Kentucky’s Supreme Court has struck down minimum wage increases passed by Kentucky’s two largest cities, Louisville and Lexington (pdf text of court decision). This will harm low-wage workers in both cities, and I’ll discuss the economics of city minimum wages more below, but I want to start with the legal reasoning used in the court’s decision.
In order to reach their ruling the court had to take a somewhat peculiar view of the purpose of minimum wage laws. The majority argues that Kentucky law does not allow cities to pass laws that prohibit something expressly allowed by state law (this part is clearly correct). However, since minimum wage sets a minimum, not a maximum, states (and other cities, like Seattle) have been allowed to set wages at higher levels than the federal minimum. Thus, the court explicitly acknowledges that it is defending the right of businesses to pay workers wages lower than the Louisville minimum wage ordinance. From the majority opinion:
The ordinance at issue here requires businesses to pay workers a higher wage than the statutory minimum. KRS 337.275(1). In other words, what the statute makes legal, the Ordinance makes illegal, and, thus, prohibits what the statute expressly permits. (p.5)
This rather odd maneuver was also noted in Judge Wright’s dissent:
The statute requires an employer to pay a wage of ‘not less than’ the amount set by statute. This statute was passed to protect workers from being paid a lesser wage. The majority’s view is that the statute expressly permitted the employer to pay the minimum. This reading of the statute requires a view that it was passed to protect the employer. (p. 12)
The majority’s decision to read the statute as protecting employers rather than employees is also fairly clearly a misinterpretation of the state legislators’ intent in passing the minimum wage law. it’s worth noting that KRS 337.395 explicitly says:
Any standards relating to minimum wages, maximum hours, overtime compensation, or other working conditions, in effect under any other law of this state which are more favorable to employees than standards applicable hereunder shall not be deemed to be amended, rescinded or otherwise affected….(p.5).
The majority opinion deems that this only covers standards that existed at the time of KY’s minimum wage law, and thus grandfathers in old ordinances but does not protect new ones. Regardless of whether or not the grandfathering in interpretation is technically correct, this seems to be clear evidence that the intent of the law is to set a floor for employees, and not to guarantee employers access to cheap labor.
The impact of minimum wages on employment is one of the most studied topics in economics. Economic theory suggests that when labor costs more, businesses will buy less of it, and thus unemployment will rise. However, empirical research finds the effect of moderate minimum wage hikes to be either extremely small or nonexistent. This paper from the Center for Economic and Policy Research summarizes the empirical evidence and suggests several possible reasons that the basic economic model is failing in the more complex actual economy. I won’t recap all 11 ways they suggest the economy might adjust to higher minimum wages without shedding employees, but a few notable ones are wage compression (upper management paid less, low-wage labor paid more), reduced staff turnover, better staff, reduced profits, and increase in economic demand (low-wage workers tend to spend all of the additional income from an increased minimum wage). On the potential of increased wages improving employee effort and reducing turnover, the New York Times has an excellent article examining the impact of Walmart’s recent decision to increase wages.
City minimum wage is a newer topic than studies that have focused on national, state, and international comparisons, but it appears to behave the same way. Some of the first cities to pass increases (D.C. in 1993, Santa Fe and San Francisco in 2004) have not seen increases in unemployment. This is not a fully settled topic, as some economists still insist that there must be employment losses, and the ability of empirical analysis to separate the impact of the minimum wage from other factors at play in the economy is imperfect. Nonetheless, we do have enough data to suggest that if there were a large and harmful effect of moderate increases in the minimum wage, we would have seen it – and we haven’t.
Instead, what we see when the minimum wage is increased is workers who are better able to pay for food, rent, clothing, and other economic needs. Raising wages can also help taxpayers by reducing the cost of anti-poverty programs. When the minimum wage isn’t enough to live on, low-wage workers turn to public assistance to survive. The UC Berkeley Labor Center found that in 2013 low-wage labor cost the 152.8 billion in public assistance (3.9 billion in KY, of which 491 million was state money). The court’s decision to strike down the minimum wage ordinances will help businesses and upper management keep a larger share of overall revenue by paying low-wage employees less, but at great cost to both low-wage workers and taxpayers.