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Unintended effects of $15 minimum, mandatory sick leave are complex

Supporters of a $15 minimum wage rally Aug. 3 at the Minneapolis City Council chambers.
Supporters of a $15 minimum wage rally Aug. 3 at the Minneapolis City Council chambers. Star Tribune

Justice Louis Brandeis argued that a state can “serve as a laboratory, and try novel social and economic experiments.” That has been true for Oregon’s citizen panels for prioritizing medical treatments under Medicaid in the 1990s or Kansas recent axing of income taxes on small businesses.

Now, movements for a $15 per hour minimum wage or mandatory sick leave benefits for all employees are hot. Seattle’s adoption of a $15 minimum, phased in by 2021, and a similar measure in San Francisco have made national news. Now my hometowns of St. Paul and Minneapolis are joining in. Brandeis would approve, but he understood that experiments — and new well-meaning policies — can have unintended consequences.

When one jurisdiction adopts a policy that differs sharply from its neighbors’ jurisdictions, people always respond to incentives created. The lack of an Oregon sales tax draws Fruitland, Idaho, shoppers across the Snake River to shop at Wal-Mart in Ontario. Oregon’s $9.75 minimum wage (set to rise to $12.50 in rural eastern Oregon in several years) attracts low-wage workers from Idaho, where the minimum is $7.25. A lower drinking age in Wisconsin draws Minnesota teens to border town bars. Ditto for substantially differing gas taxes in adjacent states. Ditto for Sunday liquor sales. Ditto for higher teacher salaries in one state than a neighboring one.

The degree of differential determines the magnitude of the effect. If a gas tax is only 5 cents higher in one state than another, driving across the line to gas isn’t worth the savings for many. But gas stations just a mile or two into the higher-cost state always will lose some business.

Differing teacher wage scales is a specific example of a common situation. Harvard economist John Kenneth Galbraith, born in a hardscrabble part of Ontario, said that in the 1930s, Canadian national pride was worth $5 per week. Whenever wages in Detroit exceeded those in Ontario by $5, patriotic Canadians decided they could live across the border. Less than that, and they stayed put. Similarly, “Polish plumbers” competing with locals in London has become an electoral cliché in Britain.

So one can expect that if St. Paul pushes mandatory sick leave for all businesses or Minneapolis adopts a $15-an-hour minimum wage, while adjacent suburbs do not, large incentives will be created instantly. The adjustment will take place over months or even years, but take place it will.

Advocates of sharply higher minimums or mandatory sick leave on a municipality-by-municipality basis argue that fairness demands this for every worker and that if the nation or individual states won’t act, then municipalities should on behalf of their working people.

The problem is that all those with jobs in a town when the minimum statewide is $9 won’t necessarily have a job if the city minimum becomes $15. Some labor-intensive, low-skill-required businesses will move elsewhere or replace workers with machines. A few may close down. A few may move. These are the effects usually cited by opponents of municipal minimums.

Retail businesses like supermarkets can pass these costs along if the change is federal or statewide, and thus all competitors are in the same boat, but it is much harder to do so for a business in south Minneapolis, when, for many customers, the distance to an alternative store in the suburb of St. Louis Park is only a few miles.

A factor receiving less attention is that even if businesses don’t reduce their number of employees, they face a much different and larger pool of applicants when they have to pay $15 and minimum wages don’t change a few miles away. They will get better-qualified applicants and can be more selective in whom they hire. This tends to work to the disadvantage of the most marginally qualified potential members of the workforce, and these tend to be minority youths. Why hire someone without a high school degree and with poor English or “work readiness skills,” to use a common euphemism, if there are graduates with good experience from outside the city limits?

The same is generally true for organizations that find jobs for those just out of prison or addiction treatment programs.

Requiring that sick leave benefits be provided to all workers would have pretty much the same effect as increasing the minimum wage — an increase in per-hour payroll costs for employers.

Note that these effects flow both ways. The desire to get positions that offer $15 an hour or paid sick leave will draw workers away from suburbs just as better teaching pay in Minnesota draws people from South Dakota. The closer South Dakota districts are to the state line, the more they have to meet the competition. The same will be true for businesses in inner-ring metro-area suburbs. So there will be some benefit to some workers outside the municipalities adopting the sharply higher benefits and some challenges for their employers.

The debate over the employment effects of a minimum wage generally considers changes in federal minimums. The general consensus remains that small increases not departing much from market wages have little harmful effect and that whatever harm results is concentrated on the least employable, generally minority youth. The jump to $15, at whatever level, is big. Adjusted for inflation, the highest level it has ever been nationally was in 1968, when it hit $11.14 an hour in 2016 dollars.

Democrats have made this part of their national campaign agenda, and pressures for a higher wage are rising in many areas. Increases at state or national levels will mute pressures at local levels and will reduce the sorts of border effects just described. But as long as we have a minimum wage, and I personally think we should, and as long as we regulate other aspects of employer-employee relationships, the details will always be contentious.

St. Paul economist and writer Edward Lotterman can be reached at boise@edlotterman.com.

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