West Hollywood, home of the famous sunset strip, is known for its high-energy nightlife, swanky clubs, and beautiful celebrities.
It’s economic acumen … not so much.
Perhaps then it’s no surprise that city council members last week voted to raise the city’s wage floor to $17.64 an hour.
“Fewer than 10% of our jobs pay enough to live in the city,” city councilmember John D’Amico told The Guardian. “I believe we are now righting the founding wrong of this city. Keeping West Hollywood workers in a position where they cannot be our neighbors and worse, they have to learn how to live without a reliable income, this has to finally no longer be acceptable.”
West Hollywood passed the measure, which will be phased in over six-month increments until July 2023, despite objections from local business leaders—including reality TV star Lisa Vanderpump—who warned the measure would harm small businesses and low-skilled workers.
"I just implore you to really give this a lot of thought,” said Vanderpump, a British restaurateur who has appeared on The Real Housewives of Beverly Hills, “because I do believe if we raise the minimum wage now it's going to be counterproductive.”
Not Lisa Vanderp*mp fighting against raising the minimum wage on her employees 😭 pic.twitter.com/NPBjahkk1Z— Queens of Bravo (@queensofbravo) November 4, 2021
The Hard Truths about the Minimum Wage
Minimum wage laws are popular in the United States, even though there is a broad consensus among economists that they are accompanied by various adverse economic consequences, including decreased employment.
“Minimum wage laws tragically generate unemployment, especially so among the poorest and least skilled or educated workers,” economist Murray Rothbard wrote in 1978. “Because a minimum wage, of course, does not guarantee any worker's employment; it only prohibits, by force of law, anyone from being hired at the wage which would pay his employer to hire him."
It’s not just Rothbard, of course.
A recent paper published by the National Bureau of Economic Research that analyzed “the entire set of published studies” since the 1990s found a “clear preponderance” of evidence that minimum wage laws reduce employment.
“[The] body of evidence and its conclusions point strongly toward negative effects of minimum wages on employment of less-skilled workers, especially for the types of studies that would be expected to reveal these negative employment effects most clearly,” economists David Neumark and Peter Shirley wrote.
The minimum wage is not just a job killer, however. A recent article published in Harvard Business Review, for example, highlighted a study that found minimum wage laws actually reduce average worker compensation.
“For every $1 increase in the minimum wage, we found that the total number of workers scheduled to work each week increased by 27.7%, while the average number of hours each worker worked per week decreased [sic] by 20.8%,” wrote researchers from Cornell University, the University of Washington, and Georgia Tech. “For an average store in California, these changes translated into four extra workers per week and five fewer hours per worker per week — which meant that the total wage compensation of an average minimum wage worker in a California store actually fell by 13.6%.”
The research helps explain why some economists are less certain that increases in the minimum wage “substantially” reduce employment. Essentially employers are finding more creative ways to adjust to minimum wage increases—slashing hours and trimming benefits—than simply laying off workers.
The Hard Truths about the Minimum Wage
The obvious question is, If minimum wage laws harm workers—particularly low-skilled and marginalized workers—why are they so popular with politicians?
The most obvious answer is they are popular with politicians because they are popular with voters. Polls show Americans strongly support raising the federal minimum wage to $15 an hour—until they are told about its economic impact, which includes an estimated 1.3-3.7 million job losses.
Indeed, many Americans equate their support for a higher minimum wage with support for the poor.
“Many well-meaning people favor legal minimum-wage rates in the mistaken belief that they help the poor,” the Nobel Prize-winning economist Milton Friedman once observed. “These people confuse wage rates with wage income.”
This is why Democratic Sen. Kyrsten Sinema’s vote earlier this year against a $15 minimum wage infuriated progressives. They saw it as cheating the poor.
If we could lift people out of poverty simply by mandating a higher pay floor for workers, it would be wonderful. Unfortunately, the minimum wage runs up against the first law of economics: trade offs.
The reality is, because of scarcity, everything we do has a cost. Every choice. Every action. Nothing is free. If you make one choice, you must forgo a different choice.
“There are no solutions,” the economist Thomas Sowell famously observed. “There are only trade-offs.”
Minimum wage proponents don’t like to acknowledge trade offs exist, but they do.
In this case, the cost of a higher minimum wage is more unemployment and potentially lower compensation for some workers. Of course, we can choose to ignore these costs if we want. But that doesn’t make them go away.