Two wage floor studies at odds

One says California will gain jobs; second offers a bleak view.

The federal government set its first minimum wage, at 25 cents an hour, in 1938. Since then, liberals have cheered attempts to raise the minimum as blows against worker exploitation, while businesses have lamented that the increases kill jobs.

But nearly 80 years later, economists still aren’t sure how a higher minimum wage affects companies and their customers.

Two recent studies out of California and Washington, which are both well on their way to a $15-an-hour wage f loor, show just how hard it is to pin down exactly how businesses respond to higher labor costs.

One report, published Wednesday by UC Berkeley researchers, suggests that California will gain jobs because of the minimum-wage hike. Another, released by University of Washington economists in November, offers a more negative view.

Ripple effects from the minimum wage are sure to draw even more scrutiny now. Nineteen states, including California, raised the wage floor effective Jan. 1. And Andrew Puzder, President-elect Donald Trump’s pick for Labor secretary who has criticized a $15-an-hour minimum wage, is scheduled to have a confirmation hearing Tuesday, though that may be pushed back to February.

Of course, even the most careful accounting of the pros and cons of a wage increase hinges on methodology and assumptions about the extent to which labor costs can sway companies to raise prices, slash hours and lay off employees.

The UC Berkeley report is based on an economic model that predicts how much businesses will raise prices or replace humans with machines, and the likelihood that poor workers will spend all of their new paychecks.

Using that model, researchers found that giving low-wage workers a pay bump will prompt them to spend more. And although retailers and restaurants may raise prices to cover their higher labor costs, that will be offset by the increased spending. The researchers, led by economist Michael Reich, say that extra spending will support enough jobs to compensate for cuts by employers who decide to replace humans

robots.

Employers will also save some of the money they spend on replenishing the bottom rung, the researchers theorize, because higher wages tend to keep workers in their jobs longer. Bigger salaries also make people more productive, which can boost sales and revenue.

Puzder has said that it doesn’t make sense to raise the minimum wage in areas that are less economically vibrant than, say, San Francisco. But the UC Berkeley economists looked specifically at Fresno, one of the poorest counties in California, and they still predict that a wage boost would result in a net gain in jobs.

Much of the economic activity in Fresno involves farms, where machines have been making their presence known for years, so the local labor force might seem like an easy target for automation. Not so, the report finds.

“Raising wages by itself is unlikely to raise the rate of mechanization,” Reich said.

The researchers base some of their optimism about Fresno handling a $15an-hour wage floor on its ability to keep growing even as the minimum wage went from $8 in 2013 to $10 in 2015.

Of course, the UC Berkeley conclusion is essentially a best guess of what will happen, not an account of what has happened. Other economists have expressed skepticism about the model, which is similar to the one that Berkeley researchers used to study the effects of the minimum wage in Los Angeles and Santa Clara.

“They make assumptions very favorable to the view that minimum wages aren’t going to have much of an adverse impact,” said David Neumark, an economist at UC Irvine. “They point to a set of studies that are at one extreme of what people find.”

In addition, Neumark said, the sharp rise to $15 is relatively unprecedented in U.S. history, so it might not make sense to use the past as a guide. The fact that Fresno companies could withstand a rise from $8 to $10.50, for example, may not be a sign that they’ll be as resilient when the $15 minimum kicks in.

Reich said he could not analyze what would happen to workers’ hours because the state didn’t provide hourly data. “I was very careful to make the inputs into the model objectively, based on the best research out there,” Reich said. Forecasts are, for now, the only way to understand how businesses will respond to a $15-an-hour wage floor.

“If we were adding a zero and looking at a $150 minimum wage, there would be a negative effect. But between $10 to $150, we don’t know when that negative effect will kick in,” he said.

The November report from the University of Washington looked at how businesses responded when Seattle raised its minimum wage from $9.47 an hour in 2014 to $11 in April 2015, compared with what happened in a group of areas that are economically similar to Seattle but which didn’t raise the minimum wage.

Workers who already had minimum-wage jobs did not lose them because of the wage boost, the researchers found. Those employees also didn’t lose hours and ended up earning about $10 more a week during the summer, when the city’s economy is at its busiest.

That finding differs from an earlier version of the study, which was widely publicized when released in July and found that the minwith imum-wage increase did lead businesses to fire existing low-wage workers and reduce hours.

Jacob Vigdor, who led the study, said the November report suggests that the July results were not statistically significant.

“For experienced workers, for people already in the labor market, things don’t look so bad,” Vigdor said. “They look a little bit better than the picture painted in the July report.”

For job seekers in Seattle, the news was less positive. By December 2015, Seattle had a couple of thousand fewer new low-wage jobs than it should have based on its past and what occurred in surrounding areas.

“It’s becoming a harder place to get a start in the labor market,” Vigdor said.

All of the net new jobs created in Seattle since 2014 are positions that pay more than $25 an hour, the study showed. Vigdor said it’s also possible that low-wage jobs are disappearing faster in Seattle because the city has become too expensive for poor workers to live, even with their new raises.