Justice Louis Brandeis argued 84 years ago that a state can “serve as a laboratory, and try novel social and economic experiments.”
That has been true for initiatives such as Oregon’s citizen panels for prioritizing medical treatments under Medicaid during the Clinton Administration or Kansas’ elimination of taxes on most small businesses under Gov. Sam Brownback.
Now, in the movements for a $15 per hour minimum wage and mandatory sick leave benefits for all employees, our Twin Cities are the ones talking about novel experiments. I think Brandeis would approve, but he was practical enough to understand that experiments — and new well-meaning policies — can have untended consequences.
When one jurisdiction adopts a policy that is sharply different from a neighboring jurisdiction, for example, people always respond to the incentives created. A lower drinking age in Wisconsin motivates Minnesota teens to stream to Hudson, Prescott and Lacrosse. Exempt grocery and most clothing purchases from Minnesota sales tax, and Sioux Falls residents will drive east to Luverne or Worthington. Ditto for substantially differing gas taxes in adjacent states. Ditto for Sunday liquor sales. Ditto for somewhat higher salaries for teachers in Minnesota than in South Dakota.
The size of whatever differential applies determines the magnitude of the effect. If a gas tax is only 5 cents higher in one state than another, driving across the state line to gas up isn’t worth the savings for many people. But gas stations just a mile or two into the higher-cost state always will lose some business.
The situation for differing teacher wage scales is a specific example of a common situation. Harvard economist John Kenneth Galbraith was born in a hardscrabble part of Ontario. He said that in the 1930s, Canadian national pride was worth about $5 per week. Whenever wages in Detroit exceeded those in Ontario by that amount, patriotic Canadians decided they could live across the border. Less than that, and they tended to stay put. Similarly, “Polish plumbers” competing with locals in London has become an electoral cliché.
So one can expect that if St. Paul pushes mandatory sick leave for all businesses or Minneapolis adopts a $15-an-hour minimum wage, while suburbs like Vadnais Heights and Richfield do not, large incentives are created instantly. The adjustment will take place over months or even years, but take place it will.
The St. Paul sick leave proposal remains under discussion in City Hall; an attempt to open a St. Paul discussion on a $15 minimum wage fizzled earlier this year. In Minneapolis, the City Council declined to set a city referendum on raising the minimum wage, and now advocacy groups are suing.
Advocates of sharply higher minimums or mandatory sick leave on a municipality-by-municipality basis argue that fairness demands this for every worker and that if the nation or individual states won’t act, then municipalities should on behalf of their working people.
The problem is that all those with jobs in Minneapolis when the minimum statewide is $9 won’t necessarily have a job if the city minimum becomes $15. Some labor-intensive, low-skill-required businesses will move elsewhere or replace workers with machines. A few may close down. A few may move. These are the effects usually cited by opponents of municipal minimums.
Retail businesses like supermarkets can pass these costs along if the change is federal or statewide, and thus all competitors are in the same boat, but it is much harder to do so for a business on Hennepin Avenue, when, for many customers, the distance to an alternative store in St. Louis Park is only a few miles.
A factor that receives less attention is that even if businesses don’t change the number of people they hire, they face a much different and larger pool of applicants when they have to pay $15 and minimum wages don’t change just a few miles away. They will get better-qualified applicants and can be more selective in whom they hire. This tends to work to the disadvantage of the most marginally qualified potential members of the workforce, and these tend to be minority youths. Why hire someone without a high school degree and with poor English or “work readiness skills,” to use a common euphemism, if there are several graduates with good experience from outside the city limits?
The same is generally true for organizations that find jobs for those just out of prison or addiction treatment programs. Those jobs will move to the suburbs or to St. Paul.
But in St. Paul, requiring that sick leave benefits be provided to all workers would have pretty much the same effect as increasing the minimum wage in Minneapolis — an increase in per-hour payroll costs for employers.
Note also that these labor market effects flow both ways. The desire to get positions that offer $15 an hour or paid sick leave will draw workers away from suburbs just as better teaching compensation in Minnesota draws people from South Dakota. The closer South Dakota districts are to the state line, the more they have to meet the competition, and the same will be true for businesses in inner-ring metro-area suburbs. So there will be some benefit to some workers outside the municipalities adopting the sharply higher benefits and some challenges for their employers.
The debate over the employment effects of a minimum wage is an old one that generally considers changes in federal minimums. The general consensus remains that small increases that don’t depart much from market wages have little harmful effect and that whatever harm results is concentrated on the least employable, generally minority youth — generally not those raising families. The jump to $15, whether at the level of a city, state or nation, is not a small jump. Adjusted for inflation, the highest level it has ever been nationally was in 1968, when it hit $11.14 an hour in 2016 dollars.
Democrats have made this part of their national campaign agenda, and pressures for a higher wage are rising in many areas. Increases at state or national levels will mute pressures at local levels and will reduce the sorts of border effects just described. But as long as we have a minimum wage, and I personally think we should, and as long as we regulate other aspects of employer-employee relationships, the details will always be contentious.