Op-Ed: Raising the minimum wage: Would it help or hurt L.A.?

On Labor Day, Mayor Eric Garcetti proposed raising the minimum wage for all workers in Los Angeles, eventually reaching a minimum of $13.25 an hour in 2017. Reactions were immediate. Organized labor applauded the proposal; business groups warned that it would kill jobs. Some City Council members, meanwhile, have criticized the Garcetti proposal for not going far enough, advocating consideration of a wage floor that would reach $15.25 by 2019.

We asked two thoughtful watchers of the local economy to engage in a dialogue on the issue: Daniel Flaming, president of the nonprofit Economic Roundtable, and Edward Leamer, a professor of management, economics and statistics at UCLA, where he directs the Anderson Forecast. Their correspondence follows.

From Edward Leamer to Daniel Flaming:

Dear Dan,

As I’ve considered L.A.’s minimum wage proposal in recent weeks, I keep coming back to one question: Who will pay for it?

It’s complicated.

It’s hard to think of a better way to provide significant amounts of money to needy individuals, families and neighborhoods than by increasing compensation for low-wage work. A report by the Berkeley Institute for Research on Labor and Employment prepared for the mayor suggested that a minimum wage of $13.25 in 2017 would directly increase the earnings of 27% of workers and would channel $1.8 billion a year toward this needy and deserving group.

But what is the best way to fund this attractive charitable activity?

Most economists think of a minimum wage as equivalent to an employment tax that applies to the very group we want to help out: low-wage workers. This is attractive politically only because the minimum wage tax doesn’t show up on the city’s books. But it could. Los Angeles could collect the $1.8 billion from employers as a tax on low-wage employment and then distribute the tax revenue to the poorly paid workers. An alternative way to raise $1.8 billion would be a 3% payroll tax on all workers earning in excess of $50 an hour.

In any case, it seems wise to keep in mind that low wages are the symptom, not the problem. The problem is too many workers chasing too few low-wage jobs. To solve this problem, we either need fewer workers or more jobs. Unfortunately, a minimum wage of $13.25, compared with $7.25 in Texas and $5 in Mexico, repels jobs and attracts workers. The much better solution is to do what we can to attract businesses that hire these workers, and to educate our low-wage workers to make them eligible for the $20 or the $30 jobs.

Any tax raises two issues: avoidance and incidence. The minimum wage can be avoided by businesses if they don’t employ the affected workers, for example, using robots instead or moving to another place where wages are lower. The tax can also be avoided by dropping benefits to keep total compensation the same, turning the minimum wage into a charade. There can also be offsetting changes in the terms of employment; for example, increasing the pace of operations and the rate at which customers are served. Or productivity could be improved through reduced turnover, which is good for businesses but bad for folks looking for jobs.

Incidence is related to avoidance. There are five possible groups that might actually end up funding the $1.8 billion in increased wages: customers, other workers, business owners, landowners and lenders. One possibility is that the cost of the minimum wage is entirely passed on to customers in the form of higher prices. The Berkeley study that informed the mayor’s proposal suggested that restaurant prices could go up by 4.1%. Then it would be the customers of minimum wage restaurants who would be compelled to make the $1.8 billion in charitable contributions. Who are these customers? I am inclined to think they are disproportionately the same group we would like to help. High-end Westside restaurants have fewer minimum wage workers and more scope for avoidance than McDonald’s. So we are likely to see McDonald’s customers being compelled to make charitable contributions to McDonald’s workers.

Some of the cost of minimum wages could be passed on to retail customers, but this is made more difficult by shopping options on the Internet and in the rest of the county where the minimum wage is lower. If not the retail customers, whoever they might be, this charitable activity might be funded by landowners through lower rents. Another sector that cannot pass the added costs on to their customers are the not-for-profits, which means fewer services for needy Angelenos.

In summary, this mechanism of funding $1.8 billion in charitable contributions has potentially adverse consequences for the very group we would like to help out, and could hurt the city’s revenue too. The academic studies of the minimum wage in the economics literature have trouble finding employment effects, but no study of which I am aware includes a city with a minimum wage that covers 27% of its workforce (or anything close) when robots are actively taking over human tasks and when the educational system is failing. San Diego, the only major city in California with a workforce similar to our own, has opted for $11.50, covering 18% of its workforce, not 27%.

This is dangerous uncharted territory. We should be worried. We should go slow.

I’m not opposin’. Jus’ sayin’.

Best,

Ed

From Daniel Flaming to Edward Leamer:

Dear Ed,

I agree there are questions we need to ask about the minimum wage proposal. But to me, the most important question is this: What can we do to ensure that workers who are creating wealth for others receive a big enough share of that wealth to support a basic standard of living? The acute economic hardship faced by so many Los Angeles families is a clear sign that the current system is out of balance.

Your chief question seems to be: Who will pay for the proposal? But the question suggests that improving the lot of low-wage workers is a zero-sum game, in which one person has to lose for another to benefit. That’s not quite accurate.

