Fargo, the largest city in North Dakota, is considering a minimum wage increase. Minimum wage laws require businesses pay their workers higher wages, which forces them to offset other costs to maintain profitability. These offsets frequently lead to fewer jobs, reduced work hours, diminished fringe benefits, and higher prices for consumers. Like many border cities, Fargo is vulnerable to cross border competition, meaning companies and consumers can easily cross state lines for better jobs and lower prices.
In early June, city commission candidate Lenny Tweeden proposed a gradually increase in Fargo’s minimum wage, up to $12 per hour. The proposal would increase the minimum wage to $10 per hour September 1 and raise it by 50 cents per hour annually until it reaches $12 per hour on September 1, 2022. The Fargo City Commission filed the proposal and will soon begin to debate the wage hike.
Fargo need only to look to Seattle to realize how a high minimum wage such as the one currently under consideration can harm a local economy. A new study from the University of Washington analyzing the recent minimum wage increases in Seattle found evidence that hiking the minimum wage to $13 per hour has had a negative impact on the city’s total payroll—particularly hurting low-wage workers.
The study examined the changes to Seattle’s labor market after each of the incremental wage increases in the city: the hike to $11 per hour on April 1, 2015 and the increase to $13 per hour on January 1, 2016. The results measure the number of low-wage jobs available, the number of hours that workers in low-wage jobs worked, and the amount of money paid to workers in these jobs. The first minimum wage increase in Seattle, from $9.47 to $11 per hour in 2015, led to only a modest reduction in employment. The second increase to $13 per hour on January 1, 2016, had a far more negative effect on the city’s labor market. Although the study cited a 3 percent increase in hourly wages for low-wage employees, it also found a 9 percent reduction in the number of hours worked at wages below $19 per hour.
As the Seattle example demonstrates, increasing Fargo’s minimum wage would likely have a dramatic effect on the number of low-wage jobs in the city. In Seattle, there was a $100 million per year reduction in the total payroll for low-wage jobs once the wage reached $13 per hour—the exact opposite of what minimum wage increases are meant to achieve. The results from Seattle seem to indicate any positive impacts of a minimum wage hike are limited and inevitably decrease dramatically if the rate is increased by too much and/or too quickly.
Advocates of minimum wage increases often assume low-wage earners are the primary breadwinners for their households, but this is rarely the case. Economist Walter Williams argues that “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 found 85 percent of the studies they considered credible demonstrate minimum wage laws cause job losses for less-skilled employees.
Furthermore, proponents of minimum wage hikes argue minimum wage laws protect workers from exploitation by employers and reduce poverty. However 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 in a 2010 study.
Increasing the 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. Cities and states should avoid arbitrary minimum wage hikes and let the market dictate wages instead.
The following articles examine mandated minimum wage increases and their effects on employment.
Minimum-Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle
This paper from the University of Washington evaluates effects of the Seattle Minimum Wage Ordinance on wages, employment, and hours worked for low-wage workers in the city. “Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016. Evidence attributes more modest effects to the first wage increase,” the study concludes.
Counterproductive: The Employment and Income Effects of Raising America’s 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.”
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.
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.
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.
The Minimum Wage Delusion, and the Death of 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.”
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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