Minimum wage rises, to Chicago's lasting benefit

New study finds fears about unemployment, effect on business unfounded

Chicago aldermen join activists calling for a $15 minimum wage in 2014. (One Illinois/Ted Cox)

Chicago aldermen join activists calling for a $15 minimum wage in 2014. (One Illinois/Ted Cox)

By Ted Cox

As Chicago's minimum wage rises again this month on the way to reaching $13 an hour next year, a new study shows it has had its intended effect of raising salaries without dragging on local businesses.

"The Effects of the Chicago Minimum Wage Ordinance: Higher Incomes With Little to No Impact on Employment, Hours, and Businesses in the First Two Years" is a new study released Friday by the Illinois Economic Policy Institute and the Project for Middle Class Renewal at the University of Illinois at Urbana-Champaign.

"Overall, the higher minimum wage has been associated with an increase in worker incomes but little to no impact on employment or the number of private business establishments," the study found.

Chicago aldermen voted overwhelmingly 44-5 at the end of 2014 to impose graduated increases in the city's minimum wage. In the first two years, it rose to $10 then $10.50, and increased to $12 an hour just this week. The study found that, in the first two years, worker incomes rose across the board 2.5 percent, while hours worked actually declined 1 percent. The hike in the minimum wage had "no impact on either the unemployment rate or the growth of private business establishments in the city."

Critics had insisted the higher minimum wage would actually cut jobs and prove to be a drag on small businesses.

Just last summer, Gov. Bruce Rauner cited those arguments in vetoing a bill that had cleared the General Assembly which would have raised the state's minimum wage to $15 by 2022. Before he took office, he said the issue was about "competitiveness."

"Raising the minimum wage doesn't help somebody who's unemployed," Rauner said. "We do not want to end up increasing unemployment in the City of Chicago."

The study found no evidence of those potential pitfalls.

"Chicago’s minimum wage increase is largely working as intended, and has directly benefited more than a quarter of the city’s workforce,” said study co-author and ILEPI Policy Director Frank Manzo IV. “The data show that Chicago is producing higher incomes, less income inequality, and modest business and employment growth that is commensurate with neighboring communities that made no change to their local minimum wage policies."

The study made a point of comparing Chicago to the suburbs, where the state minimum wage remained at $8.25, as well as the Indiana and Wisconsin communities in the greater metropolitan area, where it was $7.25.

"As minimum wages in Chicago have increased, private-sector business growth has kept pace — and in some cases even exceeded — that of suburbs where the minimum wage didn’t change,” added study co-author Robert Habans of the University of Illinois. “In fact, the unemployment rate actually dropped more in Chicago than the surrounding suburbs, which suggests that higher wages for low-income workers helped stimulate job creation across the local economy through increases in consumer spending."

As minimum wages in Chicago have increased, private-sector business growth has kept pace — and in some cases even exceeded — that of suburbs where the minimum wage didn’t change.
— Robert Habans, University of Illinois at Urbana Champaign

"By increasing its minimum wage, the City of Chicago is helping more low-income households keep up with the rising cost of living,” said co-author Robert Bruno, director of the university's Project for Middle Class Renewal. “But this also underscores the fact that low-income workers in other parts of Illinois, Indiana, and Wisconsin are falling further behind."

The across-the-board wage increase proved true for both low-paid workers, who saw a 2.7 percent increase, and for those earning mid-range salaries, who saw a 2.3 percent increase. The increase held in the private sector, where wages rose 2.4 percent, but was especially noticeable in the public sector, where they rose 3.4 percent, and at nonprofits, where wages rose 5.2 percent.

Some critics of the minimum wage, like University of Chicago economist Allen Sanderson, have suggested an increase would hurt entry-level workers, but the study actually found a "higher demand for teens because employers can pay them $.50 below the state minimum wage."

The study found that, as expected, low-wage workers were more likely to put that money right back into the local economy through spending, and not simply pocket it or put it into savings, "which indirectly created new jobs and offset any direct negative impact on employment."

The study found that the increase in the minimum wage raised pay for more than 330,000 Chicago workers in low-paying jobs, by more than 10 percent for those in service industries like nail salons and car washes, 6.1 percent in cleaning and maintenance, 5.3 percent in transportation and warehousing, and 3.3 percent in administration for clerks and secretaries.

Thus, the study urged that increased wages should be expanded to other workers, including teens, and that suburbs should opt into the similar Cook County Minimum Wage Ordinance while the state likewise hikes its minimum wage.

"Ultimately, our research confirms what the vast majority of prior studies on this topic have already concluded — that incremental increases in the minimum wage are good for workers and do not pose a threat either to businesses or the broader economy,” Manzo, Habans, and Bruno concluded. “We have also shown that more increases are justified to ensure that the most vulnerable workers in our economy retain the purchasing power they need to be able to support their families and contribute to their communities."