Wage Floors

Check it out. Chicago decides to raise minimum wage for retail workers:

The City Council brushed aside warnings from Wal-Mart Stores Inc. to approve an ordinance that makes Chicago the biggest city in the nation to require big-box retailers to pay a ''living wage.''

The ordinance, which passed 35-14 Wednesday after three hours of impassioned debate, requires mega-retailers to pay wages of at least $10 an hour plus $3 in fringe benefits by mid-2010. It would only apply to companies with more than $1 billion in annual sales and stores of at least 90,000 square feet.

I think this is another small step towards fair pay for retail workers. The minimum wage has long ceased being a living wage, especially in big cities, in part because retail workers do not form a coherent constituency or lobbying group. Factory workers, who tend to be unionized--and so also politicized, generally make more than minimum wage. If minimum wage fails to keep pace with inflation, it is only those workers in service industiries--an increasingly large sector of the economy--that suffer.

Well, and also the general public, since the taxpayers, by means of welfare and medicaid, have to step in and make up the difference. We must pay for what retail employers are unwilling to provide for their workers. I think that in order to reduce our dependance on welfare, the burden should be on employers to ensure that every full-time employee earns enough to live on.

So, what is the other side of the argument? Jerry Roper, president of the Chicagoland Chamber of Commerce, has this to say, "The aldermen who voted in support of this ... helped put the sign up really big that development in Chicago is dead."

But this doesn't seem likely. For one thing, the article also notes that "Other cities with living-wage laws include Santa Fe and Albuquerque in New Mexico; San Francisco; and Washington." But, Wal-Mart, for instance, has stores in two of these cities: one in Santa Fe; eight in Albuquerque.

Moreover, look back to this article in the Times Magazine, and we get a different picture:

The tenor of this debate began to change in the mid-1990's following some work done by two Princeton economists, David Card (now at the University of California at Berkeley) and Alan B. Krueger. In 1992, New Jersey increased the state minimum wage to $5.05 an hour (applicable to both the public and private sectors), which gave the two young professors an opportunity to study the comparative effects of that raise on fast-food restaurants and low-wage employment in New Jersey and Pennsylvania, where the minimum wage remained at the federal level of $4.25 an hour. Card and Krueger agreed that the hypothesis that a rise in wages would destroy jobs was "one of the clearest and most widely appreciated in the field of economics." Both told me they believed, at the start, that their work would reinforce that hypothesis. But in 1995, and again in 2000, the two academics effectively shredded the conventional wisdom. Their data demonstrated that a modest increase in wages did not appear to cause any significant harm to employment; in some cases, a rise in the minimum wage even resulted in a slight increase in employment.

The theory that a rise in the wage floor will result in fewer jobs only holds if a company employs exactly as many people as it can, while still remaining profitable. Now, this is a reasonable assumption if the economy is growing and if we are talking about factory work. That is, a factory’s output is directly proportional to the number of people it employs if it can sell everything it produces. Roughly, and other things equal, each additional body in a factory increases the net output, the net production.

Of course, there is a law of marginal returns, e.g. as the physical capacity of the factory is stretched. But, compare this now to a retail store. Up to a point, an increase in personnel will not result in an increase in productivity/output. For, suppose one employee can handle up to 20 customers an hour. The effect is quantized and customer dependent. If the store commonly serves 30 customers an hour, it will employ two people. What then is the result of adding one more employee? Nothing! There is no increase in output, since there are still only 30 customers an hour. Thus, retail stores are staffed according to customer trends, not according to marginal returns with respect to productivity and space constraints, etc. So, retail stores are by no means at capacity with respect to employees, in fact they are at their absolute minimum. In order to stay open, they will be forced to retain all of their current employees, even in the event of a wage floor increase. Now, it is possible that some stores will be unable to remain open, but this is not particularly likely for major chain stores like Wal-Mart.

Finally, the increase in employment found by the above economists could be due to increased spending by the now richer minimum wage earners – lets call this ‘demand-side economics’.In the same article, we get this:

"Our current average hourly wage for workers is $9.68," Lee Culpepper, a Wal-Mart spokesman, told me. "So I would think raising the wage would have minimal impact on our workers. But we think it would have a beneficial effect on our customers."

So, returning to Chicago, let's watch and see what happens. But, if I am right, this could be another instance of cities and states taking the lead on the curcial social issues that the Federal Government is increasingly unwilling to tackle--a trend I will return to.