Posted by: Josh Lehner | March 7, 2014

Portland City Club: Inequality and Minimum Wage

On Friday, March 7th I will be part of a panel at the Portland City Club on Equal Pay, Income Inequality and the Minimum Wage. In keeping with our office’s nonpartisan, independent position, I will not be advocating for or against any particular policy position. However I will provide information and facts on where Oregon stands in terms of these topics. What follows is the background information I compiled to support my prepared remarks. Warning: This is lengthy and is designed to be more of a reference piece, so I have put the rest below the fold.

.

Minimum Wage and Job Growth

As with most price/wage/tax issues, changes are generally not costless. Raising the minimum wage is no exception, however what is the tradeoff? On net is it a good policy choice? The academic and research literature here is actually pretty clear. The consensus for the impact on employment from raising the minimum wage ranges from small job losses to no statistically significant impact. For those who do keep their job following the increase, they obviously receive an income boost. This is the thrust behind the recent Congressional Budget Office report on the minimum wage: relatively small job losses but also more individuals raised out of poverty.

In terms of the Pacific Northwest economy and growth relative to the rest of the country, it can be difficult to discern an impact due to the higher minimum wages. Oregon consistently ranks well in terms of state GDP and Washington is generally in the Top 20 too. On the employment front, from 2000 through 2013 Washington ranks 15th best among all states while Oregon ranks 25th best. Given the severity of the two business cycles, particularly here in Oregon with our concentration in high-tech manufacturing and the size of the housing booms and bust in places like Bend and Medford, ranking right in the middle of the pack over the past decade or so is not exactly terrible, in a relative sense. On the income front, Oregon’s per capita figure is below average while Washington’s is above. Based on these 10,000 foot view metrics, it is hard to say that the higher minimum wage is holding the states back. The unknown counter-factual is what would growth be in the Northwest with lower minimum wages. Would growth be stronger, weaker or about the same?

Oregon has fared less well if you concentrate on just the Great Recession years as the state fell further than average and has more ground to make up. The states that have fared better in recent years are more broadly tied to the oil and natural gas industries and those that avoided the housing bubble. Those are not generally minimum wage industries and account for less than 1 percent of all minimum wage workers in the U.S. The industries where minimum wages workers are most numerous are retail and leisure and hospitality, accounting for 67 percent across the U.S. These industries are less drivers of business cycles and more followers of business cycles. Furthermore these industries are much more tied to population (growth) and income and consumption patterns.

Income Inequality

In most measures of income inequality, Oregon tends to rank below the U.S. average but right there around the median state. So Oregon is below average but in the middle of the pack.

Inequality_GiniACS

For state level comparisons, one good source that includes historical data as well is Professor Mark W. Frank from Sam Houston State University. He has compiled six different measures of income inequality going back to the 1916. Here you can see that Oregon’s GINI coefficient is typically just a hair under the median state.

Inequality_GINI

Very similar pattern when you look at the share of income going to the Top 10% of the income distribution by state. In recent years, the Top 10% of Oregonians have accounted for 41 percent of income earned, which is largely the same as Washington and the median state.

Inequality_Top10

One reason for Oregon’s relative position is that many of the very high earners are corporate executives and/or are in finance. These are two categories in which Oregon is average or below the national trends. The state is home to two Fortune 500 companies and we lost our one major bank headquarters 10-15 years ago. As such, the states that tend to rank high in these measures of inequality are places like New York, Connecticut, Massachusetts, and California, that do have large headquarter operations and (investment) banking. Other states that rank high include Florida, Texas, Nevada and Wyoming.

Minimum Wage and Businesses

In terms of whether or not businesses in Oregon that rely more on minimum wage workers are better or worse off than their national peers, I went to the Economic Census data along with hours worked by industry from BLS to compare. I first wanted to know if restaurant meals cost more in Oregon than across the nation. As Willamette University’s Fred Thompson recently highlighted, part of the CBO report analyzed whether or not the higher minimum wage would be shifted forward to consumers via higher prices, or shifted backward to owners via lower profits. In that report it was about a 75-25 split in terms of higher prices and lower profits.

