Minimum Wage Hikes Hurt Poor, Throttle Businesses

Published August 1, 2003

In February, the Santa Fe City Council approved the nation’s only municipal minimum wage. The law, drafted in large part by the left-leaning Brennan Center for Justice at New York University, will raise the hourly minimum wage in Santa Fe to $8.50 in January 2004 and to $10.50 by 2008. The ordinance takes wage regulation to the next level.

More than 85 cities have “living-wage” laws, but they apply only to municipal workers or employees at businesses with government contracts. The Santa Fe law applies to all private businesses in the city with 25 or more workers. Local businessmen, fed up with escalating intervention, are fighting back.

The Santa Fe Chamber of Commerce and other groups have filed a lawsuit in state court claiming the ordinance violates New Mexico’s constitution. Last year, the Louisiana Supreme Court overturned the living-wage law for New Orleans, so a legal challenge might work again. These legal battles have not deterred other cities, most recently San Francisco, from considering citywide minimums.

San Francisco Board of Supervisors President Matt Gonzalez, the country’s highest-ranking Green Party officeholder, wants to impose a citywide minimum of $8.50 an hour. Gonzalez says this 26 percent hike will help “the most vulnerable workers.”

Unintended Consequences

In reality, minim wage hikes set in motion responses by businesses that hurt those at the bottom of the economic ladder.

Businesses offer the mix of wages and benefits necessary to attract an optimal workforce. After a minimum-wage hike, many businesses cut training, health care benefits, and other perks for low-income workers to offset the mandated pay increase. Although many of these workers might prefer health insurance to more pay, they have no say in the matter since businesses must pay the legal minimum.

If the minimum wage is increased to $8.50 an hour, workers will be employed only if they produce at least $8.50 worth of goods and services an hour. If they don’t, they won’t be hired or they’ll be laid off. In reality, the city is saying: “If you don’t produce $8.50 worth of output, you can’t participate in the city’s economy.”

A minimum-wage hike would create unemployment among the least-skilled workers, often inner-city minorities and youth. They might blame “the system” for their joblessness or blame discrimination, but they won’t blame the minimum wage–a stealth jobs killer–and politicians know this.

Notwithstanding the rhetoric of supporters, the wage hike would essentially be a punitive tax on doing business in San Francisco, prompting businesses to locate or expand elsewhere, further damaging the city’s ailing economy and increasing its $350 million budget deficit. These developments diminish employment opportunities for those seeking work–the very people the pro-hike faction claim to be helping.

In their simplistic morality play, those who support the wage hike are compassionate advocates for the poor. Those who oppose it are heartless capitalists. Did compassion motivate white Afrikaners in apartheid South Africa to endorse minimum-wage hikes? Of course not. They understood it killed jobs for low-income blacks, preventing them from acquiring work experience and skills needed for self-sufficiency.

The minimum wage is an inefficient means of assisting low-income people. Even Joseph Stiglitz, former chief economist for President Clinton, wrote, “A higher minimum wage does not seem a particularly useful way to help the poor.”

Business growth is the source of economic opportunity and advancement for the poor. Reducing taxes, fees, and regulations would do more good than hiking and extending the minimum wage. If San Francisco, Santa Fe, New Orleans, or any other city truly wants to help the poor, they should coddle, not throttle, businesses.

Lawrence J. McQuillan, Ph.D. ([email protected]) is director of business and economic studies at the San Francisco-based Pacific Research Institute. ( This essay was first published by NRO Financial in May 2003.