L.A.'s Minimum-Wage Experiment
Would you like a raise with that?
You can't call the Los Angeles City Council timid. In voting to raise the city's minimum wage to $15 by 2020, from $9 today -- an increase of two-thirds, big by any standard -- it's taking quite a gamble. That's why the results, assuming the change gets final approval, will be instructive.
Supporters say it will make inroads against the struggles of the working poor. Opponents say it will destroy jobs. Almost certainly, it will do some of both. The net effect will depend on the strength of those countervailing forces.
It's better to run this kind of experiment -- make no mistake, that's what it is -- in a city rather than across the nation. Los Angeles follows Seattle and San Francisco in planning a $15 minimum wage, proposing the biggest test for the idea so far, and perhaps the clearest, too. Its rule will apply broadly: Even businesses with fewer than 25 employees will have to comply, though they'll get an extra year to do so.
Local experiments allow local conditions to be taken into account. A minimum wage of $15 an hour isn't as disruptive in a high-cost city like Los Angeles as it would be in, say, New Orleans. Los Angeles intends to link the minimum to inflation, once the $15 threshold is reached, which makes sense.
Still, an increase this big is entirely untested, even allowing for the city's high costs and for inflation, which will erode the $15 over the next five years.
A scholar whose work is often cited in support of a higher minimum wage is Arindrajit Dube of the University of Massachusetts at Amherst. He argues that moderate increases are unlikely to have much effect on jobs. What's "moderate"? Dube says a minimum set at half the prevailing median wage, plus a cost-of-living adjustment, would strike a prudent balance between raising the incomes of the low-paid and maintaining employment. For metropolitan Los Angeles, this suggests a figure of maybe $12 an hour, not $15.
Some researchers are less optimistic than Dube about the employment effects. At least one councilman who voted for the measure is also concerned. Gil Cedillo, who represents some of the city's poorest districts, said he would have preferred to see the most prosperous residents, rather than small-business owners, carry the burden. "Instead, it’s going to be coming from people who are just a rung or two up the ladder here," he told the New York Times. "It's a risk that rhetoric can’t resolve."
The safest way to raise the incomes of the low-paid is to subsidize low-wage employment with measures such as the earned income tax credit. This approach reduces poverty for those who are still employed while adding to the demand for workers rather than potentially reducing it. Ideally, the EITC would be broadened and made more generous.
This superior approach is harder to sell, however, because its costs fall on taxpayers. Popular support for a higher minimum wage rests partly on the view that somebody else -- employers -- will pick up the check. In reality, the costs still get passed along to everyone else, in the form of higher prices and lower employment.
Raising the incomes of the low-paid is a worthy goal. And if wage mandates aren't the best way to do it, they might be one feasible way. By all means, let Los Angeles find out. Other big cities should wait and see what happens.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.