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Minneapolis Is the Wrong Place to Try a $15 Wage

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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Organizers in Minneapolis are pushing for a referendum that would raise the minimum wage in the city to $15 an hour, joining the growing movement across the country to raise local minimum wages far above current or historic levels.

I haven’t been a fan of this idea in cities like Los Angeles, where the rationale at least is obvious: The price of low-wage labor has fallen, even as the local cost of living is rising because of various structural and regulatory barriers to real estate development. But as economists will tell you, the price of labor is generally set by the intersection of demand and supply. As price falls, people want to consume more but suppliers want to supply less. The market price is normally set by those forces meeting, otherwise known as the “market-clearing price,” because it’s the price at which no one who wants to supply labor at that price is left without a job, and no one who wants to buy it at that price is left without an employee.

What happens when you artificially impose a price higher than the market-clearing level? Well, presumably more people would want to supply labor, because it would look better than alternatives such as retirement or staying home with kids. However, employers now want to buy less labor. Maybe demand for their now-more-expensive goods and services falls, so they cut back on staff; maybe they go out of business; or maybe the owners start working more hours themselves, or look to invest in labor-saving technology. However you slice it, you’re looking at higher unemployment, as the supply of workers exceeds demand.

That’s the economic theory, anyway. In practice, we don’t know how big the effect will be. If it’s small, supporters of a higher minimum can plausibly argue that the benefits to the employed outweigh a small number of job losses (possibly too small to be measured); if it’s large, that calculus gets pretty grim. Unfortunately it’s hard to say exactly how big the effect will be, because it depends on too many things.

Like the size of the increase: A penny hike in wages will obviously have little effect, while a $100-an-hour increase probably would, we can all concede, be a bad idea.

The effect also depends on local conditions. If your artificially imposed wage applies only to bankers and traders in the Financial District of Manhattan, a $110-an-hour minimum wage might have surprisingly little impact on employment. If your administrative region consists of a garment manufacturing zone in Bangladesh, a one-cent increase in the hourly wage might actually have a measurable impact.

The visible effects also depend on the time frame. If we raised the minimum wage to $110 an hour for the whole U.S. today, we wouldn’t see everyone laid off tomorrow; companies would need to keep people on for a few days just to shut everything down. For more reasonable increases, that pattern still holds: Employment changes are more likely to show up in the long term than the short term.

So the who, what, where and when matter a great deal when we are considering an increase. That’s why, while I’m skeptical of the Los Angeles increase, I’m downright bearish on the outcomes of a $15-an-hour minimum wage in Minneapolis.

Look at the relative cost of living in the two cities: The cost in places like Los Angeles and Seattle is about 30 percent higher than in Minneapolis. A wage that might have relatively small employment effects in higher-cost cities can have much larger effects in places where the cost of living is lower, because local consumers don’t have nearly as much room to absorb the cost of higher services.

At the very least, I’d be quite cautious about enacting such an experiment, particularly before we have good data on what these minimum wage levels are doing to cities with higher costs of living. If it turns out that a $15 minimum wage causes a significantly higher unemployment rate in Los Angeles and Seattle, I’d be very leery indeed of trying the same in a place with a significantly lower cost of living.

Unfortunately these campaigns are not constructed by careful technocrats who are experimenting in small areas before rolling things out to larger regions; they’re grass-roots movements that generally seem more interested in questions of social justice than the boring slog of constructing empirical data.

There's some consolation here. Imposing a $15-an-hour minimum wage in Minneapolis would give researchers a real-life laboratory to find out what happens when you push through a dramatic increase in an area without the dramatic disparities between median wages and median housing costs that you see on the coasts. That might end up being bad for Minneapolis workers. But it would indisputably be great for social science.

  1. There are a few arguments the other way: In places like California, where business costs are very high, a higher minimum wage might finally push nationally or internationally competitive businesses out of the state entirely, whereas businesses in lower-cost states like Minnesota might find it easier to absorb higher labor costs into their margins. And Minneapolis actually has a higher median wage than Los Angeles; it’s a middle-class kind of burg. You could argue that since the new minimum would be a smaller percentage of the local median (a little under 75 percent, rather than 80+ percent), it will have a smaller impact.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Megan McArdle at mmcardle3@bloomberg.net

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