Econ 101 | 34justice

The San Jose City Council will soon decide whether to condone corporate greed and poverty-level wages for workers or apply city law to Starbucks and a large developer who want to lease property at the San Jose Convention Center. San Jose would normally require businesses leasing the property to pay employees a living wage, but the City Manager’s Office recommends an exemption for Starbucks and the developer because, among other reasons, the businesses “have indicated to City staff that imposing any wage policy requirements in [their] leases…creates financial and competitive hardships in the operation of their respective businesses.”

The dark irony is that Starbucks, the company claiming “financial hardship,” raked in hundreds of millions of dollars in profits in 2013 in “the best year in [its] 42-year-history” while the absence of wage policies like the one Starbucks is currently trying to circumvent consistently causes families to operate at or near the poverty line. And though Starbucks is unwilling to sacrifice some of an individual store’s profits for the benefit of working families, the company is perfectly happy to sacrifice an individual store’s profits when doing so helps drive out neighborhood coffee shops.

That the San Jose City Council is even considering such a request speaks to the success of corporate think tanks in confusing the public about wage ordinances. Even though the vast majority of recent research shows no downside to minimum wage laws and most economists support minimum wage increases, too many people still buy inaccurate and unsubstantiated claims that wage requirements hurt businesses, reduce available jobs, and must necessarily raise prices for consumers. In addition to bad research, however, standard teaching of mainstream economic theory on price floors is also to blame for the misinformation about minimum wage and living wage laws.

Economist Jim Stanford describes the paradigm taught in most introductory economics classes:

I was taught early on at university that minimum wages screw up an otherwise efficiently-functioning marketplace for labour. You see, there’s a demand curve for labour, and it slopes down. There’s a supply for labour, and it slopes up. The two lines cross in the middle, at the sweet spot where supply equals demand.

Now draw the minimum wage: a horizontal line, positioned above the cross. It’s plain as day. Too much supply, too little demand, too much unemployment. Well meaning but foolish bureaucrats should leave the market alone to perform its autonomous, masterful balancing act.

The story is simple. It’s elegant. And it’s wrong. But you have to progress far beyond Economics 101 to find out why. And in the meantime, that simplistic supply-and-demand diagram gets deeply imprinted on too many impressionable minds.

As Stanford goes on to explain, the model doesn’t apply well to labor markets because supply and demand for labor work a lot differently than supply and demand for goods and services. For example, employers don’t magically require fewer employees the moment wages increase. But even if we pretend the model is accurate, the policy conclusions drawn from it would still be unwarranted. First, the argument that the minimum wage is inefficient is based on a concept called deadweight loss, defined as the overall money that could have been made by both producers and consumers of some good under the free market equilibrium condition (in this case, the condition in which no minimum wage exists). Deadweight loss is essentially meaningless when it comes to assessing the impact a minimum wage policy has on people’s lives. Though it’s rarely discussed, even the deeply flawed, standard economic model generally shows a net increase in the overall money made by workers when a minimum wage is introduced.

Second, and more importantly, the standard model assumes that employers are willing to pay only what they can. In reality, large employers frequently operate with enormous profit margins and award exorbitant compensation to executives. The suggestion that minimum wage laws would force companies to raise prices or lay off workers is an outright lie – most companies can absorb the costs elsewhere quite easily. Starbucks, for example, could hold prices and profits constant and hire over 1000 new workers at San Jose’s living wage by reducing the salaries of its top five executives to the measly total of $2 million a year each.

Opponents of minimum wage and living wage laws want us to believe, despite their faulty model and a large body of research suggesting otherwise, that wage requirements harm the people they’re designed to help. They’re wrong. Minimum wage and living wage laws are quite simply a choice between the welfare of lower-income people and the greed of a wealthy few. So let’s challenge our professors when they falsely portray minimum wage as an economic problem. And let’s hope the San Jose City Council keeps the living wage ordinance intact and strong – developer Don Imwalle and Starbucks can afford to pay their workers enough to make ends meet.

If you’re interested in having an impact on this issue, SumOfUs is circulating a petition asking Starbucks to drop its request; the company has responded to intense public pressure over unethical practices before. You can also find San Jose City Council contact information here.

Update: This article ran on The Left Hook on Tuesday, January 28.

Update 2: The San Jose City Council voted later on Tuesday, January 28 to grant the exemption to Starbucks and Imwalle. Though Ash Kalra, Kansen Chu, Xavier Campos, and Don Rocha voted in the interests of the citizens of San Jose, the rest of the council, led by Chuck Reed, Sam Liccardo, Madison Nguyen, and Rose Herrera, ignored the interests of their constituencies.

Update 3 (6/16): Starbucks apparently denied that they ever asked for the exemption on January 22, 2014, an assertion that is directly contradicted by the city memo that was also linked earlier in this piece.