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Policy: Labor

The hidden costs of raising the minimum wage

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Opinion,Columnists,Sean Higgins,Labor unions,Labor,Washington,Seattle,Minimum Wage,Magazine

Most of the debate surrounding the minimum wage has focused on the question of whether raising it destroys jobs. Conservatives say yes, liberals say no and both eagerly point to various economic studies to buttress their point.

Less attention has been paid to what impact a hike will have on those who will still be working. After all, even if the hike does cost some jobs, that may still be a worthwhile trade-off if enough other low-income workers benefit.

But will those remaining workers really be better off? Not necessarily. They may lose out as employers cut back elsewhere. Some anecdotal evidence from Seattle, which recently voted to raise its hourly rate from $9.32 to $15, appears to be bearing that out.

There’s also the awkward fact that a higher minimum wage actually benefits some larger businesses by reducing competition. Walmart may be able to pay a higher wage, but neighborhood mom and pop stores may not.

In February, a Congressional Budget Office study that found that a half-million jobs will be lost under the proposal by Democrats in Congress to raise the federal minimum from $7.25 to $10.10 by 2016.

But the same CBO study found that 16.5 million other workers would see their wages increased. After adjusting for the job losses, overall real income would increase nationally by $2 billion.

For most liberals, any losses from a higher minimum are outweighed by the benefits. “Can you think of a better way to raise wages at no cost to the federal government?” Labor Secretary Tom Perez asked during an Economic Policy Institute speech last week.

Liberals also dispute the severity of the job loss. A Center for Economic and Policy Research study from February 2013 argued that the evidence was “either inconclusive … or suggestive of only small economic effects.”

But if that is the case, then how do the businesses that employ people at or near the minimum wage absorb their now-higher labor costs? CEPR, to its credit, offered some answers:

"Some employers may cut hours; others, fringe benefits; still others, the wages of highly paid workers. Some employers may raise prices (particularly if their competitors are experiencing similar cost increases in response to the minimum wage). Some employers may see their profits fall (along with those of their competitors), while others may reorganize the work process in order to lower costs."

In other words, the workers will simply lose out elsewhere. Meanwhile consumers will pay higher prices and the businesses will see lower profit margins.

The Seattle Times has reported that some hotels have already laid off workers. Some Seattle hotel workers told the Northwest Asian Weekly they had already lost their 401(k)s, health insurance, paid holidays, vacations and free parking as a result of the change. "It sounds good, but it's not good," an anonymous cleaning lady said.

Those aren’t the only unintended consequences of raising the minimum. It may actually help the corporations progressives think they are punishing.

The D.C. city council tried last year to raise the minimum wage for big retailers, and only big retailers, to $12.50, only to be vetoed by Mayor Vincent Gray. Walmart, which was in the process of opening six locations in the city, lobbied hard for the veto.

But when the council subsequently moved to raise the minimum wage across the board to $11.50, Walmart did not object. Why? Because they can afford to pay that, but their smaller competitors may not. Back in 2006, the retail giant even endorsed a federal minimum wage hike.

Seattle has tried to account for this imbalance by phasing in the increases in four different multi-year schedules according to business size. That is still going to be tough for businesses facing thin profit margins.

Still, such micro-managing shows that even Seattle is worried about the practical impact of its hike. It will be a fascinating experiment for the rest of us to watch.

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Sean Higgins

Senior Writer
The Washington Examiner