Why It Really Is (Almost) All About Costs
A comment on the bottom of a recent Seattle Times story about two restaurant closures got to a point I’ve been thinking about a lot lately:
How do you know those coffee shps [sic] are “doing pretty well”? I run a coffee shop, and it’s busy and thus everyone assumes we are “doing pretty well” but we are now only breaking even, and it’s not fun to come to work each day when my $23.10/hour employees (plus tips = about $32/hour) are earning more money than I am. When I put our savings into the coffee shop, it was to earn a return and a living, and just because the coffee shop is operating, does not mean it’s going to remain open if it doesn’t turn a profit so I can stop living off of my wife’s salary at her day job.
I’m online enough to know the usual social media response to this kind of comment, which would be something along the lines of: “Fine! Any business that can’t afford to pay its employees a living wage doesn’t deserve to stay open anyway!”
It’s an attractive enough slogan in the world of online flame wars, but one that doesn’t do enough to unpack the components of a “living wage.”
Small business owners don’t control the cost of housing in their communities. They don’t set utility rates, insurance premiums or healthcare prices. In many cases, they are just as affected by those issues as the people they employ. And yet as these costs climb, so does – arithmetically – the definition of a living wage.
Start with housing as the most glaring example. Like most states, Washington has seen a dramatic underbuilding of housing in the 21st century. This lack of supply has caused prices to skyrocket. It is estimated that we will need to build more than a million units of new housing in the next 20 years to account for population growth and get back to affordability.
Some portion of that gap was outside the scope of political intervention. The housing bust after the Great Recession broke the housing market. New construction stopped. This had a lasting impact on the construction workforce and supply chains.
Other failures clearly did lie in the realm of public policy. The legislature has taken big steps the last few years to address the supply side of housing affordability. But more work needs to be done, and the existence of those bills just demonstrates how many barriers to building had been erected in the past.
When people can’t afford the expenses of daily life, government has a few options. One is to provide direct subsidies, like food stamps or housing vouchers. As the federal government cuts these kinds of supports, that puts the state in a tough cycle of backfilling with state funding, which requires cutting other programs or raising taxes – further hurting affordability if those increases aren’t crafted to avoid working families.
However, that’s still a better option than simply dumping the public policy failure in the laps of the people who didn’t cause it, by telling small business owners that they now are required to pay their employees a lot more money, even if their own budgets can’t afford that.
This is not a blanket argument against setting a higher minimum wage. There is plenty of evidence that the federal minimum wage is far too low. And under certain conditions, raising the minimum wage can actually increase employment.
But this is not a simple case of if something is good, more of it is always better. From that same link:
Understanding the effects of raising the minimum wage requires understanding how city size and labor market dynamics influence outcomes. Large cities may see less and cities with more monopsonistic labor markets are likely to have better employment, while smaller and more rural areas that still have competitive labor markets are more likely to have worse outcomes.
Two more points from a recent, large meta-analysis of minimum wage research:
This framework predicts that short-term employment responses to the minimum wage will be muted, reflecting only scale effects, while the larger effects from substitution will come through firm dynamics. Incumbent firms with ex post suboptimal technology will exit slowly, creating entry opportunities for new firms that are able to choose a more efficient mix of inputs. Over time, obsolete labor-intensive technologies will disappear and will be replaced with capital-intensive technologies—leading to reduced employment among low-wage workers. Of course, this is only one theoretical possibility …
And:
Both studies show that in response to minimum wage increases, small, inefficient firms exited the market, and workers at these firms found employment at more productive firms. However, there could be nuanced welfare consequences from such reallocation. For example, while the exit of low-productivity employers might enhance worker productivity, it could also harm some consumers by reducing variety and diminishing product market competition.
The anonymous Seattle Times commenter has intuited the second point and made it in their own words:
Shhhh, my employees would get better benefits, healthcare, and tuition assistance by going to work at Starbucks. Their economy of scale allows them to make a profit (lower cost all the way around for them)[.] But, our Mayor tells everyone to stop patronizing Starbucks, when they are one of the only business that can survive in this environment due to their massive size/economy of Scale.
This is just a subset of a larger issue. People often talk about policies as if they are “pro-Business” or “anti-Business,” but the reality is that there are huge differences in the way new regulations affect businesses, based on their size.
For a giant technology company that already employs hundreds of lawyers and compliance people, one more regulation is simply a new task on the checklist. For a small business, it’s yet more time the owner already doesn’t have to figure out how to comply, or it’s hiring an expensive lawyer or accountant for a few hours to figure out how to make it work.
So much of Olympia’s policymaking is dominated by representatives on the I-5 corridor and therefore channeled through a big-business lens. When they think about the effect of new regulations, they’re thinking about Starbucks or Amazon or Microsoft. They’re not thinking about Bob’s Fresh Fruit Stand, Nancy’s Late Nite Diner or Pedersons’ Family Farms.
As someone who worked in small business for more than 20 years, bringing that perspective is one of my missions in Olympia.
But the biggest priority is to start solving the problem of affordability on the supply and cost side. Through better policymaking, we can cut down the barriers that slow construction to make housing more affordable. We can speed the deployment of new energy generation, storage and transmission. We can expand the healthcare workforce.
When we raise taxes to pass a new subsidy program (or, conversely, exempt certain populations from certain taxes, as with property tax breaks) we benefit some people in Washington, at the cost of others. But when we pursue smart policies that actually reduce costs, everyone benefits.
That has to be our goal.