On Thursday, the House of Representatives voted to more than double the federal minimum wage from $7.25 to $15. The Congressional Budget Office says that doing so would wipe out 1.3 million jobs. That sounds like a large number, but it likely understates the job losses that would result from such a large increase in the minimum wage. That’s because it fails to take into account the harmful chain reaction that will occur in low-wage, low living-cost areas where the median wage is currently below $15. In such areas, much of the workforce will become unemployed. The House voted largely along party lines to pass the increase, in a 231-to-199 vote. The Senate is not expected to pass the increase, and even if it did, the White House has said Trump would veto it.
Even under the CBO’s projection that only 1.3 million jobs would be lost, the economy would be harmed. Family income would actually fall, as would economic output, while prices would rise. But the actual job losses will be far more than 1.3 million. Economists estimated that in a single state — California — a $15 minimum wage will eventually wipe out 700,000 jobs, including up to 160,000 in its manufacturing sector alone. And California is a wealthier-than-average state that can better handle a minimum wage increase than poorer states in the south and midwest.
A $15 minimum wage will also drive up costs to taxpayers. That’s because state government employees are sometimes paid a multiple of the minimum wage. A legislative analyst projected that a minimum wage increase would cost his state’s taxpayers $3.6 billion due to increased government worker pay.
72 percent of economists say a $15 minimum wage is a bad idea. It may not seem as bad to some CBO economists, who live in wealthy, expensive areas like Washington, DC and its suburbs. Those areas can handle a minimum wage increase better, because the median wage there is already way above $15. To people living there, a $15 minimum wage will not seem that extreme. Studies by economists of existing $15 minimum wage laws at the state and local level all involve states or cities that have median wages of over $15, and can thus weather an increase better than most of America. So the modest job losses chronicled in some of those studies don’t fully capture the job losses that would result from a national minimum wage increase to $15.
Jobs are already being lost in New York and Illinois due to their recent minimum wage hikes to $15. New York City experienced its worst decline in restaurant jobs since 9/11 after a $15 minimum wage there was enacted. The city saw its sharpest fall in restaurant employment in nearly 20 years. Its 40 percent increase in the minimum wage was phased in over a two-year period, but substantial job losses are already evident. Similarly, Illinois businesses such as Hopper’s Poppers are already announcing plans to close up, move out of the state, or curb their expansion in the state, even though the state’s minimum wage increase is being phased in over several years. A Seattle-based restaurant chain filed for bankruptcy after Seattle raised the local minimum wage to $15.
But job losses in such areas are mild compared to what would happen from the minimum wage being raised to $15 per hour nationally. Places like New York, Illinois, and Seattle have median wages well above $15 per hour. By contrast, there are many areas of the country where the median wage is less than $15 per hour (like the state of Mississippi, or Maryland’s Somerset County). Often, living costs are so low in these areas that $12 per hour is a middle-class wage.
Increasing the minimum wage to above the current median wage in these areas would bankrupt many employers, and set in motion a chain reaction of economic devastation — an anti-stimulus. Businesses would pay the full cost of the increased minimum wage (although they would recoup some of that cost from consumers in the form of higher prices), but that revenue wouldn’t all go into workers’ pockets, as I explain below. Instead, it would mostly be eaten up by deadweight losses, which the CBO’s estimate of the job loss doesn’t adequately take into account.
First, some workers would lose their jobs. An employer can’t pay all of its employees above the current average wage without going broke or firing the employees who are less productive than average. Even corporations have an average profit margin of only 7.9 percent, or 6.9 percent for non-financial corporations. If an employer was paying its workers $10 per hour in a labor-intensive business (like a restaurant), and was making a 7% profit, it can’t afford to increase employee pay by more than a couple dollars, much less all the way up to $15. Even when workers wouldn’t get fired, some would end up having their hours cut back. Large increases in the minimum wage lead to some workers having their hours cut back by the employer.
