Seattle’s minimum wage experiment and the long-term health of labor

There’s been a lot of speculation about whether Seattle’s new $15 minimum wage is the leading edge of progress for labor or a doomed attempt to rewrite the laws of economics. The argument in favor of that high minimum wage is that the federal and state minimum wages are no longer living wages; if the minimum wage had kept pace with inflation since the 1960s, according to one estimate, it would now be $21.72/hr. So in order to provide people at the bottom end of the wage scale with a living wage, we need a radically larger minimum wage, and compared to where we ought to be, $15/hr is a relative bargain.

The argument against the Seattle plan is that any upward adjustment of the minimum wage can result in lower employment, because employers will hire fewer workers in order to adjust to the increased labor cost. A radical increase, then, is likely to throw the labor market into turmoil, as businesses that can reduce staff will do so, while businesses that can’t are likely to fail, putting their workers out of work.

Of course, that economic argument is an inherently empirical one, and it remains to be seen whether the parade of horribles occurs in Seattle. (The new law takes effect April 1.) There is a good deal of empirical evidence suggesting that modest, predictable increases in minimum wages do not meaningfully decrease employment. Employers can respond to minimum wage increases with decreases in other labor costs (like benefits) or by innovating to improve per-worker efficiency, so that the higher wages do not result in diminished profits. Workers themselves may also respond to the psychological boost of higher wages by working harder or taking greater responsibility at work.

Still, I’m inclined to think there could be some disruption. Businesses can adjust to small changes more readily than they can adjust to large ones, and as Seattle magazine explains, the new minimum wage will create significant additional labor costs that at least some Seattle businesses may not be prepared to absorb:

Washington Restaurant Association’s Anton puts it this way: “It’s not a political problem; it’s a math problem.”

He estimates that a common budget breakdown among sustaining Seattle restaurants so far has been the following: 36 percent of funds are devoted to labor, 30 percent to food costs and 30 percent go to everything else (all other operational costs). The remaining 4 percent has been the profit margin, and as a result, in a $700,000 restaurant, he estimates that the average restauranteur in Seattle has been making $28,000 a year.

With the minimum wage spike, however, he says that if restaurant owners made no changes, the labor cost in quick service restaurants would rise to 42 percent and in full service restaurants to 47 percent.

“Everyone is looking at the model right now, asking how do we do math?” he says. “Every operator I’m talking to is in panic mode, trying to figure out what the new world will look like.” Regarding amount of labor, at 14 employees, a Washington restaurant already averages three fewer workers than the national restaurant average (17 employees). Anton anticipates customers will definitely be tested with new menu prices and more. “Seattle is the first city in this thing and everyone’s watching, asking how is this going to change?”

Moreover, while restaurants are largely stuck where they are, other minimum-wage or minimum-wage-adjacent businesses, like so-called “light industrial” and warehouse businesses, might decide that it would be worth it to move outside the Seattle city limits. (The Washington state minimum wage is $9.47, or about 63% of the new Seattle wage.)

(UPDATE: A friend on Facebook pointed me to this article noting that the new minimum wage won’t be fully phased in for seven years. It will only rise to $11/hr in April, with the $15 minimum phased on graduated schedules depending on the size of the employer. That suggests that the adjustment will be less than apocalyptic, though, again, we’ll have to to wait and see.)

Of course, minimum wage laws are not the only way to better the condition of workers, and arguably they aren’t even the best way. It’s not so much that they do a lot of harm as it is that they are inflexible and don’t really put workers in the driver’s seat. (Or even the co-pilot’s chair.)

In the United States, labor unions are comparatively weak (and often viewed with suspicion), and our public debates about improving the lot of labor tend to revolve around how states and the federal government can legislate benefits for workers, including minimum wage laws, health care benefits, and our publicly-funded pension system (Social Security plus various public employee pensions).

But these legislative solutions are, necessarily, one-size-fits-all. Although unions are often involved in lobbying for labor-related laws, such laws are inherently less flexible and less customizable to the specific market conditions in a particular industry (or for a particular business) than collective bargaining agreements. Moreover, collective bargaining (if backed by a legal framework putting unions on a strong footing) allows workers a powerful direct voice in setting their own pay and benefits, rather than filtering it through the biases and political agendas of legislators. Finally, by allowing wages and benefits to periodically rise and fall with the fortunes of a given firm or industry, the collective bargaining process injects actual market information into the setting of labor conditions. This allows workers to decide for themselves whether they are willing to risk the fallout of, say, competition from foreign labor or higher materials prices. (Obviously, wages differentials also encourage, over time, worker migration toward better-paying industries, which might allow for a more efficient deployment of labor to where it is needed in the economy.)

