Opinion: Unintended Consequences — The True Cost of $15 Minimum Wage

Andrew Sidamon-Eristoff | March 9, 2016 | Opinion
‘Proceed with caution’ is the best policy when it comes to guaranteeing a ‘living wage’ for New Jersey’s lowest-paid workers

Andrew Sidamon-Eristoff
Thanks to a constitutional amendment approved by the state’s voters in 2013, New Jersey’s minimum wage is indexed to inflation and now stands at $8.38 an hour. The Democratic leaders of the state Legislature are now advancing “Fight for $15” legislation to raise the minimum to $10.10 an hour immediately and to establish a ramp-up to a “living wage” of over $15.00 an hour in five years. Knowing that Gov. Chris Christie is likely to veto the measure, the legislators have announced their intention to repackage the proposal as a ballot referendum.

What are we to make of all this? Is this a noble quest to lift the working poor out of poverty in the face of globalized corporate greed and indifference, or a futile and ultimately harmful attempt to rewrite or override immutable laws of economics? Probably a little of both, which is why this issue is so inhospitable to dispassionate debate. Mindful of the risks, I nonetheless invite readers to venture with me out onto this political minefield.

Let’s begin by deconstructing the politics. Based on the 2013 referendum and periodic polling, Democratic tacticians know that “giving New Jersey’s workers a raise” is wildly popular and surefire winner in motivating their base to show up at election time. That’s why they’ll be happy to have the governor veto the legislation and look forward to putting this issue on the ballot. (It’s interesting that the legislative leadership came to the opposite conclusion regarding the wisdom of letting the voters decide when the governor proposed a referendum on gay marriage a few years ago.)

The top-line political motivations are obvious, but is there more to this? Absolutely.

Who is pushing for this and why? When you peel back the layers of ad hoc paper coalitions, it turns out that organized labor is by far the most important constituency pushing for a higher minimum wage, both nationally and here in New Jersey. Why would labor unions, most of whose members are already earning wages higher than the New Jersey minimum wage, push for a higher wage for workers they generally don’t represent?

Two reasons. First, a higher minimum wage serves as a very useful bargaining floor. Second, the unions — facing a historic decline in private-sector union membership — desperately want more members, especially in service industries, and they know that workers who benefit from their advocacy are more likely to assert their right to collective bargaining and welcome union representation.

Why wage hike is big issue

What makes the new “Fight for $15” movement notably more potent than previous advocacy efforts? One reason is that activists have successfully leveraged the amorphous concept of a “living wage” into the political debate. Never mind that the minimum wage was never intended to be a “living wage,” or that it has no formal economic definition, the phrase “living wage” is an example of innovative brilliance in political communication. Much like the made-up advocacy terms “partial-birth abortion” and “death taxes” in conservative politics, the concept of a “living wage” is both simple and incontestable, and thus has the power to redefine the parameters of political debate. Who wouldn’t be inclined to agree that “everyone who has a job ought to be able to earn a living,” just as who wouldn’t instinctively oppose an abortion after birth or a tax on the privilege of dying?

Another key political consideration is the asymmetric impact of raising the minimum wage. In politics, if you are in the business of taking a public benefit from one group in order to give it to another, it’s always best to take from an ill-defined, disorganized constituency and give to a defined, self-aware constituency that can be organized to express its gratitude with votes.

Raising the minimum wage is a nearly perfect example of this dynamic at work, but to see it function we’ll need to touch on some economics.

Even the most progressive economists admit that the bleak and heartless laws of supply and demand have at least some applicability to the market for labor such that, at some theoretical tipping point, raising the minimum wage will lead to less employment (fewer jobs or hours of employment). The disagreement concerns just where the tipping point lies and whether it should be scored using economic or social metrics.

Back to politics. Raising the minimum wage risks reducing one public benefit (employment) in order to deliver another public benefit (higher wages). What makes for great politics is that the group receiving the benefit of higher wages is a defined, self-aware constituency while the group that is at risk of losing a benefit — those who might not get an entry-level job or extra hours in the future — is totally disorganized and has no political self-awareness whatsoever. Forgive me, but I think we ought to give at least some consideration to this second group.

