Pt I – Understanding San Diego Minimum Wages

3

April 14, 2013 by Omar Passons

An honest, difficult way to try to earn a living

An honest, difficult way to try to earn a living

I copied this photo from this consulting site and used it because I wanted to make clear that a big part of this series is about finding the best way to raise quality of life for everyone in our San Diego region.  We are getting close to a big discussion in the City of San Diego about wages.  Whether you call it a living wage, a minimum wage, a government price control or some other name, the issue of how we as a region address opportunity and economic prosperity deserves a balanced evaluation not driven by political or philosophical ideology.  So I’m gonna give it a shot.

A few words about this effort first.  One, I like to make jokes and I’m in favor of simple explanations when possible.  If you don’t like my brand of humor I won’t be upset if you take this advice from Gordon Ramsay.  Two, while I want to be balanced, that’s not the same as having no opinion.  But I’ll do my best to be transparent about those opinions. Just to get started, here are two recent pieces–a left-leaning piece and a right-leaning one—to help frame some of the issues.  Going into this effort I have a few biases that are worth noting.  One, I want people who don’t make very much money to make more of it.  Personally, this means I’ll pay more for stuff, I’ll tip better than is customary and I’ll encourage everyone I know to follow suit.  But before we make broad policy choices locally maybe it would be good to understand how systemic changes might impact people.  By the way, in my opinion you aren’t a jerk if you don’t believe legislation to increase wages is the wrong approach any more than you are a “thug” if you work for a union that tries to raise wages using regulation or collective bargaining.  These are honest attempts to address strongly held beliefs, not cheap ways to score political points.

Congressional Testimony on Federal Minimum Wage

First, up, I was given a link to March 2013 Congressional testimony by Murtaza Baxamusa, a professor and writer/advocate who is politically on the left side of the spectrum.  The 1-page executive summary of the testimony by University of Massachusetts Amherst professor Arindrajit Dube is here and the full testimony is here.  What I want to do to begin this conversation is use highlights of Dube’s testimony to raise questions I see as central to making an informed decision about minimum wage.  I’m not an economist, but then again neither are most people who will vote for or against such a measure.  Needless to say, my writing is targeted at regular people who care about this stuff, not professors and pundits (who may also care, but tend to be hard to understand).  I’m going to lay out the points Professor Dube makes one at a time, followed by my thoughts about his conclusions.  The goal of this post is to create a starting point for a larger discussion.  A discussion about core issues like what information we need to make a well-reasoned decision about what is the best way to impact economic prosperity and whether regulation is needed to achieve that end.    Maybe we do, maybe we don’t, but let’s frame the conversation first and see where the existing research ultimately takes us, shall we?

The Typical Arguments

The way I see it, the people who argue for or against raising minimum wage or creating livable wages, etc. typically make a few standard arguments.  People against laws for higher wages typically say such laws will actually have two bad impacts:

  1. They say businesses who are faced with the decision of paying more than the market price to their employees will either fire people or raise prices on everybody else.  This, so the argument goes, either leads to the very people who most need the help being directly worse off (with no job) or indirectly worse off (by paying more of their money for the now higher priced stuff); or
  2. They oppose raising the minimum because more people will want the new higher paying jobs (under the increased minimum wage) and so again the people who are supposed to get helped get the shaft because now that they are competing with more people the jobs are harder to get.

People for laws for higher minimum wages or livable wages tend to make arguments like:

  1. Employers should share the wealth and make sure the people who do the work can take care of their families and meet their basic needs; or
  2. Increasing minimum wages helps everyone because the people getting that additional money are most likely to turn around and spend it on things like food and gas and housing and it therefore winds right back up in the economy, leading to more new jobs; or
  3. It is morally offensive to have someone work a full day’s labor and not be able to meet their needs.

