By Jennifer L. Romich (University of Washington)
Since 2012, more than 30 cities or counties have raised local minimum wages above the federal standard of $7.25 per hour. New wage laws have taken effect in large urban centers such as Los Angeles, New York City, and Chicago, and smaller cities such as Las Cruces, New Mexico and Tacoma, Washington. Advocates for minimum wage laws suggest that such measures will raise wages, reduce income inequality, and make low-wage workers better off; critics counter that higher wages may lead firms to reduce employment, ultimately making workers as a class worse off.
Ultimately, the outcomes of higher minimum wage laws will depend on how firms respond to the new requirements. Wage laws require employers to offer workers at the lower end of the wage distribution higher wages, but employers have several options for adjusting business practices to accommodate higher labor costs. Employers may respond to higher labor costs by simply redistributing a share of profits from owners to workers’ wages, but classic supply and demand theory suggests employers are most likely to respond with some reductions to employee hours and headcount. Businesses might also raise prices, relocate away from the high-wage area, or even go out of business. Apart from economic impact, there is the possibility that if employer responses to higher minimums create a tipping point in the health of a community’s business climate, then local elected leaders may pay a political cost if voters perceive higher minimums have reduced employment options or increased the local cost of living. Because wage laws hinge so closely to the decisions of employers, we argue it is increasingly important for scholars of urban politics to assess how employers adjust practice and strategy to such wage regulation.
Drawing on a unique survey of firms and non-profit organizations subject to the City of Seattle Minimum Wage Ordinance, our research examines how employers within one city adjust to local minimum wage laws in the short run. Several features contribute to this study’s importance. First, we examine employer responses to the initial wage step-ups of one of the largest increases in a local minimum wage in the U.S. to date; Seattle was the first major city to pass a wage floor that will reach $15 per hour. Second, our survey data captures adjustment strategies including employment, non-wage compensation, pricing, and location. As such, this evidence expands on the conventional wisdom surrounding minimum wage laws, which focuses largely on adjustment to wages and employment rather than considering the larger, interconnected set of employer decisions. We also look at whether and how employer responses vary across geographic reach (single- or multi-site employers, located within the city or in multiple jurisdictions), sector, and ownership characteristics (franchise status; non-profit status; and women-, minority-, and immigrant-ownership). Robust local economies include diverse sets of employers who may respond differently to wage interventions, but these characteristics are not available in the administrative data often used to evaluate wage regimes.
We specifically examine employer responses to the Seattle Minimum Wage Ordinance (hereafter, the Ordinance) enacted by the Seattle City Council in June 2014. The first wage step-up, from the state minimum of $9.47 to $11.00, took effect as of April 1, 2015, and the second step-up, to $12.00 for smaller employers and $13.00 for larger employers, took effect January 1, 2016. These two increases coincided with a period of robust local economic growth, during which the city added thousands of jobs and average wages grew strongly.
Not surprisingly, we find that Seattle employers knew about and complied with the minimum wage ordinance by raising wages, and about two-thirds of responding employers made some change in business practice to accommodate the higher wages. We find evidence that firms with more than one location within Seattle initially raised wages earlier than employers with only one Seattle location or than firms with locations inside and outside the city. Many firms (almost half) raised wages of employees above the newly set minimum wage rates. About half of all employers reported raising prices to offset increased labor costs. We find that price increases were far more likely to occur in the food and accommodation sector than other types of industry sectors. Fewer than one in four employers reported reducing their workforces through cuts in hours or headcount. Franchises were more likely than non-franchises to report workforce reductions, perhaps because they have less price-setting ability than independent businesses. Together, price and employment changes account for a large proportion of the reported adjustments. We did not find much evidence that employers were eliminating benefits to reduce total compensation nor did firms commonly report withdrawing from the city.
Communities weighing the adoption of higher local minimum wage laws should consider these findings. While claims of widespread job loss or firm exit largely represent political rhetoric, it is not realistic to assume that firms can implement higher wages without affecting prices, employment, or other factors important to citizens. In particular, policymakers should attend to firms and organizations that may be most acutely affected by higher local minimums or that may have more limited responses. For example, our work suggests that immigrant-owned businesses were less likely to raise prices in response to initial step-ups in Seattle’s minimum wage, which may complicate their ability to remain viable businesses as future step-ups occur. Nonprofit human service organizations, whose revenue streams often are set by contracts and fee arrangements at the federal or state-level that are not responsive to local wage laws, face other unique challenges. Policymakers should consider how to support workers or new entrants to the labor market in particularly affected industrial or economic sectors. Such efforts would help to minimize any negative consequences for vulnerable workers. Finally, in the interest of balancing workers’ and employers’ needs, policymakers should consider how higher minimum wage laws may interact with other workplace regulations, such as compounding costs upon employers or limiting the channels of adjustment available to firms.
Jennifer L. Romich is associate professor of social welfare and director of the West Coast Poverty Center at the University of Washington School of Social Work. Romich’s scholarship examines social policy and family financial well-being with a focus on low-income working families.