Politics

The evidence is in: a minimum wage increase doesn’t actually mean economic apocalypse

In New Zealand and around the world, modest boosts to the minimum wage have failed to trigger the catastrophic effects detractors prophesy, writes Branko Marcetic

No sooner was the new government’s minimum wage hike announced than the land speed record was broken to denounce it. The Employers and Manufacturers Association went first, complaining that it was too high and would “bring the economy to a grinding halt.” Economist Eric Crampton of the free market think-tank the New Zealand Initiative joined Mike Hosking to weave a tale of thousands of lost jobs and millions of dollars of lost revenue, advocating that the government instead help struggling workers through Working for Families rather than a wage raise (in other words, have taxpayers subsidise low-paying employers – quite literally socialism).

These doomsday scenarios were followed by a series of more reasonable concerns from retailers, restaurateurs, and other small business owners about how they would manage to pay the new wage of $20 an hour by 2021.

There are a few things you should know about the proposed wage rise. For one, while the $20 figure might at first sound like the stuff of David Seymour’s nightmares, the gasp-inducing number has to be weighed against changes in inflation and prices, which anyone can do by clicking a few tabs and punching a few numbers into the Reserve Bank’s inflation calculator.

When the Minimum Wage Act passed in 1983, for instance, the wage was only $2.50, or $10.04 when adjusted for inflation, which is quite a bit less than Labour is proposing now. But then you realise the purchasing power of that wage has declined 75% by today.

Similarly, when adjusted for inflation, the $4.50 that the minimum wage has risen by over the last decade looks less impressive when figures are adjusted for inflation, translating into an increase of a little less than a dollar – and even that value has seen its purchasing power decline by 23.9%, because New Zealand is an expensive place, and only getting more so.

But even beyond this, there’s little evidence that lifting the minimum wage by more than the negligible amount we’ve seen over the past 10 years has the kind of catastrophic effects its detractors warn about. We know this mostly because it isn’t the first time someone somewhere in the world has tried to do this.

But has there been any research into whether lifting the minimum wage makes piles of coins erupt in flames? Image: Getty

For instance, in June 2014, the city of Seattle opted to raise its minimum wage by 60% to $15 an hour, giving it the highest minimum wage in the United States. The move was met with similar doom-and-gloom prognostications: the city was “set to destroy the economy,” it would create “layoffs, bankruptcies, and massive price increases passed on to consumers,” it constituted a “war on low-skilled workers,” and the “results would be ugly.” One restaurateur predicted he “would lose maybe a quarter of the restaurants in town.”

None of this happened. A Berkeley study released this year found that the measure lifted wages for workers in the food services industry – the sector most affected – while having no effect on their employment. This was the case even among fast food franchises, which saw the biggest wage increase.

Opponents of the wage typically point to a University of Washington study that found many of the original, negative predictions had been borne out. But the study was highly flawed, among other things leaving out the 40% of workers who work in multi-location businesses (in other words, chains) that typically saw a larger wage increase, and whose inclusion in previous research tended to make for more rosy results. The study was widely criticised, including in the pages of Bloomberg and Fortune – hardly bastions of leftwing economics.

Seattle’s unemployment has stayed low – in fact, it’s steadily fallen over the period the wage was raised – hitting a remarkable 2.6% in April this year. Peak unemployment was 4.5%, which it hit in February 2014, months before the raise was introduced. In fact, despite having the United States’ highest minimum wage for the better part of two decades, Washington state has had a consistently lower unemployment rate than low-wage states. A local Seattle business paper reported a year after the wage went into place on a boom in restaurants in the city, with dozens of new restaurants opening.

Before Seattle, there was San Francisco, which in 2003 became the first major US city to introduce a municipal minimum wage, in this case one of $8.50 – paltry by our standards, yet a 26% increase in California’s wage at the time. The city smartly tied the figure to inflation, and so the figure has kept rising; by 2012, San Francisco had the country’s highest minimum wage. In 2014, the city’s voters passed another ballot proposition, this one to raise the city’s minimum wage to $15 by 2018, gradually lifting the wage from the $10.74 it was in 2014 to the $14 it sits at today.

What has been the effect? A 2007 study from Berkeley found that pay went up with no impact on jobs, and as of 2014, San Francisco’s economy was going gangbusters, with employment growth and unemployment better than the rest of the state. An updated study in 2014 by the same researchers, which also looked at eight other cities, found the same thing, even though the city had placed a number of other obligations on businesses, like paid sick leave.

There’s plenty of other evidence, too. Since 2011, the unemployment rate for the statistical area of San Francisco, Oakland and San Jose (the latter another city that’s mandated a higher-than-average minimum wage) has steadily dropped from 11% to 4.3% as of August 2017. Despite claims of persecution by bar owners and panic about “job-killing minimum wage hikes”, San Francisco leads the country in eateries per capita (Seattle is in second place).