There are other arguments, but these are some of the ones I hear most often.  Unfortunately, like most things that matter in life, this conversation can’t be limited to some catchy sound bite or some vague idea about “freedom” or “just treatment.”  The real issue isn’t whether some politician can score some points by throwing out some lame rallying cry to his or her supporters, it is what can or should we do, if anything, to improve the lives of all involved.  With that, I want to take a look at Professor Dube’s testimony, give some thoughts and over the coming week or so start to evaluate how this conversation might impact San Diego specifically.  Ultimately the goal, as the name of the site suggests, is to understand how San Diego is likely to be affected by either instituting or declining to institute some increased minimum or livable wage.  Here goes…

A conversation about money deserves a photo of money

A conversation about money deserves a photo of money

On to Professor Dube’s Points

Point 1 – The minimum wage has failed to keep pace with productivity, while top pay and corporate profitability have grown rapidly.

My first reaction to this point is that I don’t have any idea what this has to do with whether raising the minimum wage or creating a livable wage is a good idea.  Seriously.  It may have a connection,  but if it’s there it’s hard to see.  Because Mark Zuckerberg created some massively profitable company that almost everyone with a pulse and a phone uses doesn’t mean that he is harming the programmers who make dramatically less money than he does.  I don’t get this one.  It almost seems to suggest that minimum wages should go up as a direct effect of increased productivity.  It’s kind of like saying my car should get better gas mileage because I fill it up every time it gets below a half a tank.  The two things don’t have a cause and effect relationship.  It seems to miss the point that productivity doesn’t increase wages, more demand for the skills of those workers does.  The technology sector makes a good example, right.  Engineers make more money not because the companies they work for produce more stuff, it’s because the companies they don’t work for will offer them more money and so their own companies have to pay more to keep them.  At least I think this is right.  Of course, Professor Dube is, well, a professor.  And he trained at some very good schools, so I might be missing something.  But that’s my first impression.

Point 2 – Minimum wages have not kept pace with cost of living.

This particular point isn’t really up for debate, right?  I mean, it’s like saying my car is parked in the driveway.  That’s an objective piece of information that is either true or it’s not.  So let’s assume it’s true, this may or may not be a reason to use regulations to get low wage workers more money.  The impact of this point is the one most up for debate.  Should we set higher minimum wages so that low wage workers can afford more of the basics or decrease regulatory/tax burdens to make it easier for companies to succeed so that they’ll want to pay more to their employees to compete with other companies?  Or maybe something else.  This is one I am hoping to find more data about.  My gut says we’ve been trying to do this by giving businesses incentives to higher certain workers and by reducing tax burdens and it doesn’t seem to be getting the job done.  Having more people be able to feed their families and not struggle seems like it would be good for everyone in the region.  So, at present without more data, this seems like a good reason to increase the minimum wage.

Point 3 – Minimum wages have also lost ground in comparison to median wages.

Okay, quick terminology lesson.  Minimum wage is the lowest wage allowed by law, it’s kind of the obvious one.  Median just means the one in the middle (see this).  The point in saying the gap between the bottom and the middle is growing is really a larger point about the impact of income inequality.  Here’s a New York Times article about why a big difference between the lowest paid workers and the average pay of all workers in a region might be something we want to avoid.  I had this conversation with a friend last weekend and he pointed out that any instability in areas with these big gaps might be caused by other stuff (like d#@$ bag dictators killing citizens or stealing money/natural resources).  Here’s a blog post on the issue that makes my friend’s point.  Then there’s this guy’s post showing what over 1,000 economist types had to say about it.  Perhaps most interesting and relevant to San Diego, is this one that takes into account the impact of technology jobs.  The only thing I’ve realized at this point is I need to challenge my own beliefs about the high importance of income inequality.  Well, that and even if I end continuing to believe that high income inequality is a bad thing, I still want to figure out what the best way to do something about would be.

This is a gratuitous insertion of former Mayor Jerry Sanders supporting the craft beer industry at the San Diego Brewers' Guild Festival last year. But workers in this industry might be impacted by this conversation.

