Let me start this post with the fact that I have a lot of respect for the Fiscal Policy Institute. They play a vital role in the District’s public policy life and act as a voice for a group of people that doesn’t have much of one. I just happen to think that FPI is wrong on the issue of instituting a two-tiered minimum wage system in the District. I think it is bad for low wage workers and will hurt them more than it helps. It strikes me more as paternalism than good public policy — one group of people thinking they’re helping another group of people when they’re really not. Let me also make it clear that I am 100% in favor of District residents making more per hour than they do now. The question is whether an increase in the minimum wage for a small group of low wage workers is the way to go about it. Elissa Silverman published a column in today’s Hill Rag supporting the increase in the minimum wage for employees at large retailers. I have posted the column in its entirety below. My comments are in bold.

Living Wages for Large Retail Workers

Sat, 06/29/2013 – 12:00am
The Numbers

Elissa Silverman

Let’s start with this chart and its definitions. First of all, the poverty line of $19,530 is the national poverty line. In the column on the left, the chart shows an annual minimum wage salary calculated at the actual minimum wage of $8.25 per hour. But in the first paragraph of Elissa’s column below she indicates that the average retail worker in DC earns $11 per hour, so we’re not talking about a starting point of $17,500 as the chart would have you believe. It’s more like $23,000 and the bill is proposing a $3,000 annual increase. There is no way $26,000 gets a family of three out of poverty in the District. The cost of living here is too high. The way to lift residents out of poverty is to have an economy that grows fast enough so that it creates large numbers of medium to high skill jobs and a job training system that imparts the types of skills that allow residents to compete for and win those jobs. Entry level retail jobs are just that. They are not designed to be careers. They are transitional jobs as a worker learns how to incorporate themselves into the workforce. We should not aspire to the creation of thousands of permanent minimum wage workers. Retail jobs should be stepping stones — basic skills are learned to be used on the way up the ladder.

The person at the coffee shop who pours your favorite morning brew probably earns about $11 an hour. The person at the drugstore who rang up your toothpaste and hand cream also makes about $11 an hour. That’s because retail workers in DC typically earn $11 an hour, according to federal government statistics. Even with full-time employment — a rarity in retail – that adds up to just $22,000 a year. Low retail wages in DC translates into a retail worker poverty rate that is three times higher than for workers in other industries. The fact that there are very few full-time retail jobs (management is usually full-time) is another indicator that retail jobs are not meant to be permanent. They are not designed to be careers. A retail worker poverty rate that is three times higher than for workers in other industries is to be expected because retail jobs are comparatively low skill. DC is predominately a high-skill, knowledge industry jurisdiction. That means a comparatively large number of high-paying, high-skill jobs, which skews the numbers in the retail industry. 

The DC Council is poised to do something about that, by requiring large retail corporations to pay their workers at least $12.50 an hour. Opponents say that this will hurt retail in the city and lead to fewer jobs for the very people the legislation is intended to help. Yet their evidence – a business-backed analysis — has been discredited by economists, who find that raising minimum wages leads to higher take-home pay without causing job losses. This statement is open to debate. There have been numerous studies on the effects of minimum wages and minimum wage increases, including an entire book, Minimum Wages, by David Neumark and William Wascher. The overall research is mixed. Some studies show significant job losses, some don’t. That’s why economics is more art than science, and the results usually reflect the biases of the individual economists. Logic, however, is on the side of those who claim at least some employment reductions, with the number varying based on the size of the increase in the minimum wage. Unfortunately, we’ll have to wait to see how it plays out for an answer. We would like to see a survey of some actual and potential employers in the District to see how they plan to react to the higher minimum wage in real time as opposed to in theory.

The living wage opponents offer no solution to the fact that an entire industry is built heavily on poverty-level jobs. And they don’t have an answer to the question of how some retailers, such as Costco, can pay wages well above industry norms and still be wildly successful. Costco has a different business model that allows them a higher level of profitability, which gives them the freedom to offer higher wages. Even if you just go in there for one thing, have you ever walked out of Costco without spending $250? It’s the way they’ve established their business. Other retailers are envious of their profit margins. As mentioned, the entire retail industry is built on a low-skill, low wage, high turnover business model. The positions are purposely transitional. The solution is to make sure an entry level retail job is the first rung on the career ladder, not the last.