And as with Seattle, those arguing against the minimum wage have not been convincing. Critics jumped on a Harvard study released this year to argue that the minimum wage does indeed kill restaurants, ignoring that the study actually found wage rises hurt poorly reviewed restaurants on Yelp. One of the authors made known his discomfort with pundits using the study to draw broad conclusions about unemployment.

These are two high-profile case studies, but they’re by no means they only ones. While researchers haven’t yet gathered enough evidence to properly evaluate the impact of the various $15 minimum wages approved in various parts of the US, what evidence there is doesn’t seem to deviate from this general trend. Two separate studies, one by Goldman Sachs (yes, that Goldman Sachs) and the other by the Centre for Economic Policy Research, found that the 13 states that saw a minimum wage increase in 2014 saw faster job creation than the states that didn’t.

Clearly there are nuances here that are being flattened out with such a broad overview. But even so, given all this, it’s hard to argue with a straight face that a minimum wage rise is some type of economic kryptonite.

We can look further, too, than the United States, where wages tend to be notoriously low. There was no shortage of catastrophising when the UK prepared to introduce a national minimum wage in 1999. Eighteen years later, a RAND study has found that only positive outcomes came of its subsequent increases, and that negative effects on employment were limited to part-time employees and, during the recession, youth workers.

A University of Warwick study conducted 15 years before that likewise found employment was barely affected, and a 2014 study by the UK’s Low Pay Commission, based on 130 research projects commissioned since 1999, found the same thing. And despite the fact that the British minimum wage has doubled over the last 17 years to its highest level, its unemployment is lower than ever.

The British could have been confident in this result because they had one of the strongest case studies for the effect of higher wages on employment: the Equal Pay Act of 1970, which gave women recourse to claim an equal pay-cheque to a man doing the same or similar work. Predictions that women would suffer mass lay-offs and men would be hired for jobs in industries dominated by women didn’t come true, and instead, the share of female employment has steadily risen the past few decades.

Likewise with Australia. When its Productivity Commission suggested scrapping the minimum wage entirely in 2015, the president of the Fair Work Commission took the unusual step of wading into the public debate and insisted that “modest minimum wage adjustments lead to a small, or zero, effect on employment”. This has been backed up by studies, as well as the fact that Australia weathered the global recession despite having one of the world’s highest minimum wages – something that surely shouldn’t have happened if the doomsday theorists are to be believed.

In fact, the consensus among researchers has in recent decades shifted away from the once-thought conventional wisdom that a high minimum wage leads to closures and unemployment. The Ben Hur of these studies was completed in 2014 by two researchers who pored over more than 200 English-language scholarly and policy papers about the minimum wage, mostly published since 2000. They determined that “moderate increases in the minimum wage are a useful means of raising wages in the lower part of the wage distribution that has little or no effect on employment and hours”.

More than 600 economists have signed on to a statement that says “increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labour market.” Even those you wouldn’t expect to endorse it have. The International Monetary Fund called for the US to raise its minimum wage in 2014. The same year, despite its original warnings in 1999, the Economist declared that “no-one who has studied the effects of Britain’s minimum wage now thinks it has raised unemployment,” and that partly because of this, “The Economist has changed its mind.”

Does that mean the minimum wage has no impact whatsoever on employment? Of course not; many studies show there is usually a small impact, typically on young jobseekers. There is also evidence that employers are responding to wage increases with increased automation. But employers are turning to automation regardless of how high the wage is, because it’s always going to be cheaper to hire an unthinking, unfeeling, tireless machine over a human being – even white-collar jobs are under threat.

And of course, you’ll always find anecdotal evidence of a business shutting down because it couldn’t keep up. To be sure, there are some business owners who will struggle more than others to pay a higher wage. While some can simply raise prices or bring their own salaries down to compensate, others may already be struggling to pay themselves a decent wage. Some of them may even go out of business.

But part of running a business is recognising the inherent risk that your venture may not end up profitable enough to survive. In the year to February 2017, 57,500 businesses closed their doors. If the wage increase means the difference between survival and failure for a business – or in other words, if the only thing keeping a business alive is the ability to pay its workers substandard or even poverty wages – then that particular business was probably not long for this world anyway, and it will be replaced by the many thousands more that are started every year.

That also doesn’t mean one can simply jack up the wage straight away and expect it to work out. Cities like Seattle and San Francisco have been successful because they’ve been smart about it. For one, all of these cities put in a gradual increase over a matter of years. But Seattle also has a different wage level depending on how many employees a business has, while San Francisco gave nonprofits and small businesses more time to adjust, and Santa Fe initially exempted small businesses and still leaves out some non-profits. The new coalition government appears to be taking a similar tack here: it’s rolling the wage rise out in stages, and is looking at ways to lighten the load for small businesses, such as cutting taxes for those that make under a certain amount of turnover.

A higher minimum wage doesn’t have to be a job- or economy-killer. It can and has been rolled out in numerous locations with none of the cataclysmic results that minimum wage opponents have been warning about for literally 80 years. If the sky hasn’t fallen yet, it probably isn’t going to.

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