Jun 19, 2018

How DC's Minimum Wage Proposal Could Hurt Those It Seeks to Help

Michael Farren Research Fellow, Study of American Capitalism

The argument over DC's Initiative 77 is a good example of how even the best-intentioned advocates can miss the deeper problems that their suggested policy changes can bring. If DC voters pass Initiative 77 on June 19, it would eliminate the 'tip credit' that permits a lower minimum wage to be paid in service industries, as long as the tips earned at least equal the regular minimum wage. Supporters of this idea argue that some workers fail to make up the difference in tips, or that depending on a variable source of income is stressful. While these arguments are certainly true, their approach generally only considers the benefits and not the costs. The people who will be harmed if Initiative 77 passes are those workers and their families who will have their hours cut (or will never be hired in the first place) as employers implement changes to the production process to re-minimize costs. For example, McDonald's made news recently when it announced that it's moving toward a self-serve kiosk model. 

The broad body of academic research finds that increases to the price of labor via minimum wage increases leads fast food restaurants to pass the increased cost along to customers and to implement cost-cutting measures. The 275 percent increase in the minimum wage for previously-tipped workers proposed in Initiative 77 will be much larger than any previous minimum wage increase, potentially doubling full-service restaurants' total labor costs. This would likely push full-service restaurants to act more like fast-food restaurants in automating orders, drink refills, etc. Customers will have their own dynamic responses to these changes; if the restaurant staff is performing less service for the customers while menu prices have increased to accommodate the higher wages, tips will certainly decrease. And restaurant staff will have their own response to the new paradigm, moving away from the high-quality service culture Americans are familiar with and toward the minimum service standard—or worse—that is prevalent in Europe (which does not have a culture of tipping).

In short, this situation is a perfect example of Frédéric Bastiat's quote: 

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

If people really want to make life easier for working class people in DC, they should focus instead on issues like allowing more housing to be built to decrease the cost of living.

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