There are few policies more popular than increasing the federal minimum wage. In a 2013 Gallup poll, 76 percent of respondents approved of the idea. It seems to make economic and moral sense on an intuitive level. President Obama reflected this sentiment in his Oct. 11 weekly radio address, saying, “We believe that in America, nobody who works full time should ever have to raise a family in poverty. … America deserves a raise right now.”
Yet most economists oppose the concept of a minimum wage at all, and data back them up. In fact, the minimum wage harms those it is intended to help.
The federal minimum is now $7.25 an hour, but it is higher in some states and municipalities. There is a movement, headed by the president, to raise this to $10.10 an hour, with the ostensible goal of reducing poverty and inequality. Some states and cities are on board. California will raise its minimum to $10 on Jan. 1, 2016, and San Diego will raise it to $10.50 on the same date, with another dollar on top of that a year later. SeaTac, Washington, the area around Seattle-Tacoma International Airport, has already raised its minimum to $15 an hour with unhappy consequences, as we shall see.
James M. Buchanan, Nobel Prize winner for economics in 1986, put it thus:
“Just as no physicist would claim that ‘water runs uphill,’ no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests.”
The overwhelming majority of empirical studies into the effects of the minimum wage find that it erodes employment. In 2007, David Neumark of the University of California-Irvine and William Wascher of the Federal Reserve surveyed over 100 minimum wage studies published since the early 1990s. They discovered that over two-thirds of them found negative effects on employment, while only about an eighth found positive effects. Worse, those studies that focused on the low-skilled people including youths found particularly bad damage done.
Wascher and Irvine also looked at the quality of the studies. They found 33 studies that were robust to most criticisms, of which 28 found negative employment effects. (Notably, much of the evidence for positive employment effects in the larger sample came from the United Kingdom rather than the United States, and that those studies may have failed to account for complicating factors during the 1980s, when the UK had sector-specific minimum wages. But the more recent evidence from the UK’s introduction of a national minimum wage in 1997 mirrors the American evidence.)
The federal minimum wage was raised in 2007, and again in a couple of steps until 2009. There has been recent research into the effects of that increase. One study, by Aspen Gorry of the University of California-Santa Cruz, focuses on the effect on youth unemployment. He found that minimum wages effect unemployment, especially youth unemployment, “because they interact with a worker’s ability to gain job experience.” While the minimum wage increase pushed the general unemployment rate 0.8 of a percentage point higher over the study period (compounding the misery of the economic downturn), the unemployment rate for 15- to 24-year-olds surged by almost 3 percentage points.
Gorry also looked at youth unemployment in France, where the minimum wage is about $12 per hour, considerably more than America’s, and where the youth unemployment rate has hovered around 24 percent, double the U.S. rate. Gorry finds that the different minimum wage levels account for nearly the entire difference between France’s and America’s youth jobless rates. That means France could find jobs for about half its unemployed youngsters by reducing its minimum wage to American levels.
Such a preponderance of evidence is reflected in official studies. When the Congressional Budget Office earlier this year reviewed the probable effects of a minimum wage increase to $10.10 an hour, it took into account the findings of over 60 studies on the issue. The CBO report suggested that the increase would help lift 900,000 families above the poverty line, as the president touted, but at the cost of killing the jobs of half a million other people.
The minimum wage transfers resources not from the rich to the poor, but among the poor. Some of America’s least well-off workers would get a raise, but many more others would see theirs hours cut, or lose their jobs entirely. Obama’s radio address concluded, “America should forever be a place where your hard work is rewarded.” But those whose jobs are destroyed by a minimum wage increase have neither hard work nor reward.
So why is the minimum wage so popular? The answer is that there are economic effects that are seen and others that are not seen, as the great French economist Frederic Bastiat noted. As he explained, any new economic policy “gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen.” In the case of the minimum wage, what is seen is the increase in many workers’ pay packets. What is not seen is workers losing their jobs.
The public may not attribute those job losses to a minimum wage increase, blaming instead other factors such as increasing automation, a company’s contraction, or an employer’s greed. Yet the underlying reason is the same in all these cases: A corporation invests in a machine because it is less expensive than paying workers the higher minimum wage, the company contracts because it cannot afford to keep the same number of workers with the same wage budget, and the employer, far from being greedy, sees the new wage cutting into his bottom line and he chooses to do other things rather than pay a marginally effective worker more than he thinks he is worth.
Yet job losses are just the beginning of the unseen effects. There are other workers, particularly inexperienced young ones, who will not be hired in the first place because the cost of their wages is too high. As Gorry found, jobs that never come into being prevent potential workers from gaining experience. Young would-be workers are denied the chance to gain basic job skills. Instead, they set off down the road to long-term unemployment. This is what is happening in France.
Those who lose their jobs or never get them are not the only ones to suffer. Even those workers who keep their jobs and are paid a higher wage and are “lifted out of poverty” often fail to account for these changes.
One unintended consequence is that taxes on wage earners go up. A higher minimum wage can make employers less inclined to offer non-wage benefits such as generous leave policies or insurance, as well as on-the-job perks such as free meals and parking. Non-cash perks such as parking and food are not taxed. But when these non-wage benefits are converted to wages, they become subject to income and sales taxes. So not only do workers have to pay for perks that used to be free, they get taxed for them, too.
SeaTac provides an informative example. There, Northwest Asian Weekly reporter Assunta Ng asked hotel workers who had received the wage increase whether they were happy with it:
“Are you happy with the $15 wage?” I asked the full-time cleaning lady.
“It sounds good, but it’s not good,” the woman said.
