Tacoma International Airport.

One could argue that you won’t see many effects because wages were already close to that level in high-wage metropolitan Seattle. Still, there had to be a fair number of people with wages substantially below $15 an hour.

So what have been the effects? Here, from the Seattle Times, are a few that were reported within the first 6 weeks of the new minimum wage:

At the Clarion Hotel off International Boulevard, a sit-down restaurant has been shuttered, though it might soon be replaced by a less-labor-intensive cafe. The nearby Cedarbrook Lodge, by contrast, is undergoing a $16 million expansion. Other businesses have adjusted in ways that run the gamut from putting more work in the hands of managers, to instituting a small “living-wage surcharge” for a daily parking space near the airport. Meanwhile, workers are flocking to SeaTac to apply for minimum-wage jobs, and recipients of the mandatory pay raise say they’re enjoying the freedom of having extra money to spend or save.

There’s a lot packed into those 3 paragraphs.

First, note that one restaurant did close. We’re not sure why but it might have been due to the higher minimum wage. Notice also that it might be replaced by a less-labor-intensive cafe. One thing that doesn’t appear to fit is the expensive expansion of the Cedarbrook Lodge. But, given how hard it is to get permission on the urban West coast to build anything, it’s highly doubtful that this expansion was planned after the minimum wage law passed in November 2013. It’s almost certain the expansion was planned well before that. So the costs of getting permission are sunk. An increase in the wage rate of part of the labor force that would work in Cedarbrook Lodge, even if it does result in loss of jobs, is not enough to cause the expansion to stop.

Second, notice the shift of work to managers. With managers doing more work, there will be fewer other workers doing the work. In other words, fewer jobs.

Third, notice the displacement of workers. The $15 an hour wage is a draw for workers from other areas, who will displace some of the workers working previously. Reasonable guess: the workers drawn in who actually get hired will be, on average, more skilled than the workers displaced.

The other parts of the Seattle Times article are worth reading also. Notice that one reason to expect less of a job loss than otherwise is that the new $15 minimum wage applies only to non-union workers. Unions have traditionally advocated using the minimum wage as a way of pricing out their competition, and this is usually easy for them to do without exempting themselves because union jobs typically pay more than the minimum. But this is a particularly blatant example that shows the unions’ real motive: price out the competition without threatening their own sub-$15 jobs.

More recently, there has been evidence that employers respond to the higher minimum wage by cutting other parts of the compensation package, namely benefits. Assunta Ng writes:

While attending an event at a SeaTac hotel last week, I met two women who receive the $15/hour minimum wage. SeaTac has implemented the new law on Jan. 1. I met the women while they were working. One was a waitress and the other was cleaning the hallway.

“Are you happy with the $15 wage?” I asked the full-time cleaning lady.

“It sounds good, but it’s not good,” the woman said.

“Why?” I asked.

“I lost my 401k, health insurance, paid holiday, and vacation,” she responded. “No more free food,” she added.

The hotel used to feed her. Now, she has to bring her own food. Also, no overtime, she said. She used to work extra hours and received overtime pay.

What else? I asked.

“I have to pay for parking,” she said.

I then asked the part-time waitress, who was part of the catering staff.

“Yes, I’ve got $15 an hour, but all my tips are now much less,” she said. Before the new wage law was implemented, her hourly wage was $7. But her tips added to more than $15 an hour. Yes, she used to receive free food and parking. Now, she has to bring her own food and pay for parking.

HT to Steve Horwitz.