The Minimum Wage Hurts, and Here’s Why

The Minimum Wage Hurts, and Here’s Why

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Image Source: www.aei.org

Matthew Vitale, Fiscal Policy Contributor

There are currently nine countries in the Organization of Economic Cooperation and Development (OECD) that have a higher minimum wage than the U.S. These countries are: Canada, the United Kingdom, Netherlands, Ireland, New Zealand, Belgium, France, Luxembourg, and Australia. Every 2016 Democratic Presidential candidate endorsed the idea of raising the federal minimum wage. The eventual nominee, Hillary Clinton, made it a part of the Democratic platform for the 2016 election cycle. The left points to Europe as a shining beacon of what a high minimum wage looks like, and many in America have jumped on the bandwagon of raising the Federal minimum wage. Twenty-nine states and the District of Columbiahave higher minimum wages than the federally mandated wage, and many individual cities, such as SeattleLos Angelesand others, do as well. 

However, it is important to note that the higher minimum wage does not have any positive impact on cities or states that enact these policies. Theoretically, such a result is clear. Raising the cost of a firm’s inputs raises the cost of the good as well as the product cost of other firms that make use of that good in their own manufacturing. The increase in prices leads to a decrease in consumption of that good and the other goods that rely on the initial good. That forces businesses either to lay off workers or cut their hours. Usually, a mixture of both strategies are used. The result of all this can be summarized as an increase in prices, a decrease in job growth, and a net decrease in earnings. These results disproportionately impact vulnerable communities, such as students, the elderly, and the poor. Students and the poor rely on low wage jobs as a primary source of income, and many are unable to afford the increase in prices coupled with a cut in hours or the loss of their job altogether. Elderly people and others on fixed incomes are also adversely affected: their purchasing power drops as prices increase, since social security and other government benefits are not inflation-adjusted. 

Proponents of raising the minimum wage often point to a landmark economic paper written by David Card and Alan Krueger in 1994, in which they examined the fast food markets in New Jersey and Pennsylvania over eleven months in 1992. New Jersey raised the minimum wage; Pennsylvania did not. The study found that, after conducting interviews of fast-food restaurant owners in both states, employment in New Jersey did not decrease relative to Pennsylvania. There are several issues with the application of that study on a broad level, chief of which is the structure of the study itself. Their method was simply to compare (through telephone and in-person interviews) the employment levels of the two states. It made no effort to examine hard employment data, instead relying solely on interviews of restaurant owners. This reliance on their own data sets created from a decidedly unscientific method creates a significant problem: it is impossible to know whether those interviewed were being truthful, or even knew enough to intelligently answer the questions asked of them. Such an eschewing of unbiased and indisputable data represents a severe shortcoming in the study’s design. In fact, this type of study is actually designated a “quasi-experiment” by most economists. The next major problem is the scope of the study: it studied only eleven months of one year. Those eleven months during which no change in employment was observed in only one industry are now being used to justify policy changes in drastically different industries under drastically different economic conditions. Furthermore, just because no change in employment was observed does not mean that other aspects of the economy were not affected: no one was fired during those eleven months, but prices of other goods increased--and Card and Krueger documented that. Thus, the rise in New Jersey restaurant workers’ wages did not necessarily translate to an increase in purchasing power, as the goods that those workers purchased were now more expensive. 

A myopic focus on the stability of employment levels in the midst of minimum wage hikes also ignores the other long-term effects of a higher minimum wage. Since the cost of doing business is higher, fewer businesses will open, floundering businesses will shut their doors sooner, and job growth in general will decrease. This is exactly what economists Jonathan Meer and Jeremy West from Texas A&M found after conducting a study of the effects of minimum wages in 2013: the minimum wage reduces job growth. 

The minimum wage does not only reduce job growth, it increases the likelihood of a firm’s exit from the market. It makes sense: a business that is already close to shutting its doors may make the decision to simply close for good after an increase in input cost like a minimum wage increase. Again, this disproportionately impacts lower-quality restaurants and the poor. A Harvard Business School studyconducted by Dara Lee Luca and Michael Luca in April 2017 found that for every $1 increase in the minimum wage, the likelihood of a median-quality (3.5 star) restaurant closing increases 14 percent. While the minimum wage has “no discernible impact” on five-star restaurants, most restaurants are not five stars. The closure of businesses due to the minimum wage increase leaves even more people without a job, and forces more people onto government welfare. In addition, Luca and Luca found that increases in the minimum wage “deter entry” into the restaurant industry. Not only are people forced out of their jobs when a restaurant closes, but there may not be a new restaurant for suddenly unemployed workers to find employment. 

Progressive leaders continue the misguided practice of raising minimum wages to this day, and nowhere are the results more clear than the City of Seattle. In April 2015, Mayor Ed Murray signed legislation to raise the minimum wage to $15 per hour in a series of staggered increases. Currently the minimum wage is at $13, on its way to the ultimate and destructive goal of $15. Recently, a team of six economists from the University of Washington found that the minimum wage increase actually resulted in a net loss of earnings for low-wage workers of $125 per month. This is without factoring in the impending wage increase from $13 to $15 per hour, which will further exacerbate the losses. The very groups progressives endeavor to help through legislation like this are made worse off. 

Progressives and leftists will continue to introduce legislation to raise the minimum wage, no matter how conclusive the data against such policies become. They have a poor relationship with facts, but the facts are conclusive. There is no benefit to raising the minimum wage. 

Follow this author on Twitter @MatthewVitale_

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