Seattle’s Minimum Wage Hike

If you live in the Pacific Northwest, you’re probably aware that Seattle raised its minimum wage to $15 in April of 2015. It wasn’t a cold turkey raise; small businesses (with 500 or fewer employees) will be required to reach a $15 minimum pay in 7 years, while large businesses (with 500 or more employees, either in Seattle or nationally) had only 3 years to implement the change. This phase-in is obviously designed to lessen the impact of the change on businesses and keep Seattle’s economy going. Unfortunately, almost a year later, we’re not really seeing the promised benefits (lowering unemployment, helping the economy, et cetera). Let’s look at the stats.

The unemployment rate has been going steadily downward for the last 5 years.(1) In November of 2011, it was at 7.1%; it was down to 4.4% in November of 2013 and 4.1% in November of 2014. On April 30, 2015, fifteen days after the signing of the new minimum wage policy into law, the minimum wage had dropped to 3%, the lowest it had been since the 2.5% unemployment in April 2008. It’s too early to tell if the number will continue its spiking pattern and trend downward this spring and summer, but the unemployment climbed since then, and held steady at 4.2% from November to December 2015. [These stats are all from footnote 1.] Of course, any number of factors could be influencing this pattern, but it is clear that the minimum wage change has so far done nothing to lower unemployment in Seattle. Aside from that, the general economy has continued to slide at the same rate as the general United States economy, including the usual margins for error, so the impact there has been negligible as well.

Logic tells us that companies like Boeing, Amazon, Microsoft, McDonald’s, and Starbucks can handle an increase to $15 dollars an hour. However, that will significantly decrease their margin of profit for each store. Imagine a McDonald’s in central Seattle, selling a 10 piece order of Chicken McNuggets for $4.49 per. The total cost of all their employees for one 24-hour period is X dollars, and they’re selling Y dollars worth of food in that same amount of time. As long as Y-X is a positive number, that particular McDonald’s is making money. (This is a simplified version of the economics involved, but it works.) The company’s objective is to make as much money as possible- after all, we live in a capitalist society, and the ultimate goal of any corporation is to make money. So when the minimum wage goes up and the company suddenly has to pay each employee $4 more per hour, their profit is going to go down. The manager of the business is faced with a question: he or she can either sacrifice their profit margin or they can do something to keep it up- in other words, when X goes up, the difference between X and Y (the profit margin) will shrink. So, as any math class will tell you, the manager will either have to increase Y (by raising prices) or decrease X (by laying off employees) for every day in order to keep that difference the same.

A simple rule of economics is as follows: When the price of something goes up, the demand for it goes down. The manager, hopefully, is aware of this (although, at McDonald’s, it’s hard to predict what the employees will and will not know). He or she will see, or the company will, that if they increase the price of their food to cope with the increase in pay to employees, sales will go down. Plenty of low-income people go to McDonald’s because the price-to-calories ratio is so staggeringly low; others eat there because the low price and ease of purchase override the admittedly less-than-gourmet quality of McDonald’s cuisine. If the price goes up, fewer people are going to buy food at McDonald’s- it’s that simple. So that’s not a great answer to the problem, and ultimately will hurt the company and the economy.

Okay, so increasing Y won’t work. The manager turns to the other option, one that liberal minimum-wage activists apparently don’t consider: he or she lowers the X value. Meaning that the company will have to lay people off in order to lower the daily cost of their employees. With the level of technology today, it wouldn’t be particularly difficult to automate many services provided by humans. You wouldn’t need a cashier if people typed their orders into a touch screen menu when they walk in, as has already been implemented by a few ingenious restaurant owners. Voice control could replace a person on a headset talking to the hurried folks in the drive-through. We already have automatic drink dispensers that aren’t run by any person; are hamburger-flipping and fry-making machines supervised by just one or two people such a stretch? This, of course, is just as bad for the economy and for people as raising the price, although in a different way. By this logic, the minimum wage increase will actually cause unemployment to increase.

Put in real economic terms: “Walter McLaughlin has been in Small Business Administration (SBA) lending for 27 years. He won the Washington State Financial Services Champion award in 2005. Concerning the minimum wage law in Seattle, McLaughlin said in an e-mail statement:

“In economics, there is a principal called ‘zero sum gain’ in which an increase is offset by a loss of equal amount. When a small business (and per the SBA’s size standards, over 99% of U.S. companies qualify as small) sees its operating costs increase, it has three options: 1) absorb the cost, 2) raise prices or 3) lower expenses. Since businesses don’t operate with the intention of losing money, the irony of a drastic increase in the minimum wage is that in order for employers to adjust, the net effect may be higher inflation and unemployment, disproportionately hurting the very same group the $15 minimum wage was intended to help.”(2)

McDonald’s, though, is a massive international corporation. It is worth a stunning 61.95 billion dollars. That is, to say the least, a lot of money. They can afford to raise the minimum wage a bit, take the hit, and keep making money. Starbucks, Boeing, Amazon, and Microsoft are similar- they’re all wealthy enough to handle such a change without too big a hitch. As McLaughlin points out in the above quote, approximately 99% of US businesses are qualified as small businesses by the SBA. It’s the little guys, restaurants in particular, who will be hit hardest by the minimum wage increase: “Regarding amount of labor, at 14 employees, a Washington restaurant already averages three fewer workers than the national restaurant average (17 employees).”(3) This is probably because Seattle’s minimum wage was comparatively high even before the big hike of April 2015. Again, it’s too early to see the real impact, but according to the American Enterprise Institute, “At the same time that Seattle area food services employment has declined this year by 700 (and by -0.52%), restaurant jobs in the rest of the state have increased by a whopping 5,800 new positions (and by 6.6%).“(4) Clearly, Seattle’s restaurant industry is out of sync with the rest of the state, where it is booming. As the minimum wage is the biggest difference between the two sectors, we are led to believe that the high minimum wage currently crippling Seattle’s restaurant industry. And it’s not even at $15/hour yet! Currently, the minimum is $11, pending the phase-in of $15/hour in the next 6-7 years!

So here’s a question: If the really massive corporations can take the hit, and if we assume that lower-class people aren’t owning restaurants and small businesses, then who is this hurting? The middle class.

And another question: The minimum wage was supposed to help the lower class by ensuring they are better paid, but if it increases unemployment and drives out the small businesses that are hiring, who is going to be hit hardest as jobs go down? The lower class.

The minimum wage in and of itself isn’t a bad thing. It’s kind of like dark chocolate and labor unions: in moderation, there are valuable benefits (in this case, keeping employers from exploiting poor employees), but in excess, it becomes a problem. Obama has been pushing for a raise in the national minimum wage by about $3. Before making any decisions, perhaps the example of Seattle and its many failing small businesses should be taken into consideration.

-Reyna Medley

 

(1) Y Charts: http://murray.seattle.gov/minimumwage/#sthash.nzU7fcKA.dpbs

(2) The New American:  http://www.thenewamerican.com/economy/economics/item/21844-seattles-coming-15-minimum-wage

(3) Forbes: http://www.forbes.com/sites/timworstall/2015/03/16/we-are-seeing-the-effects-of-seattles-15-an-hour-minimum-wage/#77d152c7715a

(4) American Enterprise Institute: https://www.aei.org/publication/minimum-wage-effect-from-jan-to-sept-seattle-msa-restaurant-jobs-fell-700-vs-5800-food-jobs-in-rest-of-state/

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