May 15, 2017
David W. Kreutzer
The bandwagon for a $15-per-hour minimum wage has run head-on into the laws of economics. It’s pretty much totaled.
Just ask the mayor of Baltimore. Last November, while running for office, she pledged to raise the city’s minimum wage. This March, she did a U-turn. After getting a reality check from local employers, who informed her that they would be unable to compete with businesses in neighboring jurisdictions with lower labor costs, Mayor Catherine Pugh vetoed the City Council’s minimum wage bill.
In nearby uber-liberal Montgomery County, Maryland, the county executive also killed a $15 minimum-wage bill. The Cleveland City Council saw the oncoming headlights and rejected the $15 minimum wage. So did the voters in Portland, Maine.
The dismal truth from the dismal science is that when the price of something goes up, people buy less. The number of workers that a firm will hire at $15 is less than the number they will hire at $7.75.
Typical entry-level employers, like restaurants and discount department stores, operate on very thin margins. When forced to raise their labor costs, they are forced to raise their prices. And their customers, faced with higher prices, wind up buying less. Naturally, when businesses start moving less product, they start using less labor.
Some firms will use a lot less labor, as in zero labor, because there is no combination of fewer sales and higher prices that allows them to stay in business with a $15 minimum wage. Those that stay in business will use a variety of strategies to economize on the costlier labor. Some businesses will reduce the hours they stay open. Some will have fewer people trying to do the same work, which can lead to worse customer service. The trend toward automation will accelerate. None of this is good for employment.
It is worth noting that the lost jobs are not assigned at random. Those workers with the fewest skills are the first to be priced out of the labor market. Though the intent may well be different, the job losses of a $15 minimum wage are disproportionately felt by those on the bottom rung of the jobs ladder.
Even ignoring the job losses, the $15 minimum wage is a very poorly targeted remedy for poverty.
A recent study in the prestigious Journal of Political Economy found that share of households with minimum-wage workers is evenly distributed across the income spectrum. The fraction of the richest fifth of households with a minimum-wage worker was 22.5 percent (think suburban teenager earning beach money). The fraction of the poorest fifth of households with a minimum-wage worker was 22.4 percent. So any increase in pay is as likely to go to a rich household as a poor one.
The ineffectiveness of high minimum wages is discouraging, but what is nearly as discouraging is its unambitious target. That’s right, we should aim higher.
Even if the Fight for Fifteen were not bound by economic reality and doomed to be a job destroyer, its effect would barely lift people out of poverty. Let’s pass on the futile attempt to force people to overpay for less productive work and, instead, focus on getting people in jobs where their productivity will take them to solid middle-class incomes or better.
For instance, the Job Creators Network is pushing a policy called “Fight for 50K.” They note that there are currently millions of job openings that don’t require a university degree but pay $50,000 per year or more. They include jobs like plumbers, electricians, health technicians, and machinists. Filling these jobs may require that we rethink our education options. Simply raising the minimum wage is not the answer.
In general, workers benefit when more employers compete for their services. This competition for workers will heat up the more startups we have and the more existing firms expand. We need to reduce the regulatory burden that stifles new-firm formation and reduce the tax policies that penalize business growth and investment.
The Fight for Fifteen does neither. It is simply a costly job killer.
The best wage policy is a pro-growth economic environment. A vibrant economy increases wages and jobs at the same time.