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Monday, April 25, 2016

Rhetoric vs. Reality on New York’s Minimum Wage

A Glimmer of Understanding Has Crept into Progressive Politicos

New York has followed California in boosting its minimum legal wage from $10 to $15 an hour. The minimum wage debate involves many factors, but nothing so complex that someone with a sound knowledge of basic economics couldn’t understand it. Unfortunately, too few do.

First, other things equal, if you increase the wage rate, the number of hours people would be willing and able to work will increase, while the hours that employers would be able and willing to offer will fall. Second, if the fall in the number of hours worked is small enough relative to the rise in the minimum wage rate, then the total earnings of those still working would be greater than before. But if hours worked fall by enough, total earnings would actually decrease.

About a year ago, the Governor of New York, Andrew Cuomo, issued a press release boldly claiming that raising the minimum wage (at that time, they were only talking about from $8.75 to $11.50) would increase employment among those “who will experience higher wages” from 594,000 to 1.35 million persons and also add $3.5 billion in “direct economic value” to boot. How is such magic supposed to work?

It’s heroic to assume that the number of people employed at the higher wage rate would stay the same as at the lower rate, because if employers don’t cut back on worker benefits, which they can only do by so much, they are most likely to cut hours or even lay people off. The more dramatic the rate increase, the more likely such reductions become.

What does it say about the economic literacy of the governor’s office for him to proclaim that increasing the cost of labor would more than double employment? Obviously, more people would be willing to work at the higher rate, but he seems to have forgotten that employers also have an incentive not to hire as many people as before, or to offer them fewer hours, or both.

Jump to March of this year, when Governor Cuomo and the Legislature came to an agreement to raise the minimum wage from its current $10 to $15 an hour in New York City by 2018, and more slowly elsewhere in the state.

If the wage floor is forced up by 50 percent, and the number of people laid-off as a result falls by less than, say, one-third, then the total amount in wages received by those fortunate enough to still have a job may go up. Putting aside the question of whether it’s somehow “better” for a person not to have a job at all rather than work for lower wages, it’s certainly not obvious that employment will fall by less than that amount. It could, but it’s an empirical question and not one that can be blandly asserted as a fact. Assuming otherwise is wishful, even magical thinking.

It’s interesting, and revealing, that the current deal includes a much slower and milder increase for areas of the state above Westchester County, just north of the City. There, according to the New York Times, the law includes the following hedge:

On the wage issue, in areas north of Westchester, the minimum wage — now $9 — will rise by 70 cents a year over the next five years, eventually hitting $12.50 by the end of 2020, though the governor said it would continue to rise toward $15, depending on its economic impact.

Indeed, in announcing the wage increase and brokering a deal with Senate Republicans, Mr. Cuomo seemed to be treading a fine line between confidence that $15 would eventually be reached statewide and cautioning that the wage could be suspended if it was determined to be hurting the economy. (Emphasis added)

Perhaps the experience of other municipalities such as Seattle have cautioned them; perhaps it’s the way McDonald’s is already rolling out automated cashiers to replace human ones.

Behind the public rhetoric, then, there may be a glimmer of recognition that raising the rate by 50 percent so quickly could impact” or “hurt” the economy. A bit — a tiny bit — of economic reality has perhaps crept into our politicos.

The problem is, how likely will it be that the political interests behind this movement will be fazed by economic reality? How likely are unions to give up the economic advantage of raising the relative cost of non-union workers? Wouldn’t New York unions, like their brethren in Los Angeles, rather just seek an exemption from the minimum wage hike they fought for?

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.