Editor’s note: The following commentary appeared on CenterMaryland.org on June 17, 2016.
A month ago I wrote in Center Maryland about a proposal before the Baltimore City Council to raise the minimum wage in Baltimore to $15 per hour and concerns that the wage increase wouldn’t address two serious city issues: chronic unemployment and a work skills gap.
Since then the Greater Baltimore Committee, business owners and other private sector organizations have studied the potential effect the legislation would have on jobs and the business climate. The overwhelming conclusion: it is not the right time to increase the minimum wage in Baltimore City to $15 per hour.
The state’s minimum wage has been set at $10.10 per hour, an amount higher than the federal requirement. The state’s rate will be achieved incrementally with the next step increase to $8.75 per hour slated to occur on July 1. The state’s minimum wage is scheduled to “top out” at $10.10 per hour on July 1, 2018.
As I noted in testimony to the City Council’s Labor and Employment Committee at a hearing earlier this week, until the state’s wage increase has been fully realized, it is premature for Baltimore City to move beyond the state’s minimum wage level for the reasons outlined below.
Minimum Wage: “Good” Economic Policy?
At first blush, increasing the minimum wage may sound like good economic and social policy. In theory, low income workers will make more money, be better able to provide for their families, have more income to spend in shops and restaurants, and the economy will grow as a result. However, increased wages also mean an increased cost for businesses in Baltimore City, many of whom are running on thin profit margins and have not fully recovered from the unrest of last spring. For businesses to adapt those increased costs will have to be offset, either by reducing the size of the workforce, automation, cutting benefits, increasing costs on goods and services, or all of the above. An official from the Federal Reserve Bank of Cleveland observed in an interview last year that lower skilled workers performing routine tasks are increasingly being replaced with machines and software. It is fair to assume that an increased minimum wage would only fuel that trend.
Businesses that are unable to overcome the costs associated with the increased minimum wage will have little choice but to close their doors. Businesses that do survive will not have the ability to grow and create jobs as they would otherwise. This is not a threat, just an economic reality that deserves very serious consideration.
Facing the Unintended Consequences
Aside from the financial impact this policy could have on businesses, there are additional consequences that must be considered. Though intended to mostly benefit low-income, low-skilled workers, research suggests this is the group most negatively affected by increasing the minimum wage.
According to the Foundation for Economic Education, young, low-skilled workers are the most likely to be hurt by minimum wage hikes because they are the least likely to have skills that employers consider valuable. Businesses may currently hire a low-skilled worker at the low end of the salary scale and train them but as mandatory wages increase, businesses will likely seek out more experienced individuals for those entry level positions. In a survey of 166 economists by the University of New Hampshire’s Survey Center, 80 percent believe that a $15 per hour minimum wage would result in employers hiring people with greater skills for entry level positions.
In Washington, D.C., where similar legislation was recently approved by the city council, the district’s Chief Financial Officer raised this as a point of concern, noting that, “Job losses [as a result of increasing the minimum wage] mostly affect low-paid, low-skilled workers who are disproportionally District residents.”
Additionally, in a recent study University of California-San Diego economics professor Jeffrey Clemens found that federal minimum wage hikes from 2006 to 2009 accounted for 43 percent of the decline in employment among this group of workers during the Great Recession.
The “Island Effect”
Increasing the minimum wage only in Baltimore City creates additional competitive burdens. If passed, Baltimore City would be island among neighboring jurisdictions in the greater Baltimore region. The businesses that operate in those jurisdictions already enjoy lower costs of doing business, lower taxes, and lower crime rates. Despite all of its positive attributes – world-class institutions of higher learning, research and medical institutions, a bustling downtown business district and more – for a business looking to locate or expand in the region Baltimore City would no longer be a natural choice. Why locate in Baltimore City when the labor costs and additional cost of doing business is so much lower just a few miles over the county line?
There are many other potential impacts that the “island effect” would create, including the increased competition between workers in neighboring jurisdictions that does not necessarily exist today. A fast food worker in Baltimore County has no reason to flip burgers at the state’s minimum wage level of $8.75 an hour (effective July 1, 2016) when they can come to Baltimore City and do the same job for more money. In that scenario, the Baltimore City resident who was supposed to benefit from this policy will lose out on a job and the income tax revenue that should have been collected by Baltimore City through the local “piggy back” tax will go to Baltimore County.
When Washington, D.C. increased its minimum wage in 2013, they did so in coordination with Prince George’s County and Montgomery County – two large neighboring jurisdictions – both of which increased their minimum wage at the same time. This coordination removed much of the potential competitive disadvantage that the district would have faced had Montgomery and Prince George’s County not followed suit. In discussions about the recently approved legislation to again increase the minimum wage in the district, the D.C. Chief Financial Officer predicted that in the absence of neighboring jurisdictions again increasing their minimum wage, “District businesses activity declines and businesses become less competitive.”
The fact of the matter is that there is little to no chance that Baltimore City’s neighboring counties would entertain such a proposal. Neighboring jurisdictions have shown no appetite for this type of change. In the absence of regional coordination, Baltimore City will find itself at a competitive disadvantage in efforts to attract and expand businesses and opportunities for those individuals this legislation is intended to benefit.
We Are Not Seattle
Proponents for increasing the minimum wage in Baltimore City point to other jurisdictions – like Seattle, New York, or San Francisco – where increased wage laws have recently been implemented. But the economic base, workforce and business conditions in Baltimore City are not comparable to those of Seattle, New York or San Francisco. Our economies, challenges, and strengths are vastly different. While the Seattle metro area boasts a gross domestic product that is 7th amongst large metro areas, Baltimore ranks 37th. In Seattle, 18 percent of the population has only a high school diploma or less. In Baltimore, that number is nearly 50 percent. These jurisdictions have economies that can handle this type of increase. Baltimore has many challenges to overcome, including the fragility of its businesses following last year’s unrest, before its economy is stabilized to the point where a $15 per hour minimum wage would not be threatening to businesses.
Let’s Work Together to Lift All Boats
When a press conference was held to announce this legislation, supporters expressed concern about a lot of the issues underlying the unrest that occurred last year following the death of Freddie Gray. I could not agree more. But this legislation does not speak to the heart of many of the issues plaguing Baltimore City.
This proposal does not increase the caliber of our school system. It does not help businesses create jobs. It does not provide access to workforce training. It does not create pathways for workers in middle-skilled employment opportunities. It does not help entrepreneurs start and build businesses. It does create more affordable housing. It does not provide a better transit system so workers can access available jobs. And it does not help connect returning citizens to employment opportunities.
Granted, it may increase wages for some, but it will also lead to job losses for many others as businesses struggle to keep pace with the rising cost of doing business in Baltimore City. It also, once again, sets Baltimore City apart from its surrounding jurisdictions in the competitive field of economic development and job creation.
The Greater Baltimore Committee, the private sector and Baltimore City Council can do better by working together to address the challenges outlined above and adopt proven strategies for Baltimore City that lifts all boats while allowing businesses to do what they do best: create jobs and grow the economy.
Passage of a $15 minimum wage that would be applied strictly to Baltimore City businesses is not one of those strategies.
Donald C. Fry is President & CEO of the Greater Baltimore Committee. He is a frequent contributor to Center Maryland.