Washington D.C. Mayor Vincent Gray is uncomfortably nestled between a rock and a hard place. Last Friday, the D.C. council sent a bill (The Large Retailer Accountability Act of 2013) to the mayor’s desk that would require large retailers like Walmart and Target to pay its workers a “living wage” of $12.50 per hour — significantly higher than the District’s $8.25 per hour minimum wage.
Not surprisingly, the bill has drawn the ire of such firms, including Walmart, which has threatened to pull out of its planned construction of stores in the city. Citing these threats and a desire to reduce D.C.’s high unemployment — which is upwards of 20% in poorer areas like Ward 8 — Gray has voiced his opposition to the bill.
The District of Columbia, however, is home to one of the most liberal populations in the country. According to Gallup, even a majority of Republicans nationwide support raising the federal minimum wage from $7.25 to $9.00. In a city where 91% of the population voted for Barack Obama in 2012, you don’t need a pollster to figure that support for higher minimum wages is significant.
If the politics of minimum wage laws is complex, however, the economics may be even more so — and they’re undoubtedly poorly understood by much of the public. Here are five common misunderstandings about the D.C. bill and minimum wage laws in general:
Myth 1: The D.C. Living Wage Bill is about helping all workers. Employees of big-box retailers aren’t the only ones who are hoping for the passage of the Large Retailer Accountability Act. Because the law exempts retailers with stores smaller than 75,000 square feet and less than $1 billion in sales, it doesn’t help many thousands of workers, and protects many small and medium sized businesses that have had a presence in the District far longer than Walmart or Target, as you might expect. Interestingly, though, previous versions of the bill had no size requirement on stores, meaning that any retailer with over $1 billion in revenue would have had to pay its workers $12.50 per hour. Would have required, that is, until the D.C. Chamber of Commerce got its hands on the bill and convinced the council to add in the size requirement, which has the strange effect of protecting giant (in revenue terms) retailers that happen to do business in relatively small stores like… Nike and Apple. Could politics have played a role? Well, it’s hard to understand why Walmart, which sports a 3.61% profit margin, should be required to pay its workers a living wage and Apple — with it’s 22.28% profit margin — should not.
Myth 2: High minimum wages reduce employment. It’s clear that many incumbent businesses would benefit from this legislation, but what about the average worker? Standard economic theory says that if you raise the minimum wage, even in a limited way, businesses will hire fewer workers. But the real-world evidence doesn’t always support this theory. For instance, over the past decade the city of San Francisco has instituted a minimum-wage requirement that rises with inflation, which currently sets wages no lower than $10.55. It has also required employers to fund employee healthcare and offer paid sick leave. Researchers have found that these laws have not reduced employment; instead, businesses seem to have merely adjusted their models by training workers and retaining them longer (thus making them worth the higher wages), and by raising prices slightly. What’s not exactly clear, however, is whether there’s something special about San Francisco, like it’s small size or great wealth, that makes it an exception to the standard economic logic.
Myth 3: Inflation has shrunk the minimum wage: Advocates for higher minimum wages point out the minimum wage, when adjusted for inflation, has actually fallen to $7.25 today from the equivalent (in today’s dollars) of $10.70 in 1968. But economist David Neumark of the University of California makes the point that the earned income tax credit, which was first instituted in 1975, has more than made up for that decline, as this graph shows:
This is significant because many economists believe that the minimum wage isn’t a very efficient way to help the people it’s aimed at, the working poor. According to Neumark’s analysis, in 2003 one-third of all minimum wage workers came from families from the top half of the income distribution. The earned-income tax credit, by contrast, is administered through tax code, enabling the government to precisely target who gets the aid and who doesn’t.
Myth 4: The earned-income tax credit therefore makes the minimum wage unnecessary. Could we eliminate the minimum wage and rely on the earned income tax credit instead? Some economists argue that the two policies are needed in tandem, because research has shown that the EITC simply allows employers to capture some of the benefits of that program because they don’t have to pay workers as much to entice them to work. The minimum wage is often criticized for helping minimum wage workers from wealthy families, but by the same logic, the EITC can be criticized as welfare for corporations.
Myth 5: Poor families are poor because of low wages. Another problem with the minimum and living wage debate is that it is often discussed as if poverty is primarily caused by low wages. As Neumark points out, not working is the single biggest driver of poverty. That’s why some economists are so hostile to the minimum wage. Unless we figure out a way to get a lot more of the population working, we won’t come anywhere close to eliminating poverty in America. Though the evidence isn’t totally conclusive on whether or not higher minimum wages reduce employment, it’s their opinion that doing anything that may reduce employment is dangerous given this reality.