Washington, D.C.'s mayor has vetoed the big box minimum wage bill. This is obviously good news.
It seems to me that, even with this veto, the clear first order market response will be for large retailers to think twice about opening new stores in DC. Once they have completed the initial investment in new stores, they will always be one signature away from capricious, targeted hostile legislation from the city government.
So, there is now a new equilibrium within the DC city limits where large scale retail has an unusual amount of uncertainty that adds to long tail risk. This equilibrium will demand a higher return on capital.
This is basically the problem with developing economies, where institutional improvements make capital investments safer, and foreign investment is lured into the growing economy. But, since reversals are possible, and trust requires the passage of time, firms require a higher rate of return. Nations that reverse to poorer institutions will lead to losses for those firms. In nations that continue to improve, the realized returns of the investing firms will appear to be high. Over time, as trust is gained, realized returns will settle to a long term reasonable equilibrium.
This is why it appears that production moves to places with low wages, when production really only moves to places with rising wages. The necessary development of trust creates a lag effect where the higher required returns cause wages to rise more slowly than they would without this long tail risk. So, there is a period of time where firms earn seemingly oversized profits at the expense of lower wages for the laborers in the developing economy. Of course, the profits aren't oversized, they are just the payment received for taking on long tail risk with a binary and unpredictable payoff. This generally calls for a high return, and also tends to produce survivorship bias in hindsight.
The Washington DC situation is the other side of this coin. Novel new risks are being imposed on potential new investment in a city that is part of a nation with decent institutions, so investment into DC retail will slow down. (Or, I should say, will continue to lag the surrounding areas, as poor governance is not new to DC or many other American cities.) The sad result will be that, predictably, in 5 years' time, large scale retailers will be making unusually high profit margins on their few DC properties, and DC wages will be below the surrounding areas. And, just as predictably, there will be activists calling for this situation to be remedied with capricious, targeted hostile legislation.
In a way, the ability of US corporations to earn excess profits by moving production to developing economies is very similar to the well-documented momentum effect on individual US stocks. Markets have a trust-but-verify mentality. Efficiency means that prices fairly quickly react to new information, but not all the way, because the veracity of new information has its own risk distribution, with its own long tail of failure risk.
CEO's don't necessarily even need to model their investment decisions this way. These factors will be built into their assumptions about wage growth and other costs, and their heuristics for how risky each location is. So, they could account for all this and still misunderstand their investment decisions as being the result of moving to places with low wages.
But, it's not the low wages that attract capital. Improving institutions lead to capital investment and increasing wages. That's why most capital flows to high wage countries and why Korea and Taiwan are now among them. That's why low wages aren't drawing capital to Congo, Zimbabwe, and Niger. And, it's why American inner cities lack retail.