Another Go at Raising the Minimum Wage?

Posted on by Rik W. Hafer

Mayor Slay of Saint Louis announced that his administration will back a proposal to increase the city’s minimum wage. The proposal is to immediately raise the city’s minimum wage to $10 an hour, a 31 percent increase over the current state minimum of $7.65. Then the wage would be increased by annual increments of $1.25 until it reaches $15 in 2020.

Scholars and analysts at the Show-Me Institute have written extensively on this topic, arguing that raising the minimum wage is not good policy. That is still the case, since the fundamentals of economic theory have not changed.

Instead of reading another installment from me, I’ll defer to Christina Romer, former chair of President Obama’s Council of Economic Advisers. Here is what she wrote in the New York Times about her former boss’s proposal to raise the federal minimum wage back in early 2013.

There is a belief that the lack of competition fosters a lower wage. Romer writes, “I suspect that few people, including economists, find this argument compelling today. Company towns are a thing of the past.” In the end, “Robust competition is a powerful force to ensure that workers are paid what they contribute to their employer’s bottom line.”

Some see using the minimum wage as an anti-poverty tool. “Most arguments for instituting or raising a minimum wage are based on fairness and redistribution,” she notes. But contrary to this view she rightly observes that “It’s precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families.” Instead, like anyone else committed to really helping the poor, Romer advocates using the existing tax system. The earned-income tax credit “is very well targeted—the subsidy goes only to poor families—and could easily be made more generous.”

“So where does all this leave us?” she asks. Her reply is that “the economics of the minimum wage are complicated and it is far from obvious what an increase would accomplish.”

What Romer believed in 2013 is still true today, and it applies whether one is talking about federal or city minimum wages. Imposing minimum wages is just bad economics and misguided policy that does not help the most needy.

KC Convention Hotel Estimates Are Notoriously Wrong

Posted on by Patrick Tuohey

Right now, leaders in Kansas City, Missouri, are eager to build a convention hotel downtown. But there is precious little information available. We know that the city has been negotiating for years with developers to build a $300 million 800-room hotel. It appears to be a 50-50 split, with $150 million coming from private investors and the remaining half will be supported by city outlays, tax abatements, and other subsides.

While we wait for hotel cost estimates and earnings projections, it is worth reflecting on previous convention hotel efforts in and around downtown. Hotel consultants have provided inflated estimates in the past.

Overland Park: Projections for their convention hotel were off by about 40 percent. A June 2010 issue of The Pitch published:

Original projections called for Overland Park’s convention hotel to earn more than $110 per available room. Actual number: $67.50.

Kansas City, MO: In 2009, when Kansas City was considering a convention hotel, the hired consultant, HVS, estimated that the average daily rate (ADR) for hotels in Kansas City in 2016 was going to be $162.72. Today it is $121.37, far short of the projection.

Kansas City, KS: The Pitch also reported on the money pit that is the Hilton Garden Inn:

The [Unified Government] hired a consultant to project how much money the hotel would make when it applied for the HUD loan in 1999. The consultant predicted that by 2005 the Hilton Garden Inn would hit $3 million from room revenues alone. Actual financial records show that the hotel has stooped below that $3 million figure. In 2006, the hotel reported only $2.2 million in room revenues. The hotel itself has always operated at a loss, and every independent audit of the hotel project since 2006 has sounded the same warning: The Hilton Garden Inn is a money loser and can’t stay afloat without subsidies from its owners.

It appears earnings projections run about 25-40 percent higher than reality. That is quite a margin of error. As we consider a downtown convention hotel, we must keep in mind that projections are rarely met.

Minimum Wage Increases Not Effective at Fighting Poverty

Posted on by Patrick Tuohey

Should Kansas City double the minimum wage from $7.50 to $15 an hour? Local politicians all seem to think so. Councilman Jermaine Reed introduced an ordinance to that effect, and Mayor Sly James has attended a rally in support of the higher wages. Though so far, there is no plan to actually vote on the matter. This is an important issue, and it’s reasonable to look at the likely impacts of the policy before jumping in.

Despite intentions, increases to the minimum wage do not necessarily help the poor. Even Christina Romer, who led President Obama’s Council of Economic Advisors, openly conceded there were questions about “whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty.”

The reasons why are simple. First, most minimum wage earners don’t actually live in poverty. Two-thirds come from households making at or above 150 percent of the poverty line; 44 percent live in households whose income is three times the poverty level. From the viewpoint of earners, raising the minimum wage is a clumsy tool and is more likely to benefit the non-poor than the poor.

Second, the number of people paid the minimum is not especially high. Today, less than 5 percent of hourly workers are paid minimum wage. Among all U.S. workers, minimum wage employees constitute just 3 percent of the American workforce. Not only are relatively few people being paid the minimum technically living in poverty, but relatively few people are being paid the minimum at all. Targeting low-wage workers is not the same as helping low-income families.

Third, and most important, there is a wealth of economic analysis that shows minimum wage laws punish the very people they are supposed to help—making it harder for people with few skills or work experience to find entry-level jobs. The Congressional Budget Office estimated that a national minimum wage increase to $10 per hour would reduce available jobs by 500,000. Doubling the minimum wage in Kansas City from $7.50 to $15 would have even more dramatic results here. The reason for this is simple: As labor costs rise, employers may turn to cheaper technological substitutes, cut employees, or have employees work fewer hours. This trend is already occurring in grocery stores and restaurants.