We are already, as a society, paying the costs of keeping the minimum wage low, and not only through such things as food stamps and other government subsidies for low-wage workers. We also pay by having an increasingly unequal society, in which the social mobility Americans value is growing ever more difficult for those at the bottom to achieve.

Moreover, the upsides of a fair minimum wage include increased household buying power, a more stable labor force and the affirmation of fairness in an economy where we are all interdependent. These things benefit all of us, not just those at the bottom.

Working people produce a big part of the wealth that drives our city, hour by hour, week by week. Over the last 14 years, the value that the average Los Angeles worker creates in the economy has increased by 15%, or by about $13,800 annually. The amount of profit generated per worker has increased about 33% or by about $10,800 over the course of a year. But average pay has decreased by 8% — dropping by more than $3,600 a year.

Put another way, people are being paid less to generate more wealth for their employers. This is an obstacle to economic stability.

Los Angeles is an expensive place to live. A third of the city’s renters pay more than half of their income in rent. This creates instability. It also harms local businesses, since people have little left over to spend after paying rent. That’s why we need to make deliberate, intelligent policy choices that take into account basic fairness for the workers who do much of the heavy lifting in our economy.

You raise the problem of avoidance, suggesting that businesses will simply decamp for other places or replace workers with robots. But the work done by most low-wage workers is not robot-friendly, and a busy McDonald’s drawing customers in Echo Park is unlikely to move to Glendale. A living wage is not going to make the great bulk of jobs disappear.

You note that studies looking at what happens when the minimum wage is raised have largely found that job loss is negligible, yet you worry that the scope of the raise here would lead to a different outcome. I would suggest that, to the contrary, a larger increase would lead to a larger stimulus effect, with households spending their additional income in the local economy.

As a result of the increased demand for goods and services, jobs would be created in many of the same industries where workers will receive wage increases, including fast food restaurants and retail stores. The increased buying power of workers will mean that these industries will be the direct beneficiaries of the higher wages they pay. And they will also benefit, studies suggest, from greater productivity and less absenteeism and turnover on the part of workers.

The conclusion that wage fairness is not a zero-sum game was established by a landmark study comparing neighboring counties in New Jersey and Pennsylvania, after New Jersey increased the minimum wage but Pennsylvania did not. It found that after the wage hike, employment in the fast food industry increased more in New Jersey counties than in neighboring Pennsylvania counties.

None of this is to suggest that a higher minimum wage won’t require adjustments on the part of businesses and employees. Might the cost of a hamburger go up a bit? Certainly. The proposal isn’t cost free, but study after study suggests that the benefits will outweigh the costs.

You recommend going slow, and I agree — to a point. Carrying out the wage increase in three or four annual steps will allow businesses to adjust to new wage levels over time. It will also allow us to study the effects going forward. Once the new floor has been reached, automatically adjusting the minimum wage to keep up with inflation will protect basic living standards.

Humans work best and unleash opportunity when we look out for one another and work together. We are weaker when we leave hardworking people behind.

Thanks for kicking off this conversation. I look forward to hearing your thoughts.

Yours truly,

Dan

From Edward Leamer to Daniel Flaming:

Dear Dan,

There is one thing you and I agree on. The income inequality trends in the United States are deeply alarming and, if continued, will tear away at the fabric of our society, threatening even our democracy.

It’s an appalling fact that 27% of workers in Los Angeles County are destined to earn less than $13.25 an hour in 2017, and most of these are not teenagers. This large low-wage, low-skilled workforce has been created over decades of neglect by a complex stew of forces including parenting choices, discrimination, drugs, incarceration, education, immigration and technological change. It feels like a desperate move to deal with these very deep problems with a minimum wage that treats only the symptom and that has some potentially serious side effects on job availability.

I don’t see the current economic situation as a class struggle between labor and capital, as suggested by your rhetoric. I don’t share your apparent desire for a citywide union of workers. The owner of a fast food franchise in Los Angeles is hardly the modern-day equivalent of Henry Ford or Andrew Carnegie. She is struggling too. What we need instead of a union is vastly improved workforce development and a government that welcomes new businesses not just with words but with speedy and reliable permitting and with regulations that do the least possible damage to job creation.

Where you and I really disagree is your notion that we don’t have to worry about who will pay for the minimum wage, since you think it will stimulate the economy so much that we will all be better off. At a debate last week, I heard both candidates for county supervisor of the 3rd District endorse the idea that putting money into the pockets of Americans was a good thing and a minimum wage would thus stimulate the economy. I wanted to ask how they felt about taking money out of the pockets of Americans, since this money doesn’t come from Mars.