“Why?” I asked.
“I lost my 401(k), health insurance, paid holiday, and vacation,” she responded. “No more free food.”
The hotel used to feed her. Now, she has to bring her own food. Also, no overtime, she said. She used to work extra hours and received overtime pay.
What else? I asked.
“I have to pay for parking,” she said.
Another interviewee, a waitress, claimed that she had seen a decrease in her tips. When the minimum wage was $7, her tips increased that to more than $15 an hour, but the differential was now less. She now has to bring her own food and pay for parking, both of which used to be provided by her employer at no cost to her.
Annual or holiday bonuses can also suffer. There is an interesting natural experiment that illustrates this in the Westfield Valley Fair mall in California. Half the mall is in San Jose, while the other half is in Santa Clara. When San Jose raised its minimum wage to $10 in 2012, Santa Clara’s remained at $8. The mall has two competing pretzel shops, one in each jurisdiction. When San Jose instituted its raise, the pretzel shop there, Wetzel’s Pretzels, was unable to raise its prices because of the competition across the mall, and the owner was reluctant to cut staff as that would have affected customer service. Instead, she took the hit in the form of lower profits.
The lower profits hurt workers, too. The store owner’s policy was to share 15 percent of profits in the form in an annual bonus. Reduced profits led to smaller bonuses. This is not the sort of thing that an aggregation of statistics picks up.
Consumers don’t escape the malign effects of increased minimum wages, either. Prices often increase when business face a shortfall in profits. Businesses that use large numbers of minimum wage workers, such as the fast food industry, tend to raise their prices the most. A 2008 study by Daniel Aaronson and Eric French of the Chicago Fed and James MacDonald of the U.S. Department of Agriculture found that fast-food restaurants pass through 100 percent of the wage increase to their customers in higher prices. Another study by Sara Lemos of the Institute for the Study of Labor found that a 10 percent increase in the minimum wage led to a 4 percent increase in food prices and an overall increase in prices of just over half a percentage point.
That may sound small, but consider where the effects fall hardest. Workers earning minimum wage are more likely to patronize fast food restaurants than anyone else, and food in general forms a much bigger part of their budgets. A significant part of the minimum wage increase is, literally, eaten up by higher food prices. The effect is all the more significant for those who work at those restaurants and may no longer have access to complimentary shift meals.
Obama claims that a minimum wage increase means those who get it “have more money to spend at local businesses, which grows the economy for everyone.” But, per Bastiat, that is only in the short run, providing the immediate “seen” effect. In the medium and long run, price increases cancel out the minimum wage hike’s stimulative effect, and the gains are reversed. Aaronson and French, in another study, find the long-term effect on the economy of a minimum wage increase to be virtually nil, as the unseen effects take over.
Most of the winners from a minimum wage increase are large businesses, which can afford to take on extra payroll. The mom-and-pop store down the road might not be able to follow suit. If, as sometimes happens, it is forced to close, customers are driven to the big retailer. Big companies often lobby for increases in the minimum wage. Walmart publicly favored the 2009 federal increase to $7.25 per hour. While it has not supported current proposals for a $9 or $10.10 hourly minimum wage, it is not opposing them, either.
The benefit to big companies is apparent even when a minimum wage hike does not increase their payroll costs. Costco, which pays all of its employees well above minimum wage, would not be directly affected by most proposed minimum wage increases, but its smaller competitors would. A combination of increased payroll and reduced hours or fewer employees hits small competitors. This means higher prices and fewer employees to serve customers, which drives more customers to Costco and other bigger companies.
There is evidence that high minimum wage laws also increase crime because they condemn some people to chronic unemployment. Some turn to economic crime, dealing drugs, or fencing stolen goods to make ends meet, while others turn to crimes of idleness, such as vandalism and assault. A study by Andrew Beauchamp and Stacey Chan based on National Longitudinal Survey of Youth data from 1997 to 2010 finds that, in states that increased their minimum wages during that time, “crimes increase among minimum wage-bound workers and most strongly among teenagers, and that these increases occur among both monetary and non-monetary crimes. … [A]ffected 14-16 year-olds are 8.4 percentage points more likely to commit crimes, and 17-19 year-olds increase crime by 3.4 to 4.1 percentage points.”
Increased crime takes a toll on perpetrators as well as victims because they acquire criminal records, which blight their chances of getting a job in the future.
Breaking out of poverty is difficult for many people, and the evidence is that a minimum wage adds to the difficulty. Workers are fired, hours are cut, jobs are not created, non-wage perks, including insurance, free parking, free meals, and vacation days evaporate, annual bonuses shrink, prices rise, (squeezing minimum wage earners themselves), big businesses gain an artificial competitive advantage over their smaller competitors, and crime rates rise. It is a bleak litany.
Raising the minimum wage remains popular because only the visible effects are usually considered. Fortunately, the public may be willing to consider the unseen effects when they are pointed out. Following the March release of the CBO study, Bloomberg News asked asked people if they supported a minimum wage increase to $10.10 an hour. With that simple proposition, 69 percent were in favor and 28 percent opposed. Bloomberg then asked, “A recent report by the Congressional Budget Office says that raising the minimum wage to $10.10 over the next three years would increase the incomes of 16.5 million Americans while eliminating 500,000 jobs. Does that trade-off seem acceptable or unacceptable to you?” When put that way, 34 percent were in favor and 57 percent found it unacceptable.
It is time for politicians to learn what the public is so quick to perceive.
Iain Murray is a vice president at the Competitive Enterprise Institute in Washington, D.C. Ryan Young is a fellow at CEI.