In July, eitght years ago, Detroit filed for bankruptcy protection. The US was well into an economic expansion, but the expansion had largely bypassed Detroit. The Detroit area unemployment rate was 9.7%, and the Detroit city rate was 17%, among the highest in the nation. Tax income was not sufficient to pay retirement or current employees. The city was riven by corruption and crime, and attendance in school was dismal, less that 25% in some districts, about 55% as an overall average. Kids no longer saw a value in education. After bankruptcy, things started to improve dramatically.
The largest cause of the problem, and of the solution, in my opinion, was a high Detroit minimum wage that applied before bankruptcy and that was voided by bankruptcy. It was called a “living wage”. In 2013 it was $16/ hour and applied to any business that dealt with the city and did not offer health insurance (see more on the specifics here).The stated purpose was to insure that all workers could support a family of four in some middle-class standard, by one wage-earner working 40 hours per week. It was a view of Detroit family life and economic need that didn’t match Detroit reality. In practice most of Detroit were not 4 person, one wage-earner households. It meant that most Detroiters could not find jobs, since most companies worked in some way with the city. The only workers who could find jobs were those with special skills or political connections. The alternative was criminal business including drug sales, prostitution and burglary. The unemployment rate was 70% among Detroit’s teenagers.
The high minimum wage bought loyalty for Detroit’s political bosses; they gave out jobs for kickbacks, and some went to jail, including the mayor. Most Detroiters could not find jobs, though, and this especially hurt those looking for their first job: the job that would demonstrate that math and spelling were important; that you had to show up on time, dressed clean, and that you were not to insult the customers. High unemployment meant low tax revenue, made worse by high city employment costs for basic services: janitors, secretaries, and mail room personnel. The city was a mess.
When Detroit went bankrupt, among the first changes was to eliminate the $!6/hour living wage for employees and others doing business with the city. This helped bring the city budget into balance, and it brought in residents, businesses, and developers. By January 2020 Detroit’s unemployment rate had fallen to 6%, and Detroit metro unemployment had fallen to 4.2%, the lowest rates on record. Employment gives a motivation to stay in Detroit and to stay in school: there are jobs to be had for those who could add and spell. I covered these improvements here.
Meanwhile, Seattle voted to raise their minimum wage to $15, with the change law taking effect in stages. The law fully came into effect three months ago, in January, 2021. New York voted for similar changes more recently. It is hard to be sure of the effect of the high minimum wage but already it seems to have hit employment. By the latest data, Seattle’s unemployment rate has risen to 6.9%. That’s higher than in Detroit, a real reversal. While unemployment in New York City has yet to rise much, they have seen a drop in rent rates while Detroit has seen a rise. New York’s are also moving to be more out of balance, something that leads to corruption and bankruptcy. We’ll see how this works out.
Robert Buxbaum, March 25, 2021. Among my first blog posts were complaints about Detroit’s high “living wage”, see here for example. As Puerto Rico slid into bankruptcy, I complained about the same thing.