An imagined Q&A between the Mayor of Seattle and a local reporter about inequality In Seattle

Reporter:     Mayor Murray, you've established an

                    Inequality Committee to consider a 

                    $15/hour minimum wage in Seattle.

Mayor:        Yes, that's right.  We’re determined to reduce the excessive inequalities of wealth and income in Seattle.

Reporter:     Well, if you’re really serious about reducing inequality, then why is the Seattle City Employees’ Retirement System planning to triple its investment in Private Equity?

Mayor:        Private Equity?  You mean the sort of thing Mitt Romney was involved in?

Reporter:     Yes, it's the province of the very wealthy, and Private Equity investors enjoy one of the most unjust loopholes in the Federal tax code.

Mayor:        Which loophole is that?

Reporter:     It's the so-called "carried interest" loophole that allows Private Equity investors to pay lower tax rates than most Seattle workers pay.  (See here and here).

Mayor:       That is unfair!  But the City of Seattle can't do anything about the Federal tax code.

Reporter:    Well, not directly, but Private Equity firms hire lobbyists to preserve this tax break, and Seattle invests money with these firms. (See here).

Mayor:        OK, I take your point.  But the Seattle Retirement System must act prudently, not politically, when it invests.

Reporter:    Yes, of course, but did you know that the Seattle Retirement System's largest investment in Private Equity, a $20 million bet on a Private Equity firm located in the Cayman Islands, is now worthless? (See here and here).

Mayor:       All investors make mistakes.

Reporter:    Granted, but according to the Retirement System’s own website (here), Seattle's Private Equity investments have underperformed their benchmark by 7.5%/year over the last five years, and by 1.5%/year since April 2007.  And these figures don't even include the high fees charged by Private Equity firms.  

 Mayor:       (Sigh) That's depressing.  Have you talked to the Retirement System's private financial advisors?

Reporter:    Oh, they love Private Equity.  But then they get much higher fees when Seattle invests in actively managed funds like Private Equity.

Mayor:        So, the upshot is that, by getting out of Private Equity, Seattle can make better investments and strike a blow against the unjust tax loopholes that benefit the very rich.

Reporter:     Well, many economists, including several Nobel Prize winners, think so.  (See here).

Mayor:        Maybe I should talk with Councilmember Licata; he's the Chair of the Seattle City Employees’ Retirement Board.

Reporter:    You've both said you wanted to address inequality.

On the $15/Hour Minimum Wage: You Can’t Govern by Rhetoric Alone; Well, You Can, But You Shouldn’t

According to Seattle P-I reporter, Joel Connelly, Kshama Sawant’s speech at the January 12, 2014 Labor Temple rally for a $15/hour minimum wage included the following remarks here:

It is “the nature of capitalism to crush small business . . . capitalism overwhelmingly sets up small business for failure,” Sawant argued.  Addressing the argument that a $15 minimum wage shock might be too much for small business, she added:  “Small business should not be protected on the backs of workers.”

Ms. Sawant’s rhetorical exuberance suggests a “power pyramid” with big corporations at the apex, small business in the middle, and workers at the bottom.  Does it follow from this socio-economic understanding that the $15/hour minimum wage should be applied uniformly and without delay to all businesses, large and small alike?

I’m not sure, but here are a few things to consider. The first is that a $15/hour minimum wage in Seattle would have relatively little effect on the total labor costs of large corporations, which hire labor all over the world.  If a corporation’s Seattle operations accounted for 5% of its total labor cost, and 10% of its Seattle labor force were to get a 50% wage increase, then the corporation’s total labor costs would only increase by 0.25%. 

Now, consider small business.  If a small business is entirely local, then its “Seattle operations” account for 100% of its total labor costs.  And if 10% of its employees were to get a 50% wage increase, then this small business’s total labor costs would increase by 5% (20 times more than the corporation’s labor cost increase!).

Now, if for simplicity, we assume that labor accounts for 100% of all business costs, and that all businesses raise their prices in proportion to their increased labor costs, then the goods and services sold by big businesses subject to Seattle’s minimum wage would rise by 0.25%, while the prices charged by small businesses in Seattle would rise by 5%.  All else remaining the same, this increase in “small business prices” relative to “big business prices” would reduce the Seattle market share of small business and increase the Seattle market share of big business.  It’s hard to imagine that Ms. Sawant (or anyone else) would welcome this outcome.

There is, however, at least one countervailing consideration on the other side of the ledger, and it concerns the effect of increased spending that could result from a $15/hour minimum wage.  Since small businesses in Seattle get a much larger share of their total revenue from local sales than large corporations do, and since a substantial part of the increase in wages would be spent in Seattle, small businesses would enjoy a disproportionate share of this increase in sales revenue.

Where does all this leave us?  I’m not really sure, except to say that, when it comes to policymaking, the results of new legislation tend to be more appealing when you’ve thought things through in some detail.  And, on this score, I commend Councilmember Nick Licata for sharing the first of a series of issue papers on the minimum wage here.