Legislators in New Jersey are considering a substantial increase to the state’s minimum wage, increasing it from $8.38 per hour to the en vogue rate of $15 per hour. The wage would increase each year by either $1.25 or $1 combined with an amount adjusted for inflation – whichever is greater – until 2021, when the rate must be $15.
Minimum wage laws attempt to create a minimum standard of living to protect employees’ health and well-being by mandating a base level of pay from employers to certain covered employees. Policymakers must consider the serious consequences a minimum-wage increase can have on employment rates and economic growth.
Supporters of minimum-wage increases often argue employers paying their employees less than $15 place an additional burden on government services. They say the higher wage would help nearly one million of the state’s roughly four million workers, especially the minimum-wage earner.
Advocates of an increase to the minimum wage often assume minimum-wage earners are the primary breadwinners for their households, but this is rarely the case. Economist Walter Williams has explained, “Workers earning the minimum wage or less tend to be young, single workers between the ages of 16 and 25. Only about 2 percent of workers over 25 years of age earn minimum wages.”
A 2007 study from economists at the University of California-Irvine and the Federal Reserve Board examined the body of work on the subject and found 85 percent of the studies they considered credible demonstrate minimum wage laws cause job losses for less-skilled employees.
Proponents of these laws also argue minimum-wage laws protect workers from exploitation by employers and reduce poverty. Opponents cite evidence that increasing minimum-wage laws is not an effective way to address poverty and often has the opposite effect by creating barriers to entry for workers with less skill and education. In a 2010 study, economists at Cornell University and American University found no reduction in poverty in the 28 states that raised their minimum-wage laws between 2003 and 2007.
New Jersey’s minimum wage is already higher than most of the state’s neighbors, so these increases would place New Jersey at a significant competitive disadvantage. Minimum-wage laws require businesses to pay their workers higher wages, forcing them to make adjustments elsewhere to offset increased costs in order to maintain profitability. These cuts often lead to reduced hiring, fewer work hours for employees, diminished fringe benefits for employees, and higher prices for consumers.
In testimony before the New Jersey Senate, Michael Egenton, vice president for government relations at the New Jersey Chamber of Commerce, warned legislators the cost of the new wage hikes far exceeds $15 an hour. According to NJ.com, Egenton predicts – when combined with unemployment insurance, workers’ compensation, and other costs – the real burden borne by businesses per employee under the hike could reach $23 an hour.
A sound policy alternative to the minimum wage is the Earned Income Tax Credit (EITC). The Earned Income Tax Credit is a refundable tax credit for lower-income working individuals and families. The amount of the credit is based on income level and the number of dependents the applicant supports. When the credit exceeds the amount of taxes owed, a payment is issued to those who qualify and claim the credit. Recent studies have shown the Earned Income Tax Credit is more effective than minimum-wage laws at bringing low-income families out of poverty.
Increasing the legal minimum wage is not an effective method of reducing poverty, and it harms workers by creating barriers to entry for less-skilled and less-educated people. Increasing a city’s minimum wage will cause more people to lose their jobs and make the city less competitive.
The following articles examine minimum wage hikes and their effects on employment.
Counterproductive: The Employment and Income Effects of Raising America’s Minimum Wage to $12 and to $15 per Hour
https://heartland.org/publications-resources/publications/counterproductive-the-employment-and-income-effects-of-raising-americas-minimum-wage-to-12-and-to-15-per-hour
In this Issue Brief published by the Manhattan Institute, Douglas Holtz-Eakin and Ben Gitis examine the economic and policy implications of raising the federal minimum wage to $12 per hour or to $15 per hour. “We focus on how raising the federal minimum wage would affect the very low-wage workers whom the policy is intended to help. Overall, we find significant trade-offs in raising the federal minimum wage.”
The Effect of New Jersey’s Minimum Wage Increase on Fast-Food Employment: A Re-Evaluation Using Payroll Records
https://heartland.org/publications-resources/publications/the-effect-of-new-jerseys-minimum-wage-increase-on-fast-food-employment-a-re-evaluation-using-payroll-records
David Neumark and William Wascher reexamine a study by Card and Krueger that found there are no real effects on employment caused by a minimum-wage increase. The results of the study by Neumark and Wascher refute these claims; they found an increased minimum wage does have a negative effect on employment rates.
The Dire Consequences of the Fight for 15: An Analysis of a $15 Minimum Wage in Wisconsin
https://heartland.org/publications-resources/publications/the-dire-consequences-of-the-fight-for-15-an-analysis-of-a-15-minimum-wage-in-wisconsin
The MacIver Institute examines the effects of an increase in the state’s minimum wage to $15 per hour, finding Wisconsin would stand to lose 91,521 jobs: “According to the data, a $15 minimum wage would inevitably lead to reductions in employment and would disproportionately harm younger workers and those without a college degree.”
The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers
https://heartland.org/publications-resources/publications/the-minimum-wage-and-the-great-recession-evidence-of-effects-on-the-employment-and-income-trajectories-of-low-skilled-workers
Jeffrey Clemens and Michael Wither estimate the minimum wage’s effects on low-skilled workers’ employment and income trajectories.
Do Workers a Disservice – Raise the Minimum Wage
https://heartland.org/publications-resources/publications/do-workers-a-disservice—raise-the-minimum-wage
In this Public Interest Institute Institute Brief, Robert N. Stewart argues minimum wage laws actually hurt the people they are designed to help: “Most of these people are teenagers working part-time or unskilled workers seeking to advance to higher paying positions. To many of these workers, raising the minimum wage will either result in unemployment or a lower-paying position. Raising the minimum wage, altruistic as it may feel, is actually doing these workers a disservice.”
