Tag: minimum wage

Will D.C. End Tipping?

The “Fight for $15” has broken out again in Washington, DC, with the city council considering raising the minimum wage to $15 per hour. The proposal includes a provision to extend that price floor to restaurant and other workers who receive much of their income from tips. Surprisingly—at least for some people—that has generated some push-back from tipped workers.

Over the weekend, the Washington Post ran a persuasive op-ed by local bartender Ryan Aston criticizing the idea. Aston writes in part:

There seems to be this myth going around that most tipped employees in restaurants aren’t earning a livable wage; after 13 years in the industry, this baffles me completely. I earn roughly $45 an hour with tips included; I don’t know a single server or bartender in the District whose wages have to be supplemented because they haven’t earned the minimum.

So what happens [if the provision is adopted]? Restaurant profit margins are already often razor-thin, and to be forced to pay the largest (and already highest-earning) portion of a staff four times more than before creates a real accounting problem. Generally, it means you need to bring in more money in sales and cut costs elsewhere. This translates to jacking up menu prices and laying off staff. Whom would this help?

Next, once menu prices have soared and staff has been cut, tips will dwindle. Remember, your weekly budget doesn’t change just because I got a raise. Within a few years, I’d be surprised if anyone tipped at all, and without tips, the incentive to give good service would be nonexistent. The great American bar culture would die. That would be a real tragedy.

Fight-for-$15 supporters may dismiss Aston’s concerns as hypothetical. But he has support from research by California-Irvine economist Richard McKenzie. In the spring 2016 issue of Regulation, McKenzie reports the results of surveys he conducted of food service worker on the effects such policies would have on tipping. He writes in part:

Tipping abolitionists might be surprised to learn that all servers surveyed chortled at the suggested replacement of their tip incomes with a “living wage” of $15 an hour. Most servers responded with comments of the essence,“How stupid can these people be?”

… To examine this issue, I asked the servers I interviewed if the service they provided affected their tips. All strongly agreed it did. Indeed, servers said that if they raised their service level from a “3” (average service) to a “4” (above-average), their average tip percentage (not total tips) would rise by over 25 percent. If they elevated their service from “4” to “5” (excellent service), their average percentage tip would rise another 25 percent, which means that an increase in service level from average to excellent would raise their average percentage tips by 57 percent. All servers strongly agreed that overall service quality would drop precipitously if their tip income were replaced with a fixed hourly wage, especially for “loud,” “obnoxious,” and “arrogant” customers, as well as customers with unruly and messy children.

He concludes:

Tipping abolitionists may be surprised to find that some of the most ardent opponents of tipping abolition are servers and their customers. One North Carolina server volunteered: “I made $60,000 in tips last year, reported $40,000—and had a before tax income of $80,000! That’s why I quit my teaching job.” And customers will likely suffer impaired service as the tipping incentive disappears.

A Colorado Minimum Wage Waiver?

Classical liberal economists oppose minimum wage laws because they restrict mutually beneficial labor market trades.  

This is the basic economic case for complete freedom of contract. Wage floors mean potential employees who would otherwise be willing to sell their labor at a lower price are unable to. Employers are banned from employing more people or giving workers longer hours at a lower wage too.

It is in this spirit that Colorado State Rep. Dave Williams has proposed an amendment to the state’s minimum wage law. Williams’ legislation  would allow an opt-out in cases where applicants for jobs or employees and employers mutually agreed to a wage below the state minimum. Paying less than the minimum wage would essentially be legal again in cases where the employee or applicant had agreed to waive their minimum wage “right” (though the employer would still be bound by the federal minimum).

This has potential benefits similar to lowering or abolishing the state minimum wage. On the margin, it would help workers with low productivity levels looking for entry-level jobs. It would also reduce the risk of hiring for employers in cases where potential employees had little work experience. While there would of course be a not insignificant risk that employees might later claim the agreement was not truly “voluntary,” such a waiver would overall shift Colorado labor market law closer to the freedom of contract that libertarians prize.

For that reason, it will of course be opposed by most minimum wage proponents. Traditionally, minimum wage advocates have recognized that such laws outlaw exchanges. But they believe this is a good thing, asserting that market-based wage setting is unfair or exploitative, or appealing to older theories such as monopsony, which says that employers in certain industries have significant market power and are able to hold wages below productivity levels absent regulation. In such a scenario, minimum wages can even raise employment levels.

Almost all minimum wage studies these days are empirical in nature, testing whether minimum wages or increases have the classical or monopsonistic effect. Though the degree of the effect differs, the overwhelming majority find negative employment or job growth consequences from minimum wage increases. From an employment perspective then, any reform in the direction of Williams’ should be welcome.