We really need to follow the money trail here. I am extremely doubtful that requiring customers at McDonald’s to make charitable contributions to McDonald’s workers can help both parties, per your stimulus assertion. That view borders on the illogical and is unsupported by any evidence. Although you write “study after study suggests that the benefits will outweigh the costs,” as a matter of fact there is not a single study that directly compares the benefits and the costs. There are plenty of studies examining the employment effects. But even when these studies find little job loss in fast food restaurants, that does not mean the benefits outweigh the costs. Restaurants are the sector in which the employment effects are destined to be the smallest because of their ability to increase the prices, and to assess the costs, one has to follow that chain of money.

The fact that so many workers — 1 in 4 — would be affected by the new minimum makes this one big risky experiment. It troubles me that you suggest that the strictly salutary effects you expect with a $13.25 minimum wage rest on a firm evidential foundation when nothing on this scale has ever been studied. I think it’s likely to leave the city — and the mayor — standing in a pit of quicksand.

And let me ask this: If raising wages is such a good idea, why not go for $22 and cover half of our Los Angeles workforce, and see what happens? That is my provocative way of asking, Dan, if there is any level of the minimum wage that you would not recommend to Mayor Garcetti?

There is, of course, one thing for sure to like about the proposed $13.25 minimum wage: It has the potential to add greatly to our understanding. If the mayor goes ahead with this proposal, we have to hope someone funds a study that rigorously tracks the employment and other effects on small businesses and large, workers young and old, restaurants and retail, neighborhoods east and west. Cities all over the world would benefit from a careful study of the benefits and costs of this level of the minimum wage. And let’s hope the mayor treats his lab rats well. We are they.

Best,

Ed

From Daniel Flaming to Edward Leamer:

Dear Ed,

You’re right. We do agree that extreme income inequality threatens our society. And here’s another point on which we agree: Neither of us wants to see the economy harmed.

But the way I see it, the status quo is already harming the Los Angeles economy. Inequality in the city is particularly acute, and the pressures that have made it so show no signs of diminishing. Action is required.

This is not an argument about placing one group’s interests over those of another’s; rather, it is about acknowledging that every segment of the labor force is important for the economy. The practical question boils down to how much and how fast can we raise the minimum wage without harming the economy?

We disagree on the answer to that question. You see a threat in raising the minimum wage to $13.25 an hour. I see a larger threat in not doing so.

Even though it represents a large increase in the minimum wage, $13.25 an hour — or about $28,000 a year for full-time work — it is still a low wage for someone living in Los Angeles. A study by Manuel Pastor at USC calculated that California’s minimum wage in 1975, when adjusted for inflation, was only $0.86 less than what Mayor Garcetti is proposing, and back then, housing took a far smaller percentage of income.

If we don’t intervene and mandate a more livable wage, we will be perpetuating a low-wage economy in which employers compete for business at the expense of their employees rather than investing in equipment and training to improve productivity.

It’s true that there have been some benefits for consumers in this race to the bottom. We get cheaper bedroom additions and kitchen remodeling, say, and the price of a hamburger is probably lower. But the long-term outlook for a city in which the workers who build housing can’t afford it for themselves is grim. One of the jobs of government is to set rules that establish a level playing field. We need new rules about wages.

You suggest that my enthusiasm for the mayor’s proposal is akin to a desire for “a citywide union.” But I’m not sure how you make that leap. Yes, I support a higher wage floor for workers across the city, and yes, higher wages are something for which unions have traditionally fought. But no one suggested in 1938, when Congress passed a law creating the first federal minimum wage, that our legislators were embracing a national labor union.

Here’s what motivates my support for the new proposal: The great bulk of the people I see in this city preparing meals, cleaning rooms, sewing garments, building homes and moving packages are industrious, family-centered and decent, and they deserve not to be exploited.

It is not charity to pay hardworking people enough to live. It is fairness. Los Angeles needs to be a place that works for everyone. I’m hopeful, as are many economists, that raising the minimum wage can be accomplished without dampening economic growth. Still, you raise important points.

Here are five actions that I think can help mitigate any harms and maximize the potential for good in the mayor’s proposal.

First, we will need to closely monitor the effects — positive and negative — of the new minimum wage over the course of annual increases and discuss them openly.

Second, other cities in the region should be encouraged to join Los Angeles in raising the minimum wage. This is a regional issue and would be best addressed as one.

Third, businesses affected by the wage hike should be given support and guidance as the law takes effect, both to mitigate any harms to them and to protect workers. Moreover, the city should simultaneously work diligently to meet the needs of the city’s businesses, making it easier and more straightforward to start, operate and expand a business in Los Angeles.

Fourth, we need to take additional steps to create jobs in the city, including through smarter approaches to land use and transportation infrastructure.

Fifth, we need to improve the city’s public schools and increase support for colleges and universities so that the skills and educational attainment of L.A.’s labor force continue to improve.

As you have pointed out, a large increase in the minimum wage is an experiment. In earlier times, enacting the GI Bill, creating the Social Security system and ending child labor were experiments too. And where would we be as a nation without them today?

Yours truly,

Dan

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