Issues & Insights

The Minimum Wage: Separating Myth from Fact

Fast food workers strike for $15 minimum wage. Photo: Fibonacci Blue, licensed under the Creative Commons Attribution 2.0 Generic license (https://creativecommons.org/licenses/by/2.0/deed.en).

Before taking office on January 20th, President Joe Biden released several economic policy ideas. Among them is a plan to more than double the federal minimum wage, from $7.25 to $15 per hour. While the policy idea is well-intentioned, unfortunately for American workers and small businesses, raising the federal minimum wage to $15 per hour would destroy opportunity for millions. Moreover, a one-size-fits-all federal wage would severely increase these economic problems for wide swaths of rural America and states with low costs of living.

A $15 per hour minimum wage would force many employers to cut hours, reduce available positions or even consider substitutes to physical labor such as automation. When Seattle raised its minimum wage to $15 per hour in 2014, hours worked declined and businesses began searching for and implementing alternatives to employment, like automated kiosks. As economist Adam Millsap points out, the costs of the increased minimum wage might be more easily absorbed by large firms who have the capital to install expensive items such as those automated kiosks.

However, small businesses and start-ups, such as food trucks, would be much less likely to survive. Often overlooked is the 600% increase in the minimum wage for tipped employees – striking a crushing blow to mom-and-pop restaurants across America who have already been decimated by the COVID-19 pandemic and economic shutdowns.

The Congressional Budget Office (CBO) finds raising the federal minimum wage to $15 per hour and removing the exemption for tipped employees could cause as many as 3.7 million Americans to lose their jobs. It is worth noting that the CBO estimates were produced during the pre-pandemic economic boom, so the reality is these numbers could certainly underestimate potential job losses. 

Worse yet, entry-level workers would be the first to lose their jobs. In testimony to the U.S. House Subcommittee on Workforce, Empowerment and Government Programs, Professor Craig Garthwaite stressed “The most damaging effect is the fact that job loss is concentrated on the least skilled employees — the very individuals that supporters of a minimum wage increase are attempting to help.” Seattle’s case found a similar result to Professor Garthwaite’s testimony. The workers most hurt by the $15 minimum wage were low-skilled, entry-level workers.

Structural unemployment caused by a minimum wage has long-term consequences as well. Entry-level jobs tend to have lower wages but are crucial for the development of skills in the workplace, such as working amicably with co-workers, providing good customer service, and even essential skills as simple as showing up on time. Employees with these skills are increasingly desirable, according to a survey of clients at Express Employment Professionals — one of the largest staffing agencies in America. An Employment Policies Institute report found entry-level work that generates these skills translated into a wage gap between those who began working early on and those who did not. A $15 per hour minimum wage would prevent many entry-level workers from developing highly desirable skills, thereby trapping many workers in a status quo with a lack of upward mobility.

Since states can determine their own minimum wage in excess of the current $7.25 per hour federal minimum, examining state economic data “from our 50 laboratories of democracy” can provide insight into what the federal economy might experience if the federal minimum wage is increased to $15 per hour. A higher minimum wage appears to have no correlation with real wage growth in state economies. In fact, of the 10 states with the fastest-growing wages, four do not add anything to the $7.25 per hour federal minimum.  And, of the 10 states with the fastest-growing job markets, five have $7.25 per hour minimum wages.

Including the minimum wage as an aspect of COVID-19 pandemic relief is window dressing for progressive politics. As of 2018, according to the Bureau of Labor Statistics, only 2.1% of hourly paid workers earned at or below the $7.25 federal minimum wage. This is significantly less than the 13.4% of hourly paid workers earning at or below the federal minimum wage in 1979. Second, minimum wage earners are overwhelmingly young: 68% are 24 years old or younger. Finally, many of these workers are part-time. Only 43% of minimum wage employees work more than 35 hours per week. Very few workers earn the federal minimum wage, and less than half of those workers work full time. Plus, since 2016, real wages have grown every year absent an increase in the federal minimum wage.

President Biden is correct to look at ideas that will help Americans during the COVID-19 pandemic. But raising the minimum wage actually harms small businesses and Americans struggling with unemployment. Rather than enacting policies that erode employment and opportunity, President Biden should focus on ways to help businesses and workers discouraged by the state of America’s economy. Considering the fragile state of America’s job market, relying on the blunt tool of a federal minimum wage would be economically damaging.

Jonathan Williams is the executive vice president of policy and chief economist at the American Legislative Exchange Council. Follow him on Twitter @taxeconomist. Skip Estes is associate director of the ALEC Center for State Fiscal Reform.

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3 comments

  • Higher wage earners are rejoicing as the impact on their wages will be fantastic in the next 10 to 20 years. Our elected officials never look at the unintended consequences that higher wages for everyone will benefit the rich more than those on minimum wage.

    The new minimum wage crusade will result in ALL wages increasing. Cost Of Living Adjustments (COLA) to wages favors the well paid: For example: a 3% COLA adjustment for someone making $100K will result in their compensation being almost $135K in 10 years (a $35K gain), but for someone making $30K, their compensation will be $40K in 10 years (a 10K gain). The unintended consequence of raising the minimum wage would be $25K more for the well compensated as the financially challenged continue to fall further behind.

    Throwing money as a band aid to cover the rising costs for everyone buys votes for reelection, but does not heal the wound of WHY the costs are rising.

  • All you need to know is that these ideas are being put forth by people who have never run a business, never had to meet a payroll and never had to pay themselves last.

  • “While the policy idea is well-intentioned…”

    If I hear / read the term “well-intentioned” any more I can not legally be held responsible for my actions.

    BTW, I still have shares in “Good Intentions Paving and Handbasket LLC” available if anyone wants them.

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