By Dave Oberting
A bitter battle is being waged in the District of Columbia and around the country as it relates to the wisdom of increasing the minimum wage. Should it be raised at all? If so, by how much? Or should it be eliminated altogether? We’d like to move past that argument by making the minimum wage obsolete.
On one side of the argument are some minimum wage workers and their advocates demanding what they call “a living wage.” When it’s put that way, who wouldn’t want all of our District workers to be able to provide something approaching a middle-class lifestyle for themselves and their families? No one really disputes that. The real battle is how to achieve it.
In the District, advocates have decided that the living wage is in the neighborhood of $12.50 per hour. Of the several bills on the table before the Council, the highest of the various proposals takes the minimum wage from $8.25 to $12.50 over a couple of years. It’s hard to say why advocates have settled on $12.50 in a jurisdiction with an extraordinarily high cost of living and an even higher cost of housing, but they have. Our theory is that a true living wage in the District is more likely $40-45,000 per year (which works out to $22.50 per hour based on a 2,000 hour work year), instead of the $26,000 that a $12.50 minimum wage would pay. Stopping at $12.50 is an implicit acknowledgement of the employment effect. Even proponents acknowledge that a minimum wage at a certain rate causes job losses. The question is are any job losses acceptable?
On the other side of the divide are businesses large and small. Small businesses employ about 46% of all minimum wage workers. Many small businesses, especially in retail, work on extremely thin profit margins. Even small changes in their cost structure can swing them from profit to loss. They argue straightforwardly that increasing the minimum wage increases their cost of doing business, and is therefore bad for them.
Let’s illustrate how a 52% increase (from $8.25 to $12.50) in the minimum wage impacts a typical small business owner and her employees:
Let’s say Sarah owns a small retail clothing shop in DuPont Circle and she employs ten minimum wage workers. Let’s raise her labor costs by 52% without providing any kind of corresponding increase in sales and let’s see what happens. First off, Sarah would try to raise prices, but there are three other women’s clothing shops within a two mile radius of Sarah’s store selling similar clothing. If she raises prices to cover the increased labor costs, she will lose business to her competitors. Even if there were no competition and she could raise prices at will, higher prices will discourage people from shopping at Sarah’s store She would then look to cut costs where she can. But, her rent is locked in for five years and most of her other expenses are fixed. She could decide to sell cheaper clothing in order to attract more business, but her customers expect a certain quality in the clothes she sells and the profit margins on cheaper clothing are significantly lower. Her customers keep coming back because of the quality of the clothing she sells, so changing her mix of inventory isn’t really an option.
That leaves Sarah with two options. She can either eat the loss herself and considerably lower her personal earnings, or she must lower the only variable cost she has: the cost of her employees. Capitalism is structured in such a way that the business owner will almost always act in their own self-interest and seek to maximize profit. That’s how it’s always worked, that’s how it should work. So, Sarah is most likely to lay off a certain number of employees. Whether that will be one, or two, or five employees depends on the size of the increase in the minimum wage, but Sarah and her remaining 7 or 8 employees will do the work of ten.
This is a terrible dilemma for Sarah. She likes her employees and she’ll do what she can to minimize the damage. For Sarah this is a move required to ensure the continuation of her business and to secure the employment of her remaining employees. But for the employees whose jobs were terminated, this is a catastrophe. They suddenly find themselves without any income at all. They go around to the other three retailers looking for work, but they’re told that the other shops are in the same boat as Sarah. They’ve laid off workers too and there are just fewer entry level jobs available in the District.
This is the trade off associated with the minimum wage. The group that retains their job will earn a bit more, but for the smaller group of people who lose their jobs completely, the situation is a disaster. Some understand this effect and have decided that the higher wage for the smaller group of workers is worth the loss in jobs. We don’t like the trade off. The damage done to the group that now finds itself unemployed is serious, not just because of the lost income, but what it does to their future employment prospects.
To avoid these outcomes, let’s make the minimum wage obsolete. The minimum wage will be obsolete when the vast majority of the District’s inhabitants acquire the kinds of skills that allow them to command a true “living wage” in a free market. We can make the minimum wage the exclusive domain of young teenagers who are entering the workforce for the first time. There is no quick fix, but there are three ways to accomplish this goal:
The District’s economy must grow faster so that it is creating more jobs at all skill levels. The two main macroeconomic policy levers at the District’s disposal tax nd regulatory policy. They can be used to lay the groundwork for faster growth. The Tax Revision Commission is currently reviewing the entire District tax code looking for ways to make the District more competitive. They should go big. The Regulatory Reform Task Force is likewise currently looking at the way the District regulates various sectors of the economy. They might think about throwing everything out and starting with a clean sheet of paper.
If you are in the changing lives for the better business, the best place to make your bet is on the workforce development system. Government provides no more valuable service than imparting the skills that permit someone to move up the economic ladder. Important progress has been made on this by the Workforce Investment Council, but there is so much more to do. The biggest task is to make the District’s system more employer driven. Employers large and small know what skills their employees need. The District should be designing and operating job training programs that produce more graduates with the skills local employers need. For instance, Wal-Mart is about open six stores in the District and the Marriott convention center hotel is also about to open. They will employ well over 2,000 people combined. In relatively short order, both these employers are going to need more supervisors and managers in the pipeline. Most businesses would prefer to promote from within because it cuts down on training costs. The District could have a retail and hospitality management training program at the community college that would train District residents to be promoted into those jobs.
Finally, the improvement in our K-12 school system is simply too slow. A 55% graduation rate dooms a new generation to permanent under or unemployment and virtually locks them out of the middle-class. We must be bolder in our efforts to improve education. We are advocates of a strong DCPS to go along with our burgeoning charter school system, but we cannot wait forever for DCPS to get there. The District not only needs to graduate 100% of our students, but they need to be prepared for success at a four year institution, a community college, a technical training program, or a career in the military. Only 35% of the jobs created in the United States require a four-year degree, so we don’t agree with the idea that every kid needs to go to college, but everyone coming out of District schools needs to be able to think critically, express themselves in writing, and know how to work as part of a team. We’ve made much progress in the past several years, but the clock is ticking.
Dave Oberting is the Chairman & Executive Director of the DC Economic Growth Action Fund, a political and economic advocacy organization focused on the District of Columbia. Follow him on Twitter @GrowthDC.