It would be unfair to say that Seattle's experiment in legislating a massive increase in the minimum hourly wage for employers in the Emerald City had no effect. Labor costs went up for the large employers first targeted by the local 12% increase from the statewide minimum rate of $9.47 an hour to $11 an hour. People earning that higher hourly rate received shorter work weeks than before. Also, fewer of them remained employed than would have been the case without the ordered wage hike. Those were some of the initial findings presented last week by the economists commissioned by the city to study the impact of their minimum wage initiative. One could easily say that the greatest obvious net gain was for politicians and labor economists rather than for employees paid by the hour.
Concluding that the actual benefits to low-wage workers might have been minimal, the group of economists supplied details showing few positive changes. The average increase in total weekly earnings was small, if at all. One research method showed workers' income increasing by $5.54 a week, while other methods showed that after the minimum wage jump total weekly earnings dropped by $5.22 a week. As one U.S. Chief Economist once said, "If you lined up every economist in the world, no two would point in the same direction."
Coincidentally, a Seattle TV news report last night featured another group of community organizers promoting new a law covering call-in time they claimed would raise wages for over 735,000 workers. The small leadership group assembled for the media event were shocked by the unexpected on-air defection of a core supporter. As they began their pitch, one of the leadership team who was a sympathetic employer threw their carefully planned presentation into chaos. He went off-script, saying that while he still supports higher wages, costs must be controlled, too. Owner of a few local cafes, he complained that he had to eliminate half of his already-small work force to make ends meet after the impact of the increased payroll costs. Although his fellow leaders seemed quite discomfited by his betrayal because he undercut their message, his statements rang true. Hope they still remain friends.
Why are practical economics so hard to understand for so many people? Paying more for the same labor output changes the compensation balance in any business. Increased payroll costs must be countered by savings in other areas, by lower profit margins or by higher prices for the goods and services being offered. One of the academic economist co-authors of the report pointed out that higher minimum wages create incentives for employers to automate. A machine works 24/7 without creating any "people problems."
The issue of pay compression was not openly addressed. Nothing was said about the ripple effect of new minimum rates on either the pay or hours worked of those already earning more (but close to) the new bottom rate. The study did, however, conclude that the higher minimum wage reduced the share of workers with jobs by about 1.2%.
While these preliminary results don't surprise me, there is still something I just can't understand. If some praiseworthy social benefit like a higher minimum wage is good for everyone, then why are the costs of providing those wonderful outcomes generally primarily borne only by big companies? Small employers, mom and pops, charities and other miscellaneous non-profits employ a lot more workers in America than big corporations. Perhaps it is because there are more beneficiaries of government-compelled higher wages on their big payrolls than there are owners and managers who will find less to like in the outcome results of inflated labor rates. Politicians always know where the votes lie.
E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience. After corporate HR jobs and consulting in every industry throughout North America, he was Senior Associate of pay survey software publisher ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook), speaker and frequent expert witness, Jim testified in many reasonable executive compensation cases. He also serves on the Advisory Board of the Compensation and Benefits Review.
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