Weak Enforcement Will Blunt the Impact of New York's $15 Minimum Wage
Luckily, the state is incapable of administering a potentially disastrous law.
In January, New York City Comptroller Scott Stringer made the case to the State Senate that a $15 minimum wage would be good even for "smaller businesses." He pointed to the example of Brooklyn Brine, "a pickle manufacturer in Sunset Park [that] pays workers at least $16 an hour."
It's telling that an artisanal pickle maker that prides itself on "hand-crafted, non-GMO, Kosher-certified" fare and a "spicy maple bourbon" flavored variety that sells for $10 per jar is Stringer's model small business. Notably, he didn't mention the numerous Ecuadorian restaurants, Chinese dumpling houses, and Mexican coffee shops in the same predominantly immigrant neighborhood.
Indeed, companies like Brooklyn Brine, which sells unique products to an upper-middle-class clientele, will probably do just fine now that the $15 minimum wage is a reality in New York State. (The increase will take full effect in the Big Apple on December 31, 2018.) It's all the other stores and restaurants in Brooklyn's Sunset Park that could theoretically be wiped out.
They probably won't be, however, for a simple reason that neither Stringer nor just about anyone else debating the $15 minimum's impact is talking about: Enforcement is weak.
Ensuring that New York businesses comply with government-mandated wage floors falls primarily to a dysfunctional and understaffed division of the state government. Many businesses don't heed the current $9 minimum; when the rate rises to $15, the ranks of the noncompliant will swell.
The prohibition of low-wage work will destroy lives despite its futility. Some small businesses will attempt to follow the rules and go under; others will find ways to get by with fewer workers. Among the noncompliant, those unlucky enough to get caught will face ruinous fines, and the city's shadow economy will expand.
Yes, the $15 Minimum Wage Is Bad For Small Businesses
First, let's review the evidence that the $15 wage floor poses a mortal threat to many small businesses. In the New York City Metropolitan Area (which incorporates parts of New Jersey and Westchester), occupations with a median hourly wage below $15 include waiter ($10.66), cashier ($9.40), retail salesperson ($10.30), restaurant cook ($12.72), and stock clerk ($10.79). (These figures account for tips.) In other words, restaurants and retail stores, many of which are hand-to-mouth operations, could see a roughly 50 percent increase in their labor costs.
Most vulnerable are immigrant-owned businesses because they tend to open stores, such as nail salons and dry cleaners, with razor-thin profit margins. When you lack proficient language skills or a college degree, running a struggling store or restaurant beats the alternatives—such as working at one.
The impact of the $15 minimum will be amplified by other New York State labor regulations already in place. The "spread of hours" rule dictates that employees who work more than 10 hours per day are entitled to an additional hour of pay thrown in. When a worker puts in more than 40 hours in one week, the hourly minimum jumps to time and a half, which will rise to $22.50.
The $15 minimum will also mean stores and restaurants will have to spend more for their workers compensation insurance, which is based on the size of their payrolls. In addition, thanks to the same law that brought the $15 minimum, by 2021 every New York State businesses will be required to offer 12 weeks of family leave at 67 percent pay. (In a concession to the restaurant industry, the new law will increase the portion of a waiter's wages that can be covered by tips from a fourth to a third of hourly pay, or $5.)
These small businesses can try raising their prices to cover the spike in their labor costs, but depending on how badly customers want what they're selling, sticker shock might lead to falloff in demand and even smaller revenues. There will also be a domino effect in noncompliance: If one retailer flouts the $15 minimum to keep prices down, its competitors will face pressures to follow suit or be undercut.
Even economists who favor the minimum wage worry that New York and California (which just passed a similar law) have gone too far. Princeton's Alan Krueger, former chair of President Obama's Council of Economic Advisors, co-authored a highly influential (though much criticized) 1993 paper arguing that a minimum wage increase from $4.25 to $5.05 didn't destroy jobs at fast food restaurants in New Jersey. Last October, Krueger wrote in the New York Times that the $15 minimum brings us into "unchartered waters" with the "risk of undesirable and unintended consequences."
Wage Laws Are Already Widely Ignored
Many restaurants and retailers already flout state wage and hour laws. A 2008 survey by the National Employment Law Project (NELP) of 1,432 workers in New York City found rampant minimum wage violations particularly in service sector businesses. Seventeen percent of restaurants, 32 percent of grocery stores, and 53 percent of laundry and dry cleaning establishments paid their workers less than the minimum wage. Immigrants, especially those who came to the U.S. illegally, were more than twice as likely to be paid below the state-mandated wage floor than the native-born workers.
When the NELP survey was conducted, the minimum wage was $7.25. Once it reaches $15, businesses will have a far more compelling reason to ignore the state-mandated wage floor.
So what's the risk of getting caught? The government has four ways of rooting out minimum wage scofflaws.
First, the U.S. Department of Labor (USDOL) investigates and sues New York businesses for labor violations. But the agency can only enforce the state-based $15 minimum for overtime hours. With straight time, the USDOL is limited to suing companies for paying less than the federal minimum wage, which is $7.25 hour.
Second, the New York State attorney general's office can prosecute companies for labor violations. But Democrat Eric Schneiderman, who currently holds that office, mainly goes after large companies and government contractors.
A third enforcement mechanism is civil litigation. But enterprising labor attorneys first have to find willing plaintiffs, which can be difficult. Immigrant businesses owners often hire family members or tap into kinship networks. (Under New York State law, even family members must be paid the minimum wage.)
"The employees usually arrive at a mutual agreement with the boss, so I don't think they feel wronged," says Aiming Feng, an accountant based in Sunset Park Brooklyn's bustling Chinatown, who represents restaurants, general contractors, and small retailers in the neighborhood.
