Many states have recently been suffering from labor shortages, high inflation, and the ever-worsening supply chain crisis. Unfortunately, the quick “fixes” advocated by many policymakers in response to this perilous economic situation would only make matters worse.
Lawmakers in the Arizona Senate have proposed Senate Bill 1555, legislation that would raise the state’s minimum wage to $20 per hour, effective January 1, 2023. In subsequent years, Arizona’s minimum wage would rise annually in accordance with the cost of living increases as measured by the consumer price index (CPI)—using the percentage change from August of the immediately preceding year to August of the previous year as the baseline for comparison.
Each U.S. state experienced some degree of governmentally imposed lockdowns due to the sudden onset of the coronavirus pandemic, with small businesses often bearing the brunt of economic pain. Bearing this in mind, a minimum wage hike in 2022 could not be more ill-timed. A Yelp analysis recently estimated that 60 percent of those U.S. businesses forced to temporarily suspend operations during COVID-19 have since permanently closed.
Given the ongoing economic upheaval, it is unsurprising that some Louisiana lawmakers are considering implementing minimum wage increases to provide relief to their struggling constituents. Yet, these efforts are both ineffective and counterproductive ways of combating the problem.
Arbitrary minimum wage hikes produce unintended consequences that often inflict even more pain upon the very people they are supposed to benefit. Though well-intentioned, minimum wage hikes are a substantial reason for the utilization of self-checkout kiosks by grocery chains and fast-food restaurants, which disproportionately eliminate jobs for vulnerable and low-income individuals.
A 2017 paper from the National Bureau of Economic Research (NBER) studies the effects of the aforementioned scenario, utilizing data collected from 1980 to 2015. The authors conclude that “increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers… Our work suggests that sharp minimum wage increases in the United States in coming years will shape the types of jobs held by low-skilled workers, and create employment challenges for some of them.”
A recent study by the Congressional Budget Office (CBO) examines how increasing the federal minimum wage by incremental degrees to $15 per hour by 2025 would adversely affect employment and household incomes. While the study does find that a minimum wage increase boosts some workers’ wages, it also leads to job loss for many others, ultimately hurting small businesses the most.
The impact on small businesses is substantial, forcing them to reallocate scarce resources from profit-generating enterprises towards higher labor costs. Often, this results in lower hiring levels, work-hour reductions, and increased prices for consumers. A minimum wage hike may even lead to bankruptcy for companies no longer able to make ends meet in the face of such costs.
Minimum wage hikes are rarely a viable economic solution. A widely-cited joint study between the Federal Reserve and the University of California-Irvine found that 85 percent of credible studies on the subject clearly demonstrate job losses for low-skilled workers in the face of minimum wage hikes. In yet another study conducted by the Federal Reserve, the authors state that [minimum wage increases] are “not likely to be sufficient to support a household. While raising the wages of workers seems like it might be a good solution, the proposal makes the mistake of equating minimum wage workers with the working poor. Rather, if the objective is to reduce poverty, it seems that using a more targeted approach… might be the most effective way to accomplish the task.”
Further illustrating the negative utility of such a policy, a recent report from the Employment Policies Institute (EPI) found that a minimum wage hike would cost the U.S. economy approximately two million jobs. The EPI study notes that of those two million, the jobs most likely to vanish are in the restaurant and hospitality industries decimated by the pandemic. Forcing small businesses in these industries to raise their labor costs would inflict even more harm upon the few that have managed to survive.
The country’s continued macroeconomic vulnerability is also important to consider. While the unemployment rate has subsided in recent months as the economy has re-opened, the labor force participation rate has not rebounded in the same way. As of April 2022, two million workers are still missing from the labor force compared to pre-pandemic levels, according to the Federal Reserve. As for inflation, the May 2022 Consumer Price Index (CPI) report reflected an increase of 8.6 percent—a level not matched since the height of “stagflation” in 1981.
Finally, it is important to recognize that a preponderance of small business failures would substantially decrease governmental revenue capture, as failed businesses would no longer contribute property taxes, income taxes, sales and use taxes, and various regulatory fees. While this policy might be politically popular, the downstream effects of a minimum wage increase would create significant budgetary challenges at the state and municipal levels.
Although attempts to bolster a minimum standard of living and protect low-skilled workers are laudable in theory, the tangible effect of the proposed minimum wage increase would hurt more than help. Such a policy would do little to lift struggling Louisianians out of poverty, while simultaneously destroying jobs and increasing government dependence.
The following documents provide more information about minimum wage laws.
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
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
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 Effects on Employment and Family Income of Increasing the Federal Minimum Wage
The Congressional Budget Office examines how increasing the federal minimum wage to $10, $12, or $15 per hour by 2025 would affect employment and family income across the nation. This shows that while minimum wage increases will provide some level of raised wages for some individuals, it will also lead to many workers across the nation losing their jobs.
Two-thirds of Americans Favor Raising the Federal Minimum Wage to $15 an Hour
The Pew Research Center conducted a survey in the spring of 2020 regarding the public approval of raising the federal minimum wage to $15 an hour. This shows the overwhelming trend of many across the nation believing that minimum wage increases are a viable way to pull Americans out of poverty.
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 and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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