Why A $15 Minimum Wage Is Overwhelmingly Opposed By Economists and Indisputably Bad Policy

 

It is often said that you should not make decisions when you are angry because you are bound to react with emotion instead of reason; quite simply, you make bad decisions when you are angry. Across the political spectrum, people are righteously angry; but they are making bad decisions because they are angry. They are eschewing reason and reacting with emotion. On the right, they are supporting a populist fool who has build a campaign around scapegoating unpopular groups, petty insults, and impossible promises. On the left, they have embraced a self-described socialist whose policies are so disconnected from reality (e.g. simple math) that even arch-liberal Paul Krugman considers Sanders’ proposals as realistic as “magical unicorns.” And, from banning Muslims to “free” healthcare and college, populist movements are pushing policies that make absolutely no sense. None is more troubling than the $15 minimum wage.

In short, anyone who knows anything about economics — or bothers to listen to anyone who knows anything about economics — or relies on basic common sense — agrees that the $15 minimum wage is a bad idea. It is sold as a policy to help workers struggling to survive in poverty; but, few minimum wage workers are truly living in poverty, and those who are will see little benefit from higher wages (even assuming that they keep their jobs) because they will be offset by lower government benefits. At the same time, we know that workers — primarily the young, low-skill, and most vulnerable workers — will lose their jobs. Likely a lot of workers. We know that businesses will shutter. And, we know that prices will rise (again most impacting lower income people who we are supposedly trying to help).

People are righteously angry that we have an economy with stagnating wages and a government that favors powerful interests. It is emotionally compelling to argue that “we” should just give people a raise. But, anger and emotion are not an excuse for bad policy. And, there is overwhelming agreement among anyone who knows anything that a $15 minimum wage is very bad policy.

There Is Overwhelming Agreement That A $15 Minimum Wage Is Bad Economic Policy

As Governor Jerry Brown signed California’s $15 minimum wage, he acknowledged that “[e]conomically, minimum wages may not make sense.” This is a striking moment of honesty: rarely does a politician admit that a law he is about to sign is bad economic policy. But, Governor Brown is generally a “straight shooter” — and the near-certain harms of the $15 minimum wage are difficult for anyone to deny.

Liberal politicians and pundits have often tried to sell minimum wages as being immune from the laws of economics, claiming that they have little or no effect on employment. (In contrast, overwhelming evidence shows, and 90 percent of economists agree, that a higher minimum wage does have a significant negative effect on employment for the young and lower skill workers most impacted by the minimum wage.) But, the $15 minimum wage is so disproportionately high that even liberal economists now overwhelmingly reject that claim. For instance, liberal icon Alan Krueger, whose work with David Card is most cited in support of a higher minimum wage, now argues that a $15 wage is too high and “could well be counterproductive” because of job losses. A recent survey of economists, 59% of which self-identified as Democrats to only 7% Republicans, similarly shows overwhelmingly strong opposition to a $15 minimum wage:

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Widespread agreement that a $15 minimum wage will mean job losses, particularly among young and lower skill workers:

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That prices will rise:

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And, that small businesses will fail:

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And with all these negative consequences, these primarily liberal economists also agree that a $15 minimum wage is a horribly inefficient way to address the income needs of poor families (the purported purpose for which it is intended):

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“Experts” are often wrong; but when even liberal economists who could be expected to support a higher minimum wage overwhelmingly agree that it is a bad idea; that is will cost jobs; that it will harm businesses; that it will cause higher prices; and that it is a lousy way to help those who it is intended to benefit — that is awfully compelling. While populist politicians and labor unions (who then seek to exempt themselves) push the emotional appeal of the $15 minimum wage, there is no legitimate debate that economically, a $15 minimum wage just does not make sense.

A $15 Minimum Wage Will Not Help People In Poverty

Bernie Sanders proclaims that “[i]t is a national disgrace that millions of full-time workers are living in poverty,” and we must raise the minimum wage so that “a job [will] lift workers out of poverty, not keep them in it.” But, the truth is that full-time work almost always does lift a worker out of poverty. As shown on the chart below, just 3% of full-time workers are living below the poverty line (and that is before accounting for most government transfers).

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As is evident, the primary cause of poverty is not low wages, but being unable or unwilling to find a full-time job. And, raising the minimum wage will only make it more difficult for people in poverty who are looking for full-time work to find a job that will lift them out of poverty.

