Be careful what you wish for?

L.A.'s Minimum-Wage Experiment

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Since it seems to be “wage week” around these parts, I thought I’d finish up with a look at Los Angeles’s proposal to raise the city’s minimum wage to $13.25 an hour. Assuming it manages to get past the City Council, what will happen to workers?

Essentially, Los Angeles is mandating that every full-time worker within the city limits must make $26,500 a year. I’m of two minds about this. On the one hand, this will obviously raise the incomes of some workers, but it could mean that a lot of workers see their hours cut back or have their jobs moved beyond the city limits, possibly so far that they can no longer do those jobs. If you’re concerned about long-term unemployment -- and I am -- then that is worrying.

On the other hand, I’m very interested to see the experiment run. Municipal minimum wages can be a good way to look at the impact of high-minimum-wage laws, because you have control groups next door. This is far from perfect, but it does offer useful observations. And Los Angeles is particularly interesting because its municipal area is so darn big; employers in the center can’t simply move a short distance to avoid the wage.

According to the Wall Street Journal, 37 percent of the city’s labor force will be affected by the law. Half a million members of the city’s labor force are manufacturing workers, whose employers cannot simply raise prices to pass on the cost, because they’re competing with products from lower-wage jurisdictions, including overseas. Now, some of them will be on piecework, or off the books. But some are not. How will their employers handle the new rules?

Local service businesses are simultaneously the most and least vulnerable. Starbucks can’t start selling you your daily latte from Columbus, Ohio; it's more likely to try to raise prices. And if people are getting a raise, they’ll have some room to do so (though, of course, that claws back some of the benefit of raising the minimum wage). But in places like Scandinavia, where servers get paid a lot, in the context of generally high wages, what you seem to see is that people spend a lot less money on going out to eat. And if your customer base has a lot of manufacturing workers -- or if your customers simply refuse to pay more for your products -- you might have to close entirely, because you simply can’t operate at a profit.

Commercial businesses that serve the greater Los Angeles area, such as office suppliers, are likely to try to move just across the city line, something that you used to see in Philadelphia when it had a gross receipts tax. That will probably benefit workers who live on the city’s periphery while making things harder for those who live near the center.

Then there are the second-order effects, such as what happens to rent. It’s hard to build in L.A., so tenants are essentially bidding on a quasi-fixed number of housing units -- by which I mean that the supply is growing, but only slowly. A big boost in wages means that people will have more money to bid on a fixed supply of units. Rent-controlled tenants, who are numerous, shouldn’t see much change. But people who rent uncontrolled units, especially single-family homes in low-income areas, will likely find that their rent rises as people use their padded paychecks to bid more for the existing housing stock.

Another second-order effect will be the incomes of people who sell their services to low-wage workers. Home child-care providers should be able to charge more for their services, for example.

We should also consider what happens to workers who already make something close to the new minimum -- say, $14 an hour. I’d expect that some of them will demand raises, both to differentiate themselves from low-wage labor and because the cost of some of their consumption will rise.

I don’t have any firm prediction about any of this. I’d expect some unemployment (and out-migration), but I can’t say how much. I’d expect some price increases. I’d expect some added consumption, particularly of goods that come from outside the city’s borders; Amazon should see its L.A. business boom. And I’d expect some conversion to gray-market employment. It’s hard to say how much of each we should expect. But it looks as if we’re going to find out.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net