The first graph below shows the distribution of sales for limited service restaurants (think fast food or places where you order at the counter) is just a hair higher than the US trends, possibly an indicator that we do pay a bit more locally for our fast food, but not by much if we do. Comparatively, the distribution for full service (think sit down) restaurants is noticeably lower than the US. Is it because Oregonians have lower incomes, so we eat at less expensive restaurants to compensate? Is there something about our local restaurants that are less expensive, like lower profit margins, lower overhead costs, lower food costs? Hard to say exactly, but this pattern is certainly there.

MealCosts07In terms of sales and how the businesses are doing, when breaking down the data by franchise and chains compared with non-franchises, some interesting patterns emerge. First, Oregonians spend just as much on fast food as the average state, so local businesses are not seeing a sub par level of sales. Unfortunately we do not have profit margin or similar metric for this but we do have payroll and employee count so we can roughly gauge labor costs in a relative sense. Payroll as a share of sales at limited service restaurants nationwide is 25 percent while in Oregon and Washington it is 26 percent. However, the average employees per limited service restaurant is a bit lower in the Northwest.

A somewhat similar story emerges for the full service restaurants. Sales per capita for full service chains are a bit lower in the Northwest, but not too much lower. Payroll as a share of sales is higher than for limited service places, at 33 percent nationwide but 35 percent in Oregon. Oregon actually has more employees per restaurant for the franchises, thus indicating a higher proportion of part-time work (more on this later).

What really sets Oregon apart here is the non-franchise full service restaurants. Sales in Oregon and California are considerably higher than the nation or in Washington, although these establishments tend to be smaller, at least as measured by number of employees. I think this speaks more to the local culture than anything else. Oregonians prefer to go to the neighborhood brewpub for dinner than a national chain, as just one example. Oregonians also appear to eat out more than the average American, in these sit-down restaurants, thus trying some of the more numerous places to eat.

FranchiseSales

What this data misses is hours worked per employee. This can be seen in the hit or miss level of employees per establishment above. For this information, one needs to turn to the Bureau of Labor Statistics and their hours worked data. Unfortunately this is only available at the larger leisure and hospitality industry level and not just for restaurants, however this is not really much of a concern for these purposes.

Below I have converted leisure and hospitality employment into full time equivalent positions and then adjusted based on population. This is an interesting pattern and one most would likely expect to see if the higher minimum wage factors into business decisions. If you tax something more, you get less of it, right? Or if something costs more, you get less of it, right? We know from the previous work that individuals on the West Coast spend at least as much on going out to eat, if not more, and have more restaurants per capita than the national average. But once you filter out the higher portion of part-time work, or fewer hours per week, the West Coast actually has fewer employees in these industries than the national average. Is this a concern? That largely rests on your individual viewpoint. To help put this is some perspective, Oregon’s leisure and hospitality FTE count is 2.7 percent below the national average, but the state’s minimum wage is 25 percent above. Additionally the state’s median wage for food preparation and service occupations is 5.5 percent higher as well ($9.60 compared to $9.10 nationwide).

LHS_FTE

Conclusion

All told it can be difficult to find an overall impact on the Northwest economy due to the higher minimum wage as Oregon and Washington tend to outperform the average state in most metrics. Restaurant sales, relative to the population, are average for fast food but above average for sit down places. Given restaurants do not generally charge more than the national average, this likely reflects a cultural preference for going out to eat. However, when adjusting for part-time work, Oregon and the West Coast do have fewer leisure and hospitality jobs, possibility reflecting businesses decisions to keep labor costs under control.


Responses

  1. Josh,

    As always, great post. When I first read this a few weeks a go, I thought of Demand Pull Inflation in Keynesian Economics. Has their been in recent research in the impact of raising the minimum wage on inflation? I would think that initially you would have “too many dollars chasing too few goods”. Prices would rise then eventually reach equilibrium possibly higher on average than they were before.

    Thoughts?


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: