In 2016, the District joined Seattle, California and others in raising its minimum wage to $15 an hour (in 2020, in D.C.’s case). This occasioned another battle in the long-running “war of the dueling minimum wage studies,” in which conservatives claimed massive unemployment would follow and liberals claimed that it had been scientifically proven that raising the minimum wage doesn’t increase unemployment. This duel ended in a draw, as it always does, because in fact it’s quite hard to study the effects of minimum-wage hikes and economic science has not provided us with any definitive answers.
Now yet another round is about to start, because a minimum-wage hike is back on the policy agenda in our nation’s capital. This time the question is whether tipped restaurant workers should draw the same high minimum wage as other workers.
Most minimum-wage laws in the United States make special provisions for tipped workers, because the bulk of their income is paid to them by patrons, not employers. In D.C. the current minimum for tipped workers is just $3.33 an hour, which one suspects is almost irrelevant to the take-home pay of the workers who staff the city’s many fine-dining establishments. But a group says this is unfair to the folks who work in places such as IHOP and has managed to get an initiative on the ballot to raise it to match the general wage level.
Is this a good idea? What will happen if they succeed? Before we answer that question, let’s dive into what we know — and what we don’t — about the minimum wage.
- Minimum wages undoubtedly cause unemployment at some level. But we don’t necessarily know what level. If the minimum wage was raised by a penny, what would be the effect on unemployment? Probably nothing. Oh, maybe some employer, somewhere, would have to cut back a few hours or lay off a single worker. But we’d never know, because it would be impossible to disentangle that result from all the other stuff happening in the economy. On the other hand, we can probably all agree that if the minimum wage were raised by $1,000 an hour, it would cause near-total unemployment. Most workers don’t generate that much revenue for their employers, so their bosses would have to let them go.In between those two extremes, we know less. How high is the minimum wage that will cause substantial unemployment, erasing the benefits to workers from higher wages? No one really knows. A study last year suggested that Seattle’s minimum wage has reached that level, but it’s contested. Moreover, even if we knew the results were correct, that wouldn’t necessarily tell us a huge amount about how it would affect the District. The effects of minimum wages are likely to be highly dependent on the local economy — a boomtown has more room to raise them than a place with declining industries.
- All studies of minimum wages have serious limitations. Until recently, most minimum-wage increases have been reasonably small. As we noted above, both the initial level of the wage and the size of the increase probably matter a lot, so studying a relatively small historical increase doesn’t tell you very much about what will happen if you increase the minimum by 50 percent, (as has happened recently in several places), or, in the case of District restaurant workers, by nearly 500 percent.Minimum-wage studies are also typically of fairly short duration. There’s a reason for that — over longer periods, it’s hard to disentangle the effects of a minimum-wage hike from other economic trends. Whereas if you study the period immediately following a hike, you can reasonably infer some causation.But employer reactions to the minimum wage don’t necessarily neatly follow a wage hike. Employers, believe it or not, really hate to fire workers, or even cut back their hours, which saps morale and may impact service. Over the longer term, however, they may not replace workers who leave, or cut back operating hours, or invest in labor-saving innovations — such as fill-your-own-drink dispensers or touch-screen ordering — that allow them to employ fewer workers. Or they may look at the economics of a low-wage business and decide to invest in something with better profit margins, so fewer businesses open and fewer jobs are created. Most of the studies we have can’t pick up those effects, because they take years to materialize.
- Whatever unemployment occurs happens on the margin. Conservatives claiming unemployment disasters and liberals pointing to some fat-margin restaurant that can easily afford a higher minimum wage are both committing the same mistake: forgetting that the effects of minimum-wage increases are not evenly distributed throughout the economy. Some employers can easily bear them, either by lowering their profit margins or passing the cost onto flush customers. Other businesses may become entirely uneconomic to run with the new cost structure, and close. Those workers are, obviously, much, much worse off, especially if people become leery of opening new low-wage businesses.
So where does that leave us? Well, the proposed wage hike is enormous, which should give us pause. It is likely to be disproportionately hard on businesses that serve lower-income District residents. Their customers are likely to be more price sensitive, meaning that budget restaurants that are forced to raise prices in response to higher labor costs are likely to see a larger fall-off in business.
So it seems more likely than not that the new proposal will result in a decline in low-wage employment, though obviously not to zero. There may also be knock-on effects that are hard to predict: Will D.C. residents, knowing that their servers now enjoy a higher wage, reduce or eliminate their tipping? Overall, this seems unlikely to provide a substantial benefit to restaurant workers as a group, although there will undoubtedly be winners and losers.
But as with any prediction about minimum wages, we should keep our humility about us. What we don’t know about increases of this magnitude far exceeds what we do.