By Jim Granato, John Antel and M.C. Sunny Wong
We have never met a person in our line of work who was not for higher wages. The question for policymakers and policy analysts is to determine the best way to get there. Acommon sense rule is to not lose sight of the potential negative policy consequences.
Focusing on only the “good” can mean the stated goals of the policy fall far short, with unintended consequences harming exactly those who were supposed to be helped. We have seen that play out in a number of cities that have raised the minimum wage. Efforts in Houston risk the same result, but there is a better way.
Over the past four years, U.S. cities have approved rules implementing a $15 minimum wage. Houston faces some restrictions in enacting similar policies, because Texas law forbids cities from simply increasing the wage for all workers above the federal minimum of $7.25 an hour. But the Texas law does allow exceptions, and the city is pushing ahead; an agreement with the municipal workers union, with caveats, called for direct hires to receive a minimum hourly wage of $13.55.
The 13-member Mayoral Task Force on Equity recommended a minimum wage of $15 per hour for not only city employees but also those who work for employers receiving city contracts, subcontracts, funds, subsidies or preferential treatment.
The need is understandable. In acity long known for its affordable housing, Houston’s low-wage earners spend an increasingly larger share of their paychecks on housing. More than 130,000 city households spend more than half of their incomes for housing. But there are reasons to believe a higher minimum wage will hurt the very workers it is intended to help. As labor costs to employers increase, there is a tendency to reduce workers’ hours, shrink new employment or even lay off workers.
The effect, then, is job losses and a decline in total employee earnings. Employers operating on narrow profit margins will try to transfer the burden of a higher minimum wage to consumers by raising prices, but there is also the potential for business to move outside of Houston. This latter effect reduces the tax base.
Clearly, these tradeoffs will offset the benefits generated by the increased wage to specific workers.
Indeed, similar tradeoffs have already emerged in some cities that have enacted a $15 minimum wage. A recent study by the Harvard Business School found lower end and less expensive restaurants are highly likely to close when the minimum of $15 per hour is reached in San Francisco in 2018. This adverse consequence for the restaurant industry — which has the highest demand for minimum-wage employees — will mean fewer jobs for lower-wage workers.
Seattle’s recent minimum wage policy has even more tradeoffs. The citywide $15 minimum wage for all workers will not be fulfilled until 2021, but a study by the University of Washington found the costs already are three times as high as the benefits for low-wage employee. The study found that at a$13 minimum wage, workers in the city of Seattle logged 9 percent fewer hours a month on average and earned $125 a month less.
What would be the “Houston Way,” an alternative that can avoid these tradeoffs? An overriding policy goal should be to focus on increasing options for all.
Houston is an economic power with a well-known entrepreneurial culture. Why not capitalize on that strength? People are paid based on their productivity but also on who and how many other employers will hire them. Policies that emphasize increasing skills and employment opportunities, including subsidizing job training, would go a long way toward increasing wages, without the downsides of a mandated higher minimum wage. Consider the examples of Job Corps and tax-deductible tuition benefits.
We also recommend emphasizing policies to increase the options for Houstonians seeking new work and starting new businesses. To that end, a thorough review of the cost of doing business in Houston — in comparison to other municipalities of similar size — would identify existing barriers and targets for reform.
The benefits, in terms of new employment opportunities and an increasing tax base, would be a measurable goal.
Granato is executive director of the Hobby School of Public Affairs at the University of Houston, where Antel and Wong are economists.