Some OECD countries rely mostly or entirely on collective bargaining and a strong union presence rather than minimum wage laws. Austria, for example, has no minimum wage law at all, and neither does Iceland; minimums are set by collective bargaining. Germany used to run on the same system and still has very strong, well-integrated unions, although it recently adopted a minimum wage law. And Australia has a minimum wage, but only to cover workers who are not covered by a collective bargaining agreement or an arbitrated wage settlement.

Finally, it is not actually clear that we always need to have an adversarial split between management/capital and labor. It is perfectly possible for workers to own and manage their own businesses — a point made frequently by economist Richard Wolff, who argues that democracy in the public sphere is incomplete and ineffective without democracy in the workplace. There are, in fact, a number of successful, real-world examples of worker-owned (and/or worker-managed) enterprises: the Mondragon Cooperative in Spain, Publix supermarkets and Bob’s Red Mill Natural Foods in the United States, and the “empresas recuperadas” movement in Argentina.

Closer to home for me, there is another well-known form of “workers’ self-directed enterprise,” (“WSDE”) as Wolff calls them — the law firm. While law firms vary greatly in their governance structures, some are quite democratic in nature, voting on major business decisions, new partner hires, and compensation. Of course, the law firm is not a perfect democracy: non-lawyer workers like paralegals and assistants, and even junior lawyers, are generally not included in the voting and get a flat salary rather than a share of the profits. Still, the law firm is an example of a well-known type of worker-owned cooperative, and some small-to-medium-sized law firms may come tolerably close to an ideal of labor-democratic decisionmaking in action.

This interesting study notes that law firms tend to lose their democratic, collegial flavor as they scale up:

The adverse effects of increasing size on democratic forms of organization have often been observed. Waters, for example, has argued that collegial structures are not well suited to the “minutiae of purchasing, personnel management, accounting and so on”, and that exigencies of size, therefore, lead to the dominance of bureaucracy even in organizations of professionals. Problems of management associated with increasing firm size, and particularly the problem of maintaining collegial relations, are often explicitly acknowledged by members of large law firms; however, such problems are treated as necessary tradeoffs for higher levels of profitability.

Still, the same study’s figures show that in 26% of firms studied all partners vote on compensation, and in 61% all partners vote on promotions.

Wolff anticipates that other kinds of WSDE’s will similarly struggle to maintain their democratic flavor as they scale up and argues that the development of the capitalist firm provides useful parallels:

Capitalism when it emerges in Europe in the 17th century it begins always in very small enterprises. A family with one or two employees, a small business with three or four hired men or women, and so on. It takes centuries for the capitalist enterprise that began always as very small to figure out how to become larger. In the process of going from smaller to larger many companies collapsed, they couldn’t navigate that transition.

Big changes had to be made by those who manage. For example, they had to stop being enterprises owned and operated by a family. It had to make a very difficult transition to an enterprise that’s owned by thousands, or maybe even millions, of people. Each of whom had bought shares, on the stock market, of a company. This allowed the company to collect large amounts of money and thereby to become big, but in the process the growth to something big really transformed the enterprise from the small family capitalist enterprise to the modern corporation that we take for granted now. Why do I tell you this? Because the worker’s self directed enterprise, the worker co-ops, have had exactly the same kind of parallel evolution. They generally start small.

A group of doctors begin to set themselves up as a co-op. A group of software engineers. A group of workers at a coffee shop restaurant. Whatever it is, they usually start small. Five, ten, twenty, thirty, that kind of thing. And if they’re successful then they grow, and when they grow the have problems of growth. How to handle it. How to preserve the collective, democratic, decision making that was their raison d’etre to begin with. In the days of the daunting demands of growth to large size.

Nonetheless, he argues, WSDE’s can rise to the challenge, especially by banding together to provide, e.g., R&D facilities and even an investment banking system:

[T]he bank, the pension system, the laboratories, these are all ways that the Mondragon corporation found it could achieve bigness, take care of more and more people, by a kind of community of relationships which the encompassed under their corporate umbrella. And the proof of the pudding is they’re the seventh largest corporation in all of Spain. They have managed the transition while all of their member co-ops continue to be run as worker’s self directed enterprises.

To return to the original point, then: which is ultimately better: an inflexible minimum wage law imposed uniformly by the state, or workers democratically deciding how to run their own business, including setting wages for themselves? That’s not to say you can’t have both, of course, if that’s what’s needed. But it is to say that the minimum wage alone is probably not the answer for the long-term woes of American labor, and regardless of how Seattle’s experiment turns out, we should probably be trying to imagine more fundamental changes in how human enterprise is organized.

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