The $15/Hour Illusion

Seattle-1024x640Having lived in the Seattle metropolitan area for almost 25 years, at some point, you’d think I’d get acclimated to its unique approach to civic issues.  Not so much.  Just about every year something new pops up that once again demonstrates the area’s idiosyncratic approach to important questions.  Much of this uniqueness is based on the power of citizen’s initiatives and referendums, a process where most any issue can be brought to a general vote.  And while I am more a fan of representative democracy, the people in Washington State demonstrate a true zeal for putting issues to a general vote.  Liquor laws, pot legalization, license tab taxes, state income taxes, and a wide array of transportation issues have all been the subject of extensive (and expensive) initiative campaigns.

The latest foray into governance through initiatives began in the town of SeaTac, which is literally the town that contains the Seattle-Tacoma Airport.  Voters there passed Proposition 1 which effectively raised the minimum wage in SeaTac to $15 from the Washington State mandated $9.19.  While there are a number of qualifications and exceptions, the basic idea is to mandate a “living wage” level in the city.  This movement has gained significant momentum in a variety of forms across the country, perhaps acting as a more organized form of the “Occupy” movement, with a number of states raising their minimum wage levels and other municipalities watching developments in SeaTac very closely.  Importantly, the newly elected mayor of Seattle pledged to establish a $15/hour minimum wage in Seattle and created a commission to make specific recommendations to achieve this goal.  Although it has some qualifications and caveats, a $15/hour minimum wage proposal is now sitting with the Seattle City Council for debate and approval.

Increasing income inequality across the United States is a real issue.  Without turning into a data nerd, there is plenty of evidence that the middle class is getting squeezed with increasing disparity between the upper ends of the income spectrum and the rest of the economic pie.  While this trend is undesirable based on purely social/moral concerns, it also creates real challenges in a representative democracy where shared experiences and the ability to find common ground are necessary for effective governance.  The United States is increasingly becoming a divided country, on many dimensions, and economics drives much of this division.  The question to debate is “what should we do about this?”

At a philosophical level, I’m not a big fan of minimum wage schemes because they assume a magical level of knowledge and skill in setting a rate that balances the needs of workers and businesses.  I just don’t think our legislators are that skilled, nor are they that well insulated from the political temptation of supporting “more”.  With that said, minimum wages do create an effective floor for compensation and are here to stay – so it is totally appropriate to ask “is $9.19 an appropriate minimum wage in Washington State?”  It’s also appropriate to ask whether a higher minimum wage would address the problems associated with increasing income inequality.  All of which brings us to the $15/hour illusion.

First off, using the minimum wage to generate a living wage isn’t terribly logical.  For many reasons, not every job will justify a full living wage – elevating the minimum wage to a level you believe is a living wage will almost certainly over value some types of work and create disincentives for some classes of jobs.  Having a different minimum wage in every city creates an even more difficult set of calculus equations for both employers and potential employees.  If we are going to have a minimum wage, you need to set it as the floor for what is socially acceptable for all forms of work.  I actually agree that $9.19/hour could be too low for the state of Washington, but I think a 50% increase misses the point of the minimum wage concept.

By extension, I don’t quite know how to think about a “living wage”.  Certainly, almost any number you pick will vary by location, cost of living, and individual needs and preferences.  The belief that the electorate, the mayor, or the city council actually knows the answer to this question makes no sense to me.  And the idea that we are going to legislate this seems equally obtuse.  Mostly, I think $15/hour is a rallying cry number someone created because they want to see workers treated fairly and reduce income inequality.  These are good goals worthy of serious discussion.

The problem, of course, is that while the $15/hour minimum wage debate may improve the economic situation of some number of workers, it will have almost no effect on the real problem of income inequality.  The idea that this will help rebuild the middle class is just an illusion.  We could have a long debate about whether it will reduce the number of jobs in a particular market – while I think it will, for purposes of our discussion, I will submit that it will neither create nor reduce the number of jobs.  So some set of people who earn between $9.19 and $15/hour will increase their income.  But the number of people this will effect is just too small…and the amount of the actual increase too little…to affect the overall problem.

The real problem we have in our economy – and the real issue that is driving income inequality – is the number of people who have no job.  Mathematically, a large number of “zeroes” in the equation has a huge impact on income distribution and the overall health of the economy.  To understand this, you can’t look at the government’s published unemployment rate – this is amongst the most misleading and misunderstood numbers in the economic debate.  Instead, consider this:  In 2007, 80% of eligible workers between the age of 25-54 were employed.  During the depression, that number dropped to 75% and basically has not changed since.  When people don’t work, no amount of wage legislation is going to improve the distribution of income to a more natural level. In addition, in 2000, labor participation rate was 67%, which has now declined to 63%.

Returning to Seattle’s $15/hour minimum wage debate, in my mind it is a misguided effort that will be a net negative for the city’s citizens over time.  It will reduce jobs in the city and won’t produce the “multiplier effect” some claim will occur because consumers will have more money.  With that said, in part because it is being phased in over a number of years, provides some caveats for smaller businesses, and addresses an overdue increase in the State’s minimum wage, it probably is not the doomsday event that some predict.  In any event, it will take a significant amount of effort, debate, and attention away from the real issue which is creating a robust jobs environment.  I’m certain there are many causal factors leading to greater income inequality across our country – but I know that the secret to impacting this trend lies in employment and improving the job market, not adjusting the minimum wage.  Some thoughts on that next week.