Efforts to raise wages for DC’s working poor, such as the Large Retailer Accountability Act, are important to ensuring that the District remains affordable to all residents and that the benefits of DC’s economic boom are widely shared. A $1.50 increase in the minimum wage for the 40% or so of retail employees who work for large retailers that will be covered under the bill will not suddenly make the District more affordable. It will give a smaller group of workers marginally more spending power. The group of workers on the margins that lose their job will have no spending power at all. We’re aiming too low if a $3,000 annual increase over near poverty wages is how we define widely sharing the District’s economic boom.

Who Works in DC Retail and Why Do They Earn So Little?

Retail workers are not just teens trying to earn spending money. The typical retail worker in DC is 34, and nearly three-fourths work full-time. In other words, most retail employees are adults trying to support themselves and, in many cases, a family.

In a high cost of living city such as the District, where a resident needs to earn $29 an hour to afford a typical two-bedroom apartment, a retail salary makes it nearly impossible to pay for basic necessities such as housing, transportation, and food costs. I hate to sound like a broken record, but the entry level retail industry was not meant to provide jobs that pay $29 per hour. The retail business model would never support those wage levels, unless you want to pay $25 for a tomato. As mentioned, the answer here is an economy that grows fast enough to produce significantly more mid-skill level jobs and a training system that prepares residents for those jobs. That’s how you get to $29 an hour. You will never get there in retail. The economics just aren’t there.

There is no easy explanation for the low wages in retail. Even after taking into account factors such as education level and age, workers in retail in DC earn one-third less than other workers. Nationally, worker productivity in retail grew faster over the past decade than in the overall economy, yet the average retail wage fell after adjusting for inflation. There is an easy explanation for low wages in retail — they are lower-skill, lower education transitional jobs by design. The average retail wage fell after adjusting for inflation because of the low growth nature of the economy for the last five years. Consumer spending has been depressed. This results in a reduced demand for retail goods, which prohibits retailers from being able raise prices. There has been no additional money to pass along in the form of higher wages. The state of retail’s wages are not retail’s fault. If the economy were growing fast enough, new jobs and wage increases would follow. The only reason I can think of for why productivity increased in retail faster than the overall economy is because they were starting from way behind. Most productivity gains are the result of improvements in technology. There is not a whole lot of technology in retail. If there were, more jobs would probably be automated. It’s probably a good thing that these entry level jobs require a human touch and cannot be automated or outsourced.

Making Retail Work Pay: The Large Retailer Accountability Act

The DC Council is attempting to address these concerns by requiring large retail corporations to pay workers at least D.C.’s living wage, which is currently $12.50 an hour. Initially, the legislation set this requirement only for retailers with large stores — those with 75,000 square feet or more — but the legislation later was changed to cover a broader group of retail corporations, those with gross revenue exceeding $1 billion nationally. The legislation has actually been changed back and the 75,000 square foot provision was re-inserted into the legislation. That doesn’t make it better policy.

The bill exempts franchisees and workers who are covered under a collective bargaining agreement. For large retailers who currently operate in the District, the bill gives a four-year period to raise starting wages to $12.50 an hour. I would be interested to know if there are retail collective bargaining agreements that lock in wages lower than $12.50 an hour and how those union members feel about that. The bill also purposefully excludes smaller retailers because they operate on very thin margins and these kinds of cost increases would be devastating. This tells us that the council understands the economics of retail for the small business owner, but what makes them think the economics are different just because you have 75,000 square feet? The price pressures and the margins are the same throughout retail. Smaller employers are going to get caught up in the wage increases in the context of a competitive labor market. In order to retain their best employees, small retailers may have to match the $12.50 rate, which could make them unprofitable.