Second, other workers would continue working as much, but at the higher wage. But while their employer would pay the entire higher wage — and thus have less money to spend on other things, and less money to invest in expanding the business to create new jobs — the workers don’t keep the full amount their employer pays them. Instead, much of that amount leaves their community, as the workers pay higher taxes to the federal government on their increased income, and also lose the earned income tax credits that the government uses to encourage employment for low-income workers. The loss of such tax credits means such workers have less money to spend in their communities than one might assume from their increased hourly wage, reducing their community’s disposable income.
Much of the benefit of the wage hike to low-income workers who manage to keep jobs at the increased minimum wage is lost due to increased federal taxes and reduced federal earned-income tax credits and food stamps, as a writer noted in the Wall Street Journal in 2016:
“[T]he tax implications of going from a $10- to a $15-an-hour minimum wage … [is] very significant. For a family of four with both spouses making the minimum wage, their federal tax will increase from $4,106 to $7,219, payroll tax will increase from $2,579 to $3,869, their earned-income tax credit (EITC) will be reduced from $596 to zero … and the $2,400 food-stamp credit will be lost. Of the $20,800 increase in income in going from $10 to $15 an hour, $7,778 will be diverted to the government, which doesn’t include loss of other income-dependent government welfare programs and added costs due to the resulting inflation. Over one-third of the wage increase will flow to the [federal] government.”
Meanwhile, their former co-workers who got fired due to the increase are now poorer, and spend less in their community (a jobless worker receives no earned-income tax credit, unlike a low-wage worker). And businesses have much less money left over to spend on purchases of goods and services, due to being impoverished by the minimum wage increase. Overall, there is much less money to spend in an economically-struggling area after a large minimum wage increase than before it. That reduced spending impoverishes retail establishments that rely on consumer and business spending hard.
The net result is that an economically struggling town with lots of low-wage workers tends to have less disposable income, higher prices, and less consumer purchasing power (meaning fewer retail jobs) after a minimum wage hike than before.
Even in prosperous areas like New York City that have high median wages, large minimum wage increases wipe out some jobs in labor-intensive businesses, like restaurants. As Jon Miltimore of the Foundation for Economic Education noted:
“Restaurants tend to operate on famously low profit margins, typically 2 to 6 percent. So a 40 percent mandatory wage increase over a two-year period is not trivial.
“In response to the minimum wage hikes, New York City restaurants did what businesses tend to do when labor costs rise: they increased prices and reduced labor staff and hours.
“For example, Lalito’s, a popular restaurant on Bayard Street, recently raised its menu prices 10-15 percent, Eater New York reports.
“A New York City Hospitality Alliance survey also showed that three out of four full-service restaurants said they planned to reduce employee hours. Nearly half of those surveyed said they planned to eliminate some job positions in 2019.”
Many politicians realize that minimum wage hikes increase unemployment, but support them anyway because uninformed voters back them. A recent poll shows that 63% of Americans support a $15 minimum wage, although support falls to 37% when people are informed of the CBO’s estimate that 1.3 million jobs would be lost as a result. In 2016, the Democratic Party platform proposed increasing the minimum wage to $15, even though such an increase would wipe out many jobs, as Hillary Clinton once admitted. Clinton’s purpose in supporting such a large minimum wage hike was to pander to people who know nothing about economics, and thus win the Democratic Presidential nomination. As the progressive-leaning Vox website admitted, “Hillary Clinton knows a national $15 minimum wage is a bad idea. She endorsed it anyway.” Clinton is not the only politician to endorse a $15 minimum wage after admitting it was bad for the economy. California’s former governor admitted it, too. In signing his state’s $15 minimum wage into law, Governor Jerry Brown said, “Economically, minimum wages may not make sense,” but “politically,” they do.
While moderate and conservative voters tend to oppose a $15 minimum wage after being informed that it will lead to significant job losses, not everybody does. Most Californians support a $15 minimum wage despite knowing that it will lead to job losses and increased prices. The Los Angeles Times reported that “Californians strongly back the state’s minimum wage increase to $15,” even “though they believe the wage hike will hurt their pocketbooks and the state’s economy,” and “high percentages of those surveyed expected negative consequences, including layoffs and business relocations to states with lower minimum wages. Almost 90% of respondents believed that prices for consumers would rise because of the wage hike.”