Increasing Minimum Wage Hurts Teens
http://www.maciverinstitute.com/research/2014/01/Min-Wage-Report/
The MacIver Institute examines the effects of a minimum wage hike on teen employment: “MacIver notes since 2002, the minimum wage in Wisconsin has increased from $5.15/hr to the current $7.25/hr; meanwhile, the unemployment rate for Wisconsin teens has increased from 15.5 to 19.8, an increase of 27.7 percent over the decade.”
The Minimum Wage Delusion, and the Death of Common Sense
http://www.cato.org/publications/commentary/minimum-wage-delusion-death-common-sense
Writing for Forbes, James A. Dorn of the Cato Institute argues the commonly held belief the minimum wage helps the poor is a delusion: “The belief that increasing the minimum wage is socially beneficial is a delusion. It is short-sighted and ignores evident reality. Workers who retain their jobs are made better off, but only at the expense of unskilled, mostly young workers who either lose their jobs or can’t find a job at the legal minimum.”
Busting 5 Myths about the Minimum Wage
http://blog.heritage.org/2013/03/05/busting-5-myths-about-the-minimum-wage/
James Sherk of The Heritage Foundation debunks five myths about minimum wage hikes, often used by proponents of minimum wage laws: “A higher minimum wage would help some workers, but few of them are poor. The larger effect is hurting the ability of potential workers living in poverty to get their foot in the door of employment. A minimum wage hike might help politicians win plaudits from the press, but it wouldn’t reduce poverty rates.”
Unintended Consequences of Raising the Minimum Wage
http://mercatus.org/publication/unintended-consequences-raising-minimum-wage
Antony Davies of the Mercatus Center examines arguments for and against minimum-wage increases and presents new results comparing employment for workers with differing educational attainments.
The Negative Effects of Minimum Wage Laws
https://heartland.org/publications-resources/publications/the-negative-effects-of-minimum-wage-laws
Mark Wilson of the Cato Institute reviews the economic models used to understand minimum wage laws and examines available empirical evidence. Wilson describes how most of the academic evidence shows minimum wage laws have negative effects, and he discusses why some studies produced seemingly positive results.
The Negative Effects of the Minimum Wage
https://heartland.org/publications-resources/publications/the-negative-effects-of-the-minimum-wage
David R. Henderson of the National Center for Policy Analysis examines several of the negative effects of the minimum wage, including its effects on unemployment, job benefits, and competition.
Research & Commentary: Earned Income Tax Credit vs. Minimum Wage Laws
https://heartland.org/publications-resources/publications/research–commentary-earned-income-tax-credit-vs-minimum-wage-laws
The Earned Income Tax Credit (EITC) and minimum wage laws have been two of the primary mechanisms the federal and state governments have used to help low-income families move out of poverty. A debate is currently ongoing in many state legislatures and Congress over which of these two policies is more effective and should be expanded. Recent studies have shown the EITC to be more effective. In this Research & Commentary, Matthew Glans examines the Earned Income Tax Credit and minimum wage laws from multiple perspectives.
Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research
https://heartland.org/publications-resources/publications/minimum-wages-and-employment-a-review-of-evidence-from-the-new-minimum-wage-research
David Neumark and William Wascher review the literature on the employment effects of minimum wages in the United States and other countries spurred by new minimum wage research beginning in the early 1990s. Their review indicates there are a wide range of estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. Their review found very few studies provide convincing evidence of positive employment effects of minimum wages.
Thinking about Local Living Wage Requirements
https://heartland.org/publications-resources/publications/thinking-about-local-living-wage-requirements
Timothy J. Bartik of the W.E. Upjohn Institute for Employment Research reviews what is currently known about the benefits and costs of different varieties of a “living wage”: a local government requirement now adopted by more than 50 local governments for wages above the federal minimum imposed on employers with some financial link to the local government. The paper concludes moderate living wage requirements applied to the local government’s own employees, as well as contractors’ and grantees’ employees who are funded by the local government, may do more good than harm. However, excessive living wages or living wages applied to non-city-funded workers are more likely to have negative side effects.
Living Wage and Earned Income Tax Credit: A Comparative Analysis
https://heartland.org/publications-resources/publications/living-wage-and-earned-income-tax-credit-a-comparative-analysis
Writing for the Employment Policies Institute, Mark Turner and Burt Barnow argue “living wage” laws are less efficient than localized Earned Income Tax Credit programs.
Minimum Wages, the Earned Income Tax Credit, and Employment: Evidence from the Post-Welfare Reform Era
https://heartland.org/publications-resources/publications/minimum-wages-the-earned-income-tax-credit-and-employment-evidence-from-the-post-welfare-reform-era
David Neumark and William Wascher examine the effects of minimum wages and the EITC in the post-welfare reform era.
Raising the Minimum Wage Hurts Vulnerable Workers’ Job Prospects without Reducing Poverty
https://heartland.org/publications-resources/publications/raising-the-minimum-wage-hurts-vulnerable-workers-job-prospects-without-reducing-poverty
Although minimum wage laws are intended to reduce poverty, in reality, they encourage teenagers to drop out of school and reduce low-income workers’ future job prospects and earnings, observes James Sherk of The Heritage Foundation.
Minimum Wage, Minimum Employment
http://www.mackinac.org/19504
Michael LaFaive of the Mackinac Center examines the research on minimum wages and concludes, “[T]heory and evidence very clearly point to minimum wage policies doing great economic harm, including minimizing employment opportunities.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Logan Pike, Heartland’s state government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