The legislation is important for several reasons. Full-time work at $12 an hour would lift about two-thirds of DC’s working-poor families out of poverty. Lifting families out of poverty means that they will be less reliant on taxpayer-funded programs. Full-time work at the living wage would be enough to help a family move off welfare entirely. As mentioned, this is only the case if you agree that the real poverty line in DC is $19,530. I think the true poverty line in DC is more like $40,000. $57 per week is marginally helpful, but it does nothing to pull a household out of poverty. But for every ten workers who earn the extra $57 per week, one or two may lose their jobs altogether. Is the $57 per week worth it in light of those whose jobs could be eliminated? To really pull a family of three out of poverty, they have to be trained for and able to compete successfully for higher skill work. A raise from $11 per hour to $12.50 will not make a family of three less reliant on public assistance. If a raise of $57 per week forces a family to lose access to welfare or other forms of public assistance, they would be far better off declining the $1.50 raise.

The District’s economy also would benefit, because lower-wage workers spend their earnings at local businesses. Higher wages will go right back into the local economy, creating more jobs. The first thing a large retailer like Wal-Mart is going to do when hit with higher wage costs is raise prices. Assuming those price increases stick, they are going to harm the very same employees and other low wage consumers who shop at Wal-Mart. A good portion of those wage increases could go right back to Wal-Mart in the form of higher prices.

Retailers also stand to benefit. Costco, whose parking lot at its recently opened store in Northeast DC always seems full, understands the benefit of paying living wages to its workers who are the public face of the company to customers. Its starting wage is at least $11.50, and company officials report an average wage of $20 helps keep good employees and prevents high turnover. I’m not sure how any business benefits from higher costs. Cost increases leave less money for hiring new employees. I suspect that Costco doesn’t actually pay a $20 dollar wage in DC. My guess is most of their employees are closer to $11.50 than $20 per hour. As mentioned, they have a completely different business model from the average retailer which gives them higher margins and allows for higher wages. They are not the “low cost leader.” I would also be interested to know how many DC Costco employees are actually District residents. I would not be surprised if the majority of their employees live outside the District.

Living Wage Opponents “Unequivocally Misrepresented” Minimum Wage Research

Two economists examined the impact of city-level minimum wages in DC and two other cities, and their 2011 study concluded that “citywide minimum wages can raise the earnings of low-wage workers, without a discernible impact on their employment.”

Yet a new report, commissioned this spring by the DC Chamber of Commerce, relies on this earlier research to conclude that the Large Retailer Accountability Act could lead to large job losses and adverse economic impact. That would be funny if the new report, by the Sage Policy Group, weren’t being used to challenge the proposed retail living wage.

The Sage report’s estimates of job losses rely entirely on research conducted by John Schmitt and David Rosnick in 2011.They found that raising the minimum wage in two of the three cities studied—San Francisco and Santa Fe—improved the take-home pay for workers without resulting in job losses. The findings for DC were less clear, however. And the report did not “allow us to draw conclusions about the employment effects of binding citywide minimum wages.” Yet Sage Policy Group cherry-picked one piece of data from the Schmitt and Rosnick report to come to a conclusion that the authors had not made.

In a statement issued on June 17, 2013, Schmitt concludes that the “Sage Policy Group’s report does not accurately reflect our conclusions and should not be used as an argument against the implementation of a living wage for retail workers in the District.” So the research the Sage Policy Group relied on was inconclusive. It didn’t prove there were job losses associated with minimum wage increases in the District, but it didn’t prove that there weren’t. I would like to hear some retailers weigh in about their hiring plans in relation to the wage increase.

Raising Wages Allows Everyone to Benefit from DC’s Retail Boom

The Large Retailer Accountability Act comes at a time when the District is experiencing a population boom, and when development in many neighborhoods is attracting national retailers. Many national retailers want to be in DC because of our thriving economy. The DC Council should act to ensure their workers can afford to live and thrive in our city, too. I would take issue with the name of the bill. It implies that large retailers have been unaccountable in the past. I’m not aware of anyone accusing large retailers of not following current law and regulation. I think the name is unfortunate and sends a bad signal to other employers thinking of moving to the District. It is true that many national retailers want to be in DC because of our thriving economy, but they don’t want to operate at a loss. It’s my understanding that Trader Joe’s has already made it clear they will not enter the DC market at Walter Reed if the new minimum wage is adopted. I think it would make sense to hear from other retailers. One last point: Maryland’s legislature this session considered and rejected an increase in their minimum wage for exactly these reasons.

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