When employees do sue and damages are awarded, plaintiffs often struggle to get their money. That was the finding of a 2015 study, Empty Judgments: The Wage Collection Crisis in New York, which concluded that "[m]any workers and lawyers do not even bring claims in the first place because collection seems so unlikely."
A "Do-Nothing" Regulatory Agency
The final way businesses get caught for minimum wage violations is through inspections by the Division of Labor Standards, which is part of the New York State Department of Labor (NYSDOL). But a scathing 2014 audit by the state comptroller found that Labor Standards had just 98 investigators charged with policing the entire state. Each had an unmanageable 95 active cases. The comptroller's report also found that the division uses a custom-built $812,000-computer system that doesn't work.
"It really turned into a do-nothing agency and a patronage dump," says Gerry Reiss, who worked as an investigator with Labor Standards from 1974 to 2004. In 1976, then-New York State Budget Director Peter Goldmark gutted the division, reducing its investigator headcount from 130 to just 60, according to Reiss. He says the agency never fully recovered.
In 2013, Labor Standards took steps to decrease its backlog of 17,191 cases by limiting the scope of its investigations. "It's been getting rid of the backlog by closing older cases, turning some workers away, going back just three years on wage claims instead of six years as allowed by the law, and settling many cases for peanuts," says JoAnn Lum, the executive director of the National Mobilization Against Sweat Shops (NMASS) and an advocate for more stringent minimum wage enforcement.
External factors occasionally force state investigators to target specific industries. Last year, in response to a deeply flawed New York Times expose, Gov. Andrew Cuomo, a Democrat, ordered a crackdown on Korean and Chinese-owned nail salons. Prior to the Times' report, investigators rarely visited nail salons. The resulting sweep found that manicurists, whose services are in high demand, tend to earn more than the minimum wage (which was then $8.75). But many salon owners were still hit with labor violations for their poor bookkeeping practices and for paying workers by the day instead of by the hour, as the law requires.
Still, the nail salon crackdown is the exception. Aiming Feng, the Sunset Park based accountant, says that other than his nail clients he recalls just one instance of a business he works with being investigated by Labor Standards. (That case, which involved a construction job, resulted in a $5,000 settlement.)
Labor Groups Are Fighting for Tougher Enforcement
The enforcement problem is well known among labor groups, who are fighting to change the laws. A coalition of 67 community organizations in New York State called "Securing Wages Earned Against Theft," or SWEAT, has been fighting for passage of a state bill that would make it easier for private plaintiffs to collect on court judgments for back wages. The legislation, which was sponsored by Manhattan Assemblywoman Linda Rosenthal (D-Dist. 67), has a chance of making it through the New York State Assembly, but a companion bill probably won't survive in the GOP-controlled Senate.
Another minimum wage enforcement tactic is requiring businesses to purchase insurance policies against wage and hour lawsuits, which simplifies the collection process. In May 2015, Gov. Cuomo issued an emergency order forcing every nail salon in New York State to hold such a policy. In July of last year, Mayor Bill de Blasio, a Democrat, signed a law imposing a similar mandate on the car wash industry. (The city's law department put a temporary stay on enforcement of the so-called Car Wash Accountability Act after an industry association mounted a strong legal challenge.)
The result is that many nail salons, which are under unusually heavy scrutiny, will probably go out of business thanks to the $15 minimum. Car washes, which are also being closely monitored, will react by playing catch up with the rest of the country and replacing men with machines (as I argue in a feature story in the current issue of Reason's print magazine). Luckily, there's no movement in Albany to extend the insurance mandate to other industries.
Are New York Officials Counting on Weak Enforcement?
New York politicians came out overwhelmingly in favor of the $15 minimum—a necessity since the measure was championed by the state's most powerful labor union—but weak enforcement helps them avoid alienating key constituents.
Which brings us back to New York City Comptroller Scott Stringer. On February 23, he hosted a private roundtable of business leaders from the city's Korean-American community at his office in Manhattan. During the meeting, participants expressed concern about the destructive consequences of a $15 wage floor. According to a source who was present, Stringer assured his guests in thinly veiled language that they didn't have to worry about fines because overall enforcement of the $15 minimum would be weak. ("That's completely false," Stringer's communications director, Eric Sumberg, told me in a phone interview. "Those comments were never made.")
In January, the New York Post accused Stringer of "playing both sides of [the] restaurant minimum wage battle" because he participated in a fundraiser co-hosted by a hospitality industry lobbyist who has opposed the $15 minimum.
Stringer has no direct control over minimum wage enforcement, but other elected officials may see the value of speaking out in favor of a popular law while quietly permitting weak enforcement to help them avoid alienating key constituents. Enacting tough new laws requires new resources. Yet when Gov. Cuomo signed the $15 minimum, he didn't bother allocating extra funds to bulk up the Division of Labor Standards' investigative muscle.
Drawing the Wrong Conclusions
In the meantime, weak enforcement could lead economists and policymakers to draw the wrong conclusions when they study the impact of a $15 minimum in New York City.
Enforcement lapses are hard to quantify; they don't fit neatly into econometric studies. University of California at Irvine Economist David Neumark, co-author of a comprehensive overview of minimum wage research, told me via email that he isn't aware of any studies of the issue that take weak enforcement into account.
The good news is that those predicting catastrophe could be happily proven wrong even though their analysis is sound. Conversely, the minority who claim the $15 minimum will have no negative impact whatsoever (notably U.C. Berkeley's Michael Reich) could be partially vindicated for the wrong reason.
It's not that the state has the power to improve the lot of low-wage workers by fiat; on the contrary, it's government ineptitude that will spare the city's economy the devastating consequences of a foolish law.