In fact, the cliche pushed by politicians like Sanders of the impoverished minimum wage worker trying to support his or her family applies to only a minority of minimum wage workers. Just 33% of minimum wage workers work full time, and only 23% live in households with incomes at or below the poverty line. Most minimum wage workers are high-school or college students working part-time to gain experience and to help pay for their school, or secondary earners helping to boost a family’s income. The average household income of minimum wage workers is over $53,000 per year, and 65% of minimum wage earners live in households with incomes above 150% of the poverty line. So, almost all of the economic benefits of raising the minimum wage will go to workers in living in households with earnings well above the poverty line — which is why economists overwhelmingly agree that raising the minimum wage is a horribly inefficient way to address poverty.

But, at least the 23% of minimum wage workers who are living in poverty will benefit from a pay increase, right? Not really. Assuming that these workers keep their jobs (and we know that many will not), the increase in gross wages will largely be offset by a decrease in government benefits. While this varies by state and family status, the graph below shows the impact that a higher hourly wage would have for a single parent with two children living in Chicago:

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In essence, due to the loss of government benefits as income rises, a worker now making $8.25 an hour would need to see his or her hourly pay rise to over $38 per hour before getting any net benefit. In fact, going from $8.25 to $15 per hour would actually mean a net decrease in total pay and benefits. And, workers who lose their jobs due to the higher minimum wage would see a significant decrease in their net pay and benefits.

Similarly, the chart below shows the hypothetical disposable income of a single parent with one child on a national level. While not quite as extreme as in Chicago, even here you see little increase in disposable income as earnings rise toward $15 per hour (approximately a $31,000 full-time annual income).

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So, minimum wage workers living in households at or around the poverty level will see little (if any) benefit from higher wages because they will be offset by fewer government benefits. They will also likely suffer further losses because employers who are facing higher wages will often cut back on other benefits that they provide (such as health care, free or discounted meals, parking, etc.). Thus, it will primarily be the workers in the higher-earning households, who do not get government benefits that would be lost to higher wages, who will benefit from the minimum wage increase.

Even without all the negative consequences, a higher minimum wage is a horribly mistargeted anti-poverty policy.

Workers Will Lose Their Jobs

While low income workers will likely see little benefit from a higher minimum wage, many will lose their jobs. By some estimates, 700,000 jobs could be lost in California alone. These are people like Marina Neza, who has worked over 32 years in Los Angeles’ apparel industry, helping to support herself and her ailing husband with the $500 per week she makes as a sewing machine operator.  “Apparel manufacturing has been my life,” she explains, but after a recent layoff she now fears that she will be unable to find another job in an industry that most agree cannot support a $15 wage. Marina’s story is likely to be shared by many of Los Angeles’ over 40,000 apparel workers who will be involuntarily priced out of the market by a law that prohibits them from working unless they can convince someone to pay them $15 per hour.

So too will the fast food workers, many of whom have been pushing for this change. But, fast food executives have been clear about how they intend to deal with a higher minimum wage: they will turn to automation and hire fewer workers. This has already begun in higher wage areas like New York, San Francisco, and across Europe. Welcome to the new McDonald’s:

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People want to believe that McDonald’s makes millions and can easily cover a pay increase. But, the truth is that 90% of McDonald’s are run by franchisees who have about a 6% profit margin and make just $156,000 profit per year — most or all of which would be erased by a $15 minimum wage. Eliminating higher-priced workers will not be a matter of greed; it will be a matter of survival.

The same is true for many small businesses, which could see employee costs rise by more than their profit margins. Their only options will be to reduce their workforce, cut hours, cut employee benefits, raise prices, or shut down altogether. This has already begun in areas where minimum wages have started to rise, with businesses shutting downcutting staffing and benefits, and moving from high-costs states like California to lower-cost states like Texas. Just as harmful but less obvious, many jobs will never be created in the first place, such as Walmart’s decision not to open two planned Washington D.C. stores because a higher minimum wage made the anticipated stores unprofitable. Even UC-Berkeley, whose economics department touted a $15 minimum wage, has “coincidentally” announced that it will cut 500 workers just days after the new minimum wage law passed.

So, we know that jobs will be lost because we can see it happening. We can listen to leaders in various industries explain exactly how and why they will eliminate jobs or, as with the Los Angeles apparel industry, that the industry itself likely cannot survive. We can look at the economics of a fast food restaurant or a small business and know that these businesses will need to cut jobs and raise prices just to survive. We can use common sense to understand that fewer people will invest to start businesses and fewer businesses will expand into areas that have imposed a higher minimum wage. Nobody is going to invest in a business where they cannot make a decent profit.

