In 2014, Seattle instituted a minimum wage of $15, which will be phased in over the coming couple of years (Burtless, 2014). Other cities, including Chicago and Philadelphia, are aiming to follow suit with sharp increases in their own minimum wages (Dardick & Garcia, 2014). These increases are expected to increase the standard of living among the working poor in these jurisdictions. While popular ideas with low-income workers, these plans have generally not been met with much enthusiasm by business groups (Worstall, 2014). These policies can be examined from both a macroeconomic perspective (effects on unemployment, GDP and poverty rates) and from a microeconomic perspective. This paper will focus on the latter.
The first concept is basic supply and demand. A simplistic version of supply and demand is typically utilized to argue against a $15 minimum wage. In this understanding, when the cost of labor increases, demand for labor decreases. This immediately creates concerns that employers affected in the city will be at competitive disadvantage to those in nearby suburbs with lower costs of labor. The result will be that such employers will move, thereby creating a decline in employment, or will cut back their operations, in either case creating a decrease in demand (Burtless, 2014).
The problem with this argument...
If today a city is in a state of equilibrium with labor demand and supply, but tomorrow the city institutes a sharply higher minimum wage, it is true that demand will decrease. But supply will increase. Low-income workers will all want to work in the city, where they can earn the higher minimum wage. The jobs lost aren't market failure, they are a shift towards a new equilibrium point.
This is where it gets interesting. Labor moves more easily than industry. Thus, workers can come into the suburbs to seek out the high wage jobs, but in many cases employers cannot relocate. There are high costs associated with relocation. Many affected workers are in service industry jobs -- fast food, hotels, etc. Those are jobs that cannot be relocated, because the supply has to locate where the demand is. The hotels in downtown Seattle are not going to pack up for Spokane just because the minimum wage went up. So the demand is much stickier than the supply. The net effect is that many businesses will have to maintain their employment levels, but will have a better selection of workers from which to choose. They can skim the cream of workers in their field, because all workers in the metro area will want to work for the $15/hr wage.
In some businesses, the higher costs will need to be passed along to the customers. In wealthier neighborhoods, the residents can absorb the costs, especially since the inflationary effects of the wage policy are going to be phased in over the course of several years. Price elasticity of demand for basic goods is fairly low -- at least for minor price increases -- among wealthy residents. At worst, there will be some degree of wealth transfer from the wealthier residents to the less wealthy. In poorer neighborhoods, prices will also have to increase, but…
Burtless, G. (2014). Seattle's minimum wage is now $15/hr: Is that a good idea? Brookings Institute. Retrieved December 1, 2014 from http://www.brookings.edu/blogs/up-front/posts/2014/06/09-seattle-15-minimum-wage-good-idea-burtless
Dardick, H. & Garcia, M. (2014). Illinois, Chicago could be on track for separate minimum wages. Chicago Tribune. Retrieved December 1, 2014 from http://www.chicagotribune.com/news/local/politics/ct-chicago-city-council-minimum-wage-met-1202-20141201-story.html
Worstall, T. (2014). A $15 minimum wage would be a $17,500 tax on jobs. Forbes. Retrieved December 1, 2014 from http://www.forbes.com/sites/timworstall/2014/09/06/a-15-an-hour-minimum-wage-would-be-a-17500-a-year-tax-on-jobs/
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