This is a gratuitous insertion of former San Diego Mayor Jerry Sanders supporting the craft beer industry at the San Diego Brewers’ Guild Festival last year. Actually, I included it because workers in this industry might be impacted by these issues as well.

Point 4 – For the range of minimum wage increases we have seen in the U.S. over the past two decades, recent evidence based on credible methodologies do not find job losses of any sizable magnitude.

This one is self-explanatory and puts the “minimum wage as job killer” argument under the microscope.  That Reason Foundation article I linked to in the first paragraph above says hotels in Long Beach are laying off people and decreasing available rooms in direct response to an increase in minimum wages for hotel workers.  Professor Dube’s materials—the full testimony—shows that he did a lot of research on this one and his findings are that there’s not as much impact as some think.  If I’m being honest, this doesn’t make sense to me.  I would expect increasing wages above what an employer is already willing to pay will cause that employer to hire fewer people, fire some, or both.  But if that doesn’t actually happen, maybe this is just the last remnants of my limited economic training rattling around.

To my mind, this is a unique consideration in the San Diego region because we have an international border and rural Arizona nearby.  I can’t wait to start looking at the data that exists for San Diego on this topic.

Point 5 – While employment may not fall from moderate increases in minimum wages, both separation and hires fall, lowering the turnover rate.

This one seems strange.  The point he is making is that if we increase minimum wages, people who work at a low wage job won’t leave for a higher paying competitor so that will open op more jobs at those competitors.  At least I think that’s what he’s saying.  But wouldn’t competitors have to raise their rates too to keep the competitive advantage they believe they gained by paying more in the first place?  It’s not clear to me how this is a rationale for raising the minimum wage.

Point 6 – Based on existing evidence, we can expect some increases in restaurant prices from a minimum wage increase. However, the overall price level is unlikely to change noticeably, and there is little risk of wage-price spirals from indexation.

So this point takes on the “increased wages lead to increased pricing” argument.  Essentially, Dube says that doesn’t really happen much.  If true, this might be a compelling reason to increase minimum wages.  What I’d really like to do is have a panel with my friends at Urban Solace, Blind Lady Ale House, Alchemy and URBN and find out from them what the impact of increased minimum wages would be.  While I’m at it, I wonder what the big thoughts on the tipping aspect of these jobs are and whether the employees would prefer a better minimum wage in exchange for not having tips.  Or if these things must be all or nothing.  Hmm, more questions.  Greeeat.

Point 7 – The best evidence suggests that minimum wage increases lead to moderate reductions in the poverty rate, especially together with the Earned Income Tax Credit.

Again, as with the last point, if this is true, it might be a compelling reason to increase minimum wages.  But there is one point worth considering.  Think about buying a home.  We often talk about it as an investment, which I would say is a questionable proposition.  But even if you do view it as an investment, the real way to measure the value of that investment would be to compare how much you make on your home relative to what you paid versus what you would have made with that money if you’d rented and invested the difference in a mutual fund or something.  Applied here, the question would be not whether the higher minimum wage and Earned Income Tax Credit reduced the poverty rate, it is whether that would reduce the poverty rate more than some other policy like direct payments to people or reducing taxes or something.  Again, it doesn’t appear that the tax break model is doing the trick, but that’s the data I want to find – especially has it applies to the San Diego region.

What’s next?

Rebecca's is a coffee shop in South Park whose employees would probably be effected by this issue

Rebecca’s is a coffee shop in South Park whose employees would probably be effected by this issue

So, Professor Dube did a nice job taking on some of the more interesting aspects of this debate.  I’ve gotten some material from my friend Mark Cafferty of the San Diego Regional Economic Development Corporation, which I plan to analyze soon.  At the end of this little adventure I want to have a series of easy to understand posts about the pros and cons of the minimum wage issue so that more people are informed when it comes time to vote on City and County of San Diego minimum or livable wage issues.  Thanks for dropping by.