But another benefit of a debate around this law could be educational. It is difficult to make the case for complete abolition of minimum wage laws, in part because opponents lament that some workers would see pay cuts. No doubt there would be some companies that sought to move to a model with lower pay, with attempts to get employees to sign forms waiving the wage. This is the “seen” effect. But what is not seen is that there are people out there willing to work in Colorado between the federal and state minimum wages, who are currently unable to do so.

Williams’ legislation highlights that minimum wage laws are coercive, ceasing to give us control over our own labor. Indeed, under Williams’ legislation, employers would have to post notices to inform applicants and employees that they have the right to negotiate wages. Well, above the federal minimum at least!

There is therefore a principle and a consequence at stake. The principle is freedom to contract your labor. The consequence is that minimum wage laws tend to cause “unemployment”. While complete abolition of minimum wages would be preferable, Williams’ legislation helps highlight the principle and ameliorate the consequence. 

Shake Shack Planning for Higher Minimum Wages

CNBC reports that the burger chain Shake Shack is planning to trial a new restaurant in New York which will not have a traditional cashier’s counter. Instead, “guests will use digital kiosks or their mobile phones to place [and pay for] orders.” Their order will be processed immediately to the kitchen and the guest will receive a text message when their food is ready.

Great, you might think. Shake Shack is investing in innovations which could improve the productivity of remaining workers, increasing wages (indeed, they want to pay the lower relative number of staff in this restaurant at least $15 an hour). Such investments might provide a more efficient and desirable service to customers too. This frees resources and excess labor for other more productive pursuits in the economy.

But the kicker for why Shake Shack is undertaking such investments comes later in the article:

it’s likely that in the next 15 to 20 months that areas like New York, California and D.C., in which there are many Shake Shacks, will transition to a $15 minimum wage…Adopting this payment policy in Astor Place will give the company a chance to work out the kinks before it rolls out a $15 minimum wage in these locations.

Anyone who has been to a McDonald’s in France will know what’s going on here. Shake Shack suspects that the cost of labor will rise due to an increased minimum wage, and given that projection, it’s become economic to consider investments in labor-saving technologies. Higher minimum wages act in effect as a subsidy to automation.

But these investments for productivity improvements don’t come for free. A recent paper by Grace Lordan and David Neumark finds empirical evidence showing that between 1980 and 2015, increasing the minimum wage by $1 decreased the share of low-skilled automatable jobs by 0.43 percent in general and by 0.99 percent in manufacturing. Other jobs might be created of course, but they may well be more demanding or stressful, such as overseeing the running of multiple machines or having to have the skills to deal with technical problems etc. “Regulating to innovate,” subsidizing the rapid introduction of some technologies before they are actually high quality and cost effective, drives up prices for consumers too.

Perhaps more pertinently, low-skilled workers younger than 25 and older than 40, especially women, tend to be particularly affected by the disemployment effects of automation and can find it very difficult to find replacement work given their productivity levels.

As I concluded in a recent Daily Telegraph article:

If we are moving into a period when technological innovations are speeding up, we could be hiking minimum wages dramatically at just the wrong time. It will prove enough of a policy challenge as it is, to equip people with new skills to adapt in a rapidly changing labor market. Making more low-skilled jobs uneconomic by artificially hiking the cost of labor substantially could exacerbate this change at a time before new investments would otherwise make economic sense.

Being worried about this consequence is not to be anti-technology or anti-innovation. We all recognize that mechanization and technological innovation are the only way to sustainably raise living standards. But encouraging new investments by raising business costs and driving out low-skilled jobs is another matter entirely.

Just because Luddite efforts to destroy machines was economically harmful does not mean that destroying low-skilled employment opportunities would be beneficial.

More on the minimum wage here, here, here, and here.

Business in Revolt, D.C. Might Pause in Adding New Employer Burdens

Peter Jamison, Washington Post

For several years, the nation’s capital has joined other left-leaning cities and states in pushing legislation to improve the plight of the working poor.

Now, facing growing unrest from business owners and internal division over their priorities, D.C. lawmakers are preparing to take a break from further beefing up labor standards.

The retreat, coming after a year in which the District adopted a plan to increase its minimum hourly wage to $15 and enacted a law guaranteeing private-sector workers some of the nation’s most generous family- and medical-leave benefits, is an abrupt shift for a city whose leaders have been in the vanguard of the national campaign for workers’ rights.

In particular, this may mean shelving the next priority on the agenda of the unions and their allied liberal groups, namely a law dictating methods by which employers may schedule workers, following a Seattle model (and editorially opposed by the Washington Post here). 

If the council chair gets his way, employers can look forward to fifteen whole months of not having new legal cinder blocks deposited on their backs: 

“Businesses like certainty, and if we’re constantly changing the tax burden or the tax environments, or constantly changing the regulatory burden, then it becomes more difficult to do business in the District,” said D.C. Council Chairman Phil Mendelson (D), who has proposed a moratorium through the end of 2018 on bills that would negatively affect businesses.