We also know who will be hurt most by these job losses: young and lower skill workers — the most vulnerable workers, who need lower wage jobs for experience, opportunity, and survival. We know this because it is what the overwhelming evidence shows – that young and low skill workers lose their jobs when there is a higher minimum wage. We know it by looking at other countries with relatively higher minimum wages; it is no coincidence that countries with the highest minimum wages also tend to have the highest youth unemployment rates. Sure that French minimum wage seems great — just not for the 25% of young people without a job. The same connection can be seen throughout Europe:

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We know it because we have seen what has happened in Puerto Rico, American Samoa, and the Northern Mariana Islands when the Federal government forced them to raise their minimum wages to come into line with the Federal rate, which like a $15 minimum in the United States is disproportionately high compared to their median wages. We know of the massive financial crisis in Puerto Rico, which stems largely from a 40% labor participation rate (compared to 63% in the United States), even after there has been a mass migration of low skilled workers to the U.S. mainland because they could not find jobs on the island. As explained in a report by the World Bank, “raising the [minimum] wage led to massive job loss on the island.” The Federal Reserve similar concludes that because of the high minimum wage “unemployment remains particularly high for the young and less skilled segments of the workforce.” Another recent report explains that despite “an abundance of unskilled labor” on the island, “employers are disinclined to hire workers because the US federal minimum wage is very high relative to the local average.” Everyone agrees that Puerto Rico’s labor markets have been devastated by a too high minimum wage.

Even more disastrous effects were seen after higher minimum wages were imposed upon American Samoa and the Northern Mariana Islands, where employment dropped by 30% and 35% respectively, while real incomes fell because prices increased by more than wages. Yet, Governor Togiola Tulafono of American Samoa explained that these even statistics do “not capture or convey the magnitude of the economic disaster that has befallen American Samoa,” as he testified before Congress that there is “the real possibility that American Samoa could be left substantially without a private-sector.” Because of these disastrous effects, Congress froze further minimum wage increases in American Samoa and the Northern Mariana Island, which were slated to have their wage floors stepped-up until they reached the Federal minimum wage.

And, we know that young and low skill workers will be hurt the most because, again, it just makes sense. For $15 per hour, an employer can get a worker that has more skills and experience than he can for $10 per hour. A low skill or inexperienced worker competes with a higher skill, more experienced worker by offering his labor for a lower price. If a low skill worker is prohibited from offering that wage discount, then there is no way that he can compete against a more experienced, more skilled worker. If a low skill, inexperienced worker and a more skilled, more experienced worker must be paid the same wage, the more experienced, more skilled worker will always get the job. At $15 per hour, many low skill, inexperienced workers will lose out on jobs that they could perform, and that they could compete for, if they were allowed to offer their services at a lower wage.

This is particularly harmful to younger workers, who need lower paying jobs to develop the skills and experience that will later allow them to obtain better jobs and higher wages. Early work experience can have lasting effects on a workers’ employment prospects and earnings even decades later. Indeed, each year close to 1 million young people work in unpaid internships just for an opportunity to gain experience. But, this is primarily an option for students from wealthier families who can afford to work without pay. Lower income students do not need a “living wage” to support a family of four — but they do need an opportunity to work while earning some money to live.

The “Fight for $15” movement argues that it is a moral imperative that every job pay a “living wage.” But, not everyone needs a “living wage,” a “living wage” is not the same for people living in different areas and with different family situations, and not all jobs can economically support a “living wage.” There is simply no moral justification — much less imperative — for the government to impose an artificial constraint that prevents people from working. Through a $15 minimum wage, we are telling people like Marina Neza that they have no right to work. We are telling an inner city high school student looking for valuable work experience that he cannot work unless he can find someone willing to pay him $15 per hour. We are telling a young worker looking to learn a trade by apprenticing for an electrician or plumber that he must be able to justify a $15 per hour wage just for the opportunity to learn skills that could provide the foundation for a career. We are condemning to unemployment and poverty lower skill, entry level workers who cannot compete for $15 per hour jobs — but who could eventually work their way up to $15 or more if they were just allowed to start somewhere.

Not everyone can start their first job making a “living wage” that will support a family of four. But, everyone should have the opportunity to begin their career ladder, which could then lead them to that “living wage” and beyond. By imposing an artificial wage floor that we know will eliminate jobs — lots of jobs — we are depriving young and low skill workers of this opportunity. This is bad policy; this is unfair; and this is simply cruel.

You may be angry, and a $15 minimum wage may have emotional appeal. But, Marina Neza is not the cause of your anger and she should not be required to sacrifice her job for your emotional satisfaction. Everyone should have the right to work — and for lower skill and younger workers that means having the right to price their labor at wages commensurate with their skills and experience.