Citywide Minimum Wage Hikes Do More Harm than Good
My assessment of Louisville’s minimum wage ordinance relies deeply on my own academic research. I have studied how citywide minimum wages have played out in both Santa Fe and San Francisco and the effects of statewide minimum wages in Kentucky and Missouri.
Citywide minimum wages are fundamentally different from federal or statewide minimum wages because of the ability of businesses to move across city borders. There is consistent and compelling evidence that raising the citywide minimum wage increases unemployment and harms the labor market. The concerns about businesses relocating and unemployment rising are amplified in Louisville. And if your goal is to improve the lives of working families, a citywide minimum wage doesn’t solve that problem.
It is extremely uncommon for cities to enact a minimum wage. When I originally studied this issue in 2004, the only cities with minimum wages were Santa Fe, San Francisco, and Washington, D.C. March forward 10 years, and you can add Seattle to the list, along with a handful of other localities in California, New Mexico, and around Washington, D.C. Voters have explicitly rejected minimum wage ordinances at times.
Why are citywide minimum wages uncommon? The answer is that some businesses can escape the minimum wage by moving outside of city lines. In Santa Fe, for example, a business at the center of the city could have relocated less than 4 miles away to avoid the ordinance, at least in the time that I was studying it. Even if businesses don’t relocate, customers do, by shopping elsewhere. In Santa Fe, less than half the residents in the metro area live in the city proper. If people can do their shopping outside of city lines, it restricts the ability of businesses to pass along the higher labor costs of the minimum wage through higher consumer prices. In turn, that means that businesses adjust in other ways – such as cutting hours, laying off workers, or not hiring when someone leaves – in order to maintain their bottom line.
Citywide minimum wages put those businesses operating within city limits at a competitive disadvantage compared with businesses outside of city lines that do not have to play by the same rules.
Evidence shows these labor market effects are substantively important. Professor Robert Pollin of University of Massachusetts has stated about citywide minimum wages that “A rise in unemployment or business flight from the city would obviously be unintended and undesirable consequences of passing such a measure into law.” My work convincingly illustrates these negative labor market consequences. In my September 2005 study for Employment Policies Institute, I found that Santa Fe’s ordinance, which increased the minimum wage from $5.15 to $8.50 per hour, was responsible for a 3.2 percentage point increase in the city’s unemployment rate. The adverse effects were extremely large and entirely concentrated among those with a high school education or less. Among this group, usual hours of work fell by 3.5 hours per week, an important reduction in full time equivalent employment.
This research suggests these labor market effects would ultimately be more dramatic in Louisville, even though the proposed minimum wage hike—from $7.25 to ultimately $10.10 per hour—or a 39 percent increase, is less than Santa Fe’s increase.
Louisville has three key disadvantages. The first is that Louisville is fairly small in geography, and therefore the ability of customers to shop around elsewhere is more pronounced. Shopping around makes it difficult for businesses to raise their prices. Thus, the main avenue of adjustment would be through the labor market rather than consumer prices. The second is the cost of living in Louisville is much different than these other cities. Hiking the minimum wage in San Francisco to $10.74 per hour is not that dramatic because the cost of living is so high. Hiking it to $10.10 per hour in Louisville has a real effect on a business’s operating costs. Finally, San Francisco, Seattle, and Santa Fe all have citywide minimum wages in states where the surrounding areas have higher minimum wages too. In contrast—the rest of Kentucky, as well as Indiana, have the federal minimum wage of $7.25 per hour.
The final issue to consider is whether minimum wages improve the lives of working families. The answer is “no.” In an analysis of Kentucky, I found two important things that matter for today’s discussion. First, just 12 percent of low earners are single earners with children. The largest group, 28 percent, lives with parents or relatives. Poverty among the working poor is about hours of work, not wages. Full-time, full-year work leads to greater reductions in poverty than raising the minimum wage. It is about hours, not about wages.
Based on all the evidence, enacting a minimum wage in Louisville would do more harm than good.
This article is an excerpt from University of Kentucky Professor Aaron Yelowitz’s testimony before the Jefferson County Town Council on October 30, 2014 about a proposed minimum wage increase in Louisville, Kentucky. You can follow Professor Yelowitz on Twitter here.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.