There is little here to surprise libertarians. Coercive employment legislation harms local economies as it does national, and gains no added rationality from being sentiment-based (the $15 number was selected because it made for easier organizing.) While D.C., like Seattle and San Francisco, has the slack to absorb large-scale folly thanks to its role in hosting a booming sector of today’s economy, it is not entirely immune from nearby competition, a few miles away in Virginia and Maryland.

What must worry unions is that the District’s retrenchment could break the momentum among what one analyst calls its “peer group of fairly progressive cities” and states to outdo each other in enacting laws regimenting employment relations and banning various workplace arrangements that are voluntary and desired by both sides. 

Let’s hope it does break that momentum. Washington loves to picture itself as the civic peer of that other capital of broad boulevards, Paris. And as it happens, the French themselves have finally been figuring out that dirigisme in the workplace leads to no good place. D.C. should back off too.

Minimum Wage: The Plural of Anecdote…

…is data, as the late UC-Berkeley political scientist Ray Wolfinger once said.

David Boaz used Wolfinger’s quote when emailing me this short note from the Economic Policy Journal’s website about the apparent harmful effects on employment of Washington state’s recent minimum wage increase. A snippet:

As we were seated, I couldn’t help but notice that there were no busboys in sight—waitresses and the manager were busy clearing and cleaning tables. There were no young people in sight either, only employees in their late-20s and up.

I waited for the manager to man the checkout register and couldn’t pass up a brief economic discussion. I commented that I’m from out of state (Idaho, where the minimum wage is the federally mandated $7.25/hr) and couldn’t help but notice the impact that Washington’s minimum wage ($11/hr) was having on his restaurant.

Well-intended proponents of higher minimum wages will likely dismiss this note using the far-more-common but very wrong misquotation that “the plural of anecdote isn’t data.” More sophisticated proponents will go further and cite David Card and Alan Kreuger’s 1994 American Economic Review paper on the apparent beneficial effects on employment of a minimum wage increase on fast-food restaurant employment in the Philadelphia metropolitan area in the early 1990s.

Thing is, there has been an awful lot more empirical research on the effects of minimum wage increases than this one paper by Card and Kreuger. The overwhelming balance of that research has found harmful employment effects, falling mainly on an especially disadvantaged population: young black males. In a review of this academic literature, economists David Neumark and William Wascher find:

Nearly two-thirds [of the 102 analyses they reviewed] give a relatively consistent (although by no means always statistically significant) indication of negative employment effects of minimum wages while only eight give a relatively consistent indication of positive employment effects. … [Further, of the 33 analyses we] view as providing the most credible evidence; 28 (85 percent) of these point to negative employment effects. Moreover, when researchers focus on the least-skilled groups most likely to be adversely affected by minimum wages, the evidence for disemployment effects seems especially strong. … We view the literature—when read broadly and critically—as largely solidifying the conventional view that minimum wages reduce employment among low-skilled workers.

The plural of anecdote, indeed.

For more on minimum wage research, see this Cato Policy Analysis by former U.S. deputy assistant labor secretary Mark Wilson. Or this brilliant little Cato Handbook on Policy chapter.

Misconceptions of the Efficiency Wage Hypothesis

In an otherwise largely fair write-up of the disagreements and controversies surrounding the economics of minimum wage laws, a blog I was cited in yesterday made a common error in discussing the so-called “efficiency wage hypothesis.” Here’s the extract (my emphasis):

But if employers have monopsony power (they have enough market power to influence the wage rate in their industry) then the impact of a minimum wage is to raise employment (up to a point). Furthermore, the efficiency wage theory suggests that a minimum wage could help raise employment by increasing productivity and lowering turnover.

This last sentence is a misreading of economic theory.

Many do claim that higher minimum wages can lead firms and workers to improve productivity in ways that avoid job losses, whether that be through more worker effort, less staff turnover or whatever. And there’s no doubt that in some cases, firms and workers adjust in this way.

But the efficiency wage theory itself is actually a market failure theory of unemployment. It does not suggest that raising the minimum wage could increase employment. It suggests that in certain sectors where the costs of replacing labor are high, firms pay above market wages out of fear that lowering them would reduce their workers’ productivity substantially. The consequence is that the specific sectoral labor market does not clear, resulting in at best excess supply of workers in that sector (who subsequently have to find employment in other sectors at lower wages) or at worst more unemployment in the economy as a whole.

Economics 101 Still Works

The economist Herbert Stein, chairman of the Council of Economic Advisors under Richard Nixon, once quipped,

Most of the economics that is usable for advising is at about the level of the introductory undergraduate course.

One lesson from such courses is that minimum wage laws reduce employment, so this is reassuring:

I critically review the recent findings regarding the effects of minimum wages on employment. Contrary to often asserted statements, the preponderance of the evidence still points toward a negative impact of permanently high minimum wages.

From Jesus Fernandez-Villaverde at the University of Pennsylvana.

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