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3 thoughts on “Pt I – Understanding San Diego Minimum Wages

  1. Oscar Ramos says:

    I just came across this website. I like that you’re opening this discussion.

    In discussing the minimum wage, I think we need to revisit the question of why we have a minimum wage in the first place. The free market system of arriving at a wage, in which the employer offers a wage based on the supply of potential workers who are qualified to perform the needed work, doesn’t necessarily require a minimum wage. There are surely some jobs that have such a quick learning curve that most people could fill it, which means that the employer could find workers even through offering a lower wage than the minimum.

    Yet we have a minimum wage. We as a government have told employers that if they are going to fill a position, regardless of how low a wage the free market would allow, they have to offer a wage that will allow their workers to buy… something. But what is that?
    We need to talk about the purpose of the idea of a minimum wage, since we have one. If the purpose of a minimum wage is to allow someone to work 40 hours a week and be able to afford the rent, groceries, transportation, and health care in San Diego (that’s what I think it’s for, at least), is $320 a week adequate?

    The fact that many people who work are also on food stamps is an indication that full-time work at minimum wage is not adequate for a minimum standard of living in our community. So the rest of us collectively kick in through our tax dollars to help others among us meet their basic needs since they are unable to through the wages they earn.

    The problem I have with this situation of everyone else subsidizing the wages of the working poor is that many who are working poor are working for large, publically-traded corporations who are giving their shareholders and executives large amounts of profit. From the point of view of the corporate shareholder or executive, if I earn more profit because I save on costs by paying some workers so little that taxpayers have to make up the difference, I’m pretty happy. I’ve externalized a cost and increased my profit. From the taxpayer perspective, why should my tax dollars go to support someone’s basic standard of living when their employer profits enough to pay them enough to not be on food stamps? Food stamps and public benefits are subsidizing wealthy corporations if full-time workers don’t have enough to meet the minimum standard of living in our community.

    The minimum wage should allow for someone to meet their basic needs and be an independent member of the community in which they live and work. If someone is working full-time for someone else’s profit, the responsibility is on the employer and not the public to ensure that they earn the minimum to meet their needs. Otherwise, what’s the point of the minimum wage?

    • Omar Passons says:

      Oscar, you raise lots of interesting points. I’ve been meaning to pick back up the argument against raising minimum wage to round out the discussion but haven’t gotten that far. The most interesting point you raise is one that, oddly, I’m not sure I’d really thought of in that way. Namely that we, as a society through our elected officials, have essentially said that we are willing to have a wage price structure that is other than the market would bear because of some other positive good – in this case, the ability to meet some set of basic needs. As it applies to the private sector, I spend lots of time thinking about this issue because I have both seen people get screwed by a market that doesn’t enable them to meet basic needs and also seen government price controls fail horribly. I have heard – though not read in detail myself – that raising the minimum wage is one of the least effective ways to improve the lives of the very poor who need it most. The problem seems to be that we get stuck in dogma and partisan crap and not outcomes. If one even questions whether a living wage ordinance is the best possible way to help the people who are making very little, you get instantly branded as a right-wing nut. And if you are sick of seeing poor people live hand to mouth and really want to push for better options you get cast as a bleeding heart liberal. The reality to me is if the conversation is about how to give people the best chance to succeed and be able to take care of life’s necessities, then let’s work from that starting point. If the answer is raising minimum wage, okay. If it is instead some combination of Earned Income Tax Credit and cheaper housing closer to work, well that’s okay too. Too many leaders and policy types get stuck in their own ideological framework for the only way to solve an awful problem. It’s frustrating

      • You might find some answers by researching history to discover what factors led to the implementation of the minimum wage in this country in the first place (1938), how the economy performed at points of relatively high and relatively low minimum wages since that time, and how the economy reacted to relatively sharp hikes in minimum wage. None of this is new. It’s all happened before.

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