Many states have recently been suffering from labor shortages, high inflation, and the ever-worsening supply chain crisis. Unfortunately, the quick “fixes” such as minimum wage hikes advocated and passed by many policymakers in response to this perilous economic situation only make matters worse, especially for small business owners.
Due to a recent minimum wage hike, lawmakers in the New Jersey Assembly have proposed Assembly Bill 4493, legislation that would provide corporation business tax (CBT) credits and gross income tax (GIT) credits to restaurant owners intended to offset the negative impacts of the increased state minimum wage. AB 4493 moves in tandem through the legislative process with companion legislation, Senate Bill 2836.
The legislation would provide a tax credit to restaurant owners equal to the hours worked by an employee during a tax year multiplied by the difference between the current state minimum wage and the state minimum wage prior to the recent increase.
AB 4493 restricts the number of employees that can be used in calculating the tax credit amount, caps the credit amount at $12,500 per employee, and limits the credit’s availability to the 10 years immediately following the effective date of the bill. Furthermore, a taxpayer will not be allowed to claim a credit for more than three restaurant locations, and the credits will only be available to a taxpayer with five or fewer restaurants.
A legislative initiative such as this clearly illustrates the warranted skepticism towards the efficacy of minimum wage hikes, especially regarding their deleterious impacts upon small business owners.
Each U.S. state experienced some degree of governmentally imposed lockdowns due to the sudden onset of the coronavirus pandemic, with small businesses bearing the brunt of that economic pain. Government imposed lockdowns sent shockwaves throughout the small business ecosystem that are still being felt which is exactly why minimum wage hikes could not be more ill-timed. In an analysis based on self-recorded closures in their database, Yelp estimates that 60 percent of U.S. businesses have been devastated by the pandemic.
Given the ongoing economic upheaval, it is unsurprising that New Jersey lawmakers turned to implementing minimum wage increases to provide relief to their struggling constituents. Yet, these efforts have been both ineffective and counterproductive ways of combating the problem, ultimately leading to the necessity of legislation such as AB 4493.
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 June 2022 Consumer Price Index (CPI) report reflected an increase of 9.1 percent—the highest increase 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 minimum wage hikes might be politically popular, the downstream effects of these increases 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, the overall economic effects of forced minimum wage hikes accomplish neither of those worthy goals and lead to the necessity of legislation such as Assembly Bill 4493. Ideally, the initial New Jersey minimum wage hike would not have been passed, eliminating the need for a bill such as this one.
Arbitrary minimum wage hikes, out of sync with the laws of supply and demand, do little to lift struggling individuals and families in New Jersey from poverty while destroying the livelihood for many small business owners. As this legislation moves through the New Jersey Assembly, lawmakers should see the long-term economic benefits to providing some reprieve for restaurant owners. They might also consider amending the prior legislation creating these minimum wage hikes that galvanized this new legislation.
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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