Moreover, I fear that the “Fight for $15” political movement is attacking a symptom rather than addressing the underlying cause of distress, and thus risks hurting innocent people.

A new paradigm

Let’s review the larger context. As many lament, our economy is navigating a decades-long and very painful transition away from the post-World War II industrial paradigm toward a knowledge-based service economy that is placing a higher and higher premium on education, technical skills, and experience. The explosion in digital technologies since the early 1990s has boosted workplace productivity and returns on equity (capital) while at the same time reducing the demand for manual and low-skilled labor. Although these trends are a net positive for the economy as a whole, lower-end wages have stagnated while employers are having difficulty finding qualified applicants for jobs with high skills requirements. Stated in cold economic terms, we have reached a point of sustained “structural unemployment” or underemployment, with large numbers of potential workers languishing outside the formal workforce and economy.

What to do? If you accept that technology-enabled productivity gains and labor reductions are an unstoppable global reality, you might believe that our objective should be to give our workers the education, technical skills, and experience they need to compete and earn higher wages in the modern economy. In particular, you would want to avoid erecting new barriers to entry-level jobs that build work experience and put wage earners on a positive path forward.

In contrast, the minimum-wage movement seeks to leverage the anger and frustration over stagnant wages to declare, by governmental fiat, that entry-level and unskilled jobs deserve a “living wage.”

Beyond the political considerations noted above, this reflects social-democratic values that, for better or worse, are ascendant in America. To simplify, these values seek to socialize the economic benefits and burdens of higher productivity and technological innovation rather than take the risks of challenging structural unemployment head-on, even at the cost of continued growth and some employment. Although I understand and empathize with this very human (and European) point of view, I find it somewhat depressing. I don’t want to give up on America’s workers. And I still cling to old-fashioned notions that “a job is the best social program” and that, over the long run, economic growth offers the only proven path toward social advancement and a higher standard of living.

In reality, employers with economic flexibility and market power — mostly larger concerns — will react to a much higher minimum wage by passing the higher cost to consumers (many of whom are low-wage earners themselves), trimming discretionary spending on labor such as overtime, or investing in new labor-reducing technologies, with the lowest-skilled jobs the first to go. The inexorable result: fewer entry-level jobs and/or fewer employment hours. Those “fortunate” enough to get or retain a job at a higher minimum wage will face higher prices for consumer staples and basic services. Yes, studies suggest that low-wage earners spend a higher proportion of their income, with the implication that a higher minimum wage ultimately boosts consumer demand. Yet it’s far from certain that minimum wage earners will come out ahead in the long run or that struggling local businesses will benefit instead of Walmart.

Smaller employers with less flexibility will face a bleaker choice. I have no way of proving this empirically, but I firmly believe that almost doubling the minimum wage over five years will drive a dramatic increase in off-the-books and casual employment. Already a significant, growing, and widely tolerated component of our service economy, the grey market for labor is far from benign: It deprives workers of access to the full protection of our labor standards and Social Security laws, and it undermines our cultural commitment to tax compliance and regulatory compliance generally. Long term, this is a big deal. For decades, one of the hallmarks of American social and economic success has been our relatively high rate of voluntary compliance with tax and other regulations.

Where does all this lead? I hope it leads to an appreciation of the need for balance and caution.

The market for labor is far from perfect. Economic distortions abound and the tradeoffs are not as zero-sum as free-market academic models might imply. For that reason, I understand the logic of increases in the minimum wage that dignify the value of work and set a reasonable wage floor that makes it impossible for employers to leverage their relative power unfairly. That said, I hope we can achieve a balance that works.

So what’s the right amount?

Which brings us back to the tipping-point question. I don’t know exactly where it is, but I’m convinced that the tipping point is somewhere short of going to $15 an hour within five years. Even if you don’t agree, I hope you will concur that there are compelling reasons to be cautious. Caution might suggest that enshrining a minimum wage in our state constitution might not be a great idea or a sound precedent. Caution might also suggest proceeding slowly enough to measure impacts and calibrate policy in real time as necessary. Finally, caution might suggest expecting our elected leaders to rise above immediate political considerations and consider long-term consequences.

The question, then, is whether our elected leaders have the courage to be cautious.