Center Maryland: A $15 minimum wage and the law of unintended consequences

Entering the Baltimore Inner Harbor with the Baltimore Skyline in the background

Editor’s note: The following commentary appeared on CenterMaryland.org on April 22, 2016.

By Donald C. Fry

Back in the 1930s a Harvard-trained sociologist named Robert K. Merton published a paper that examined why deliberate acts intended to cause change (typically intended for the good) sometimes result in unintended (bad) outcomes.

The result of Merton’s work has since been referred to as the “law of unintended consequences.”

More than a few books on sociology and economics contain interesting, and at times humorous, examples of how this theory has played out.  A telling example is the release of rabbits in parts of Australia to boost the hunting business. Unfortunately it also resulted in gullies and other environmental damage from an explosion of the critters undermining farm fields and other terrain.

This leads us to legislation proposed earlier this week by Baltimore City Councilwoman Mary Pat Clarke which would raise the minimum wage in the city to $15 per hour by 2020.

Like the rabbit release, passage of this bill is likely to hurt more than it helps.

It also will not address two of the pressing issues Baltimore needs to tackle: chronic unemployment and a work skills gap in some communities and demographic groups.

For example, in Baltimore City, among young African American males between the ages of 20 and 24 the unemployment rate is 37 percent, according to the latest census data available. For white males in the same age range the unemployment rate is about 10 percent, the data shows.

At an April 18 press conference held to discuss her proposal Clarke said her intentions are noble – and no doubt they are.

Clarke stated at the news conference that since the civil unrest that occurred last spring in the city, she had become “concerned about a lot of the issues that underlie such unrest, and one of them is certainly economic equity and the divide between people who are working sometimes three jobs and still are going to the church pantry at the end of the month to feed their families.”

Boosting the minimum wage in the city from the current $8.25 per hour to $15 per hour will address this “economic divide,” Clarke said.

Her proposal calls for future cost of living adjustments in the minimum wage as well.

Maryland’s minimum wage is $8.25 – a dollar higher than the federal requirement. In 2014 state legislators approved increasing the state’s minimum wage to $10.10 by 2018, with the next increase to $8.75 scheduled to kick in on July 1.

According to news reports an estimated 80,000 low-wage workers in the city could be affected by Clarke’s proposed legislation.

There’s no estimate as to how many businesses would be affected, but the city council should develop reliable estimates so the entire economic effect of the bill is clear.

One certain consequence of this legislation, if passed, would be that Baltimore becomes an island surrounded by nearby counties that have a lower minimum wage.

Businesses that are able to do so might choose to relocate or expand their operations to one of these jurisdictions to keep their operating costs from rising as a result of the wage hike.

This “island effect” alone underscores that a state or federal approach to minimum wage laws is the most appropriate.

Unfortunately no matter how well intentioned, there are also a number of other unintended consequences that could result from Clarke’s legislation that need to be fully studied and understood before this proposal advances.

One place to start would be to take an in-depth look at Seattle, where in 2014 the city council passed legislation that will gradually raise the city’s minimum wage to $15 per hour (by 2021 for all employers.)

A study published earlier this year by the American Enterprise Institute found that significant job losses occurred soon after the law took effect and the step increases in the minimum wage began.

The study should raise a red flag for the Baltimore City Council to have a reliable, independent study conducted of the potential effect the proposal could have on Baltimore’s business climate and economy.

Economists often argue that minimum wage hikes affect employment by reducing hiring, particularly for low-skilled workers.

Based on that premise alone, Clarke’s bill may end up hurting some of the very people the council member hopes to help.

It’s hard to think of a more worrisome outcome.

This should be particularly concerning for Baltimore City, where the unemployment rate is much too high in some pockets of the city.

There are several communities in Baltimore where unemployment exceeds 19 percent, according to an analysis of Baltimore City Health Department data published by The Baltimore Sun. There are multiple reasons for some of this high unemployment, but in many cases the residents in these areas lack strong educational backgrounds, basic work experience and job skills.

So the jobs they can get are typically entry level and likely pay minimum wage or slightly more.

Small businesses that operate on thin profit margins hire from this very labor pool. A $15 minimum wage will force them to adjust to higher operating costs associated with a wage hike.

They can do that in a couple of ways. They can pass on the costs to customers via price hikes for goods and services – risky in competitive environments such as the restaurant and hospitality industries. The other option is to cut back the number of current hourly-wage employees on the payroll.

Here’s another consideration: Under Clarke’s bill employees such as bartenders, waiters and waitresses who are currently paid $3.63 per hour in Maryland would also see the minimum hourly wage rise eventually to $15 per hour.

Will restaurants and bars pass on the wage hike to customers? Will waiters and other service staff, who rely heavily on tips for income, see less tip income due to patrons holding back or reducing tips with the higher minimum wage in mind?

These are good questions and they deserve an answer from the city council.

The concerns raised thus far only touch on companies and businesses currently operating in Baltimore.

What effect could a $15 minimum wage have on attracting new companies and businesses to the city? And what about those considering an expansion and adding new jobs?

Anytime a business is considering where to open a new operation or to expand, it sizes up the costs of doing business in locations that it has in mind.

The aforementioned island effect would certainly come into play for most businesses considering Baltimore for a new or expanded operation that involves hourly-wage employees.

Wage costs – not to mention property taxes – would be lower in any of the surrounding counties, putting the city at a serious competitive disadvantage.

Without question there is a lot about Merton’s law of unintended consequences that could play out in Baltimore should Councilwoman Clarke’s bill becomes law.

The best possible outcome would be for the Baltimore City Council to not let this rabbit loose at all.

Instead, the city council, working with the business community and others, is better off focusing on developing long-term education, training, apprenticeship programs, and other solutions to address income disparity and high unemployment in the city.

That’s an approach that is a solution to the real root of the “economic divide” in Baltimore, not the minimum wage.

Donald C. Fry is the President and CEO of the Greater Baltimore Committee. He is a regular contributor to Center Maryland.

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