As workers have to compete for fewer entry-level jobs, those with the fewest skills are left behind. A study by the University of California, San Diego found that increasing the minimum wage reduced the earnings potential of low-skilled workers whom the higher minimum wage was meant to help by limiting job opportunities. These workers need entry-level jobs that enable them to develop skills and gain experience.

As a compassionate people, we are eager to promote policies that help alleviate poverty. We do not succeed by making jobs more scarce, which is what would happen if Kansas City enacted a “living wage.”

 

Highway Funding: “When You Start Talking $160 Million, There’s an Incentive to Do Something”

Posted on by Joseph Miller

State Senators Bob Onder and Joseph Keaveny discussed the results of the 2015 legislative session at a recent Show-Me Institute Policy Breakfast. Highway funding in Missouri was a major topic. The senators expressed a couple of views that are fortunately becoming more and more the consensus among policymakers: 1. Something will have to be done soon, and probably next year; 2. The solution will likely be some type of fuel tax increase or tolling.

Watch the senators handle questions on transportation funding in the video below:

Light Rail Light on Riders in Saint Louis

Posted on by Joseph Miller

With Saint Louis County spending $1 million to study possible MetroLink expansion, light rail proponents are out trying to gin up support for new routes. We’ve been skeptical of light rail expansion in the past, especially given the large (in this case billion-dollar) price tag. But light rail proponents are undaunted by cost and argue that MetroLink is worth every penny. How do they argue this, when MetroLink loses nearly four dollars (not counting capital costs) for every passenger that steps on board? According to proponents, MetroLink is one of the best light rail systems out there. As the Post-Dispatch reported:

[Executive Director of Citizens for Modern Transit Kimberly] Cella cites studies that name MetroLink percentage-wise among the most utilized light rail corridors in the U.S.

Calling MetroLink one of the most utilized light rail lines could be considered damning with faint praise. However, the compliment itself does not appear to be correct. A quick look at data from the National Transit Database contradicts the idea that MetroLink is a particularly successful light rail line.

Of 21 reporting light rail systems, MetroLink ranked ninth in terms of passenger trips in 2013. Of course, those systems vary in their total mileage and level of service, so a better measure of utilization is passenger miles or passenger trips divided by total vehicle revenue miles (VRM), a proxy for total service provided. By those measures, MetroLink ranks eighth for passenger mile per VRM (24.6) and 19th for passenger trips per VRM (2.7).

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From this data, we can see that large, dense cities tend to have the highest rate of ridership given the level of service provided. The best term to describe MetroLink utilization is middling.

Interestingly, utilization was much higher before MetroLink expanded in the early and mid-2000s.

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When MetroLink only had the initial line from the airport to just across the river, it may have been true that the system had among the highest utilization rates of any light rail system. But after MetroLink expanded further into Illinois and again to Shrewsbury, utilization rates fell substantially. The reason for this is obvious: The route with the highest ridership potential was built first, with secondary options being built secondarily. Later routes, with fewer riders at a given level of service, drag down the entire system’s average.

In reality, MetroLink does not stand out among light rail systems in terms of ridership. Furthermore, adding new lines in Saint Louis County are likely to have even less ridership potential than existing routes, due to lower population density and higher car ownership. And since fewer people per train means higher subsidies per train, new lines will likely require higher subsidies and carry fewer riders. Residents should think carefully about whether Metro should, or even can, take on the extra burden.

Saint Louis to Spend $1 Million on MetroLink Expansion Study

Posted on by Joseph Miller

metroRecently, Saint Louis County announced that it would spend around $1 million to “study” whether the region should commit money toward an expansion of the MetroLink system. The money for this study comes primarily from Proposition A, the primary purpose of which was to raise money to keep buses running in Saint Louis County. The study will look at three possible corridors, one running from Clayton to Westport, one running from Lambert Airport to Florissant, and one running from Shrewsbury to Butler Hill. Given the recent push to build a North-South MetroLink line from Florissant to Butler Hill (running through downtown), it appears that the end goal could be a giant light rail loop around the Saint Louis area.

Unfortunately, expanding MetroLink in this way will easily exceed a billion dollars, and when one considers that a billion-dollar North-South MetroLink line will likely precede these county-specific projects (and need to precede routes to Florissant and Butler Hill), we are talking multibillion-dollar funding requirements.

But too often, costs like these do not daunt regional planners. The results most often conclude that any rail expansion plan would have positive benefits; just some routes are more positive than others and should be built first. We should not be surprised if that is the case with this study as well. However, as so much money is being spent, I propose the following questions the study could address:

  1. How might the bus system in Saint Louis City and County be improved for $1 billion to $2 billion? How much money are we proposing to spend per new transit user?
  2. Given the higher-than-expected costs and lower-than-expected usage of the Shrewsbury MetroLink line, does it make sense to extend the MetroLink into areas of the county that predict for even less demand for public transportation?
  3. Do planners expect transit-spurred economic development, given the distinct lack of economic development surrounding most existing MetroLink stations in Saint Louis?

And last . . .

  1. How exactly will $1 million be spent on this study? Itemization is encouraged.
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