Following the financial roller coaster that was 2020, all state legislatures are beginning sessions reeling from budget deficits due to lost tax revenue courtesy of the coronavirus-related recession. Because of the perilous economic situation, many states are considering quick fixes to address their budget problems, even though these so-called quick fixes will likely make matters worse over the long term. For example, lawmakers in the Sooner State are considering legislation in the Senate that would raise the minimum wage. Senate Bill 161 would increase Oklahoma’s minimum wage from $7.25 to $10 per hour beginning January 1, 2022.
These Oklahoma lawmakers are considering implementing a sizable minimum wage hike in a feeble attempt to provide relief to their struggling constituents. However, this is a deeply ineffective way to improve the economy. Moreover, arbitrary minimum wage hikes produce unintended consequences that can inflict even more pain upon the very people they are supposed to benefit. Sadly, minimum wages hikes are one of the most significant reasons grocery store and fast-food chains have moved toward self-checkout kiosks in place of employees, especially teenagers, who have often previously occupied those positions.
Economists Grace Lordan and David Neumark showcase the effects of minimum wage hikes in relation to the increase of automation as a replacement for people in low wage jobs in their working paper, People Versus Machines: The Impact of Minimum Wages on Automatable Jobs. Lordan and Neumark find that raising the minimum wage increases the likelihood that low-skilled workers become unemployed or employed in inferior jobs, based on data collected from 1980 to 2015.
Minimum wage hikes rarely meet the expectations of the policymakers who advocate for them. For example, they do not raise the living standards in any appreciable way for individuals and families, yet illogical wage increases have the propensity to shutter small businesses for good. A recent study by the Congressional Budget Office, titled “The Effects on Employment and Family Income of Increasing the Federal Minimum Wage,” examines how increasing the federal minimum wage to $10, $12, or $15 per hour by 2025 would adversely affect employment and family outcomes.
According to the study, minimum wage increases have the potential to boost the wages of some in the working class. However, minimum wage hikes also push millions of workers out of their jobs due to increased automation and small business closures.
Minimum wage hikes have a myriad of unintended consequences to all businesses, especially small businesses—the heartbeat of the American economy. Minimum wage increases in Oklahoma would force businesses to reallocate their costs to cover the increase in employees’ wages, ultimately forcing them to alter spending elsewhere to offset their newly increased labor costs. More times than not, this results in reduced hiring, a decrease in work hours, and increased prices for consumers. This is often the small margin between staying open and bankruptcy for small businesses, which typically operate on slim margins to begin with.
As aforementioned, every state experienced some degree of state and federally imposed lockdowns and shelter-in-place orders due to the coronavirus pandemic, which sent shockwaves throughout the small business ecosystem that are still being felt. Therefore, a minimum wage hike in 2021 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 that have closed since the start of the COVID-19 pandemic have shut down permanently.
Failed businesses don’t pay property taxes, income taxes, sales and use taxes, and the dozens of other licensing and regulatory fees that governments rely on for revenue. Therefore, minimum wage hikes, like the one being considered in Oklahoma, could result in further reducing the revenue flow to the state, exacerbating the budget shortfall caused by the coronavirus pandemic. While seemingly politically popular, the downstream effects of a minimum wage increase would certainly create problems for Oklahoma’s budget over the long term.
It is disingenuous for Oklahoma lawmakers to push minimum wage hikes, which routinely result in businesses closing and increased unemployment, especially when unemployment has skyrocketed due to the ongoing pandemic. According to Wallethub, Oklahoma experienced a 63.7 percent increase in unemployment from December 2019 to December 2020.
Minimum wage hikes are never a viable economic solution. A 2007 study from economists at the University of California-Irvine and the Federal Reserve Board comprehensively examined the body of work on the subject and found 85 percent of the studies they considered credible demonstrate minimum wage hikes cause job losses for less-skilled employees. Furthermore, a 2010 study by economists at Cornell University and American University found no reduction in poverty in the 28 states that raised their minimum wage laws from 2003 to 2007.
Many states throughout the nation are considering minimum wage hikes in legislative sessions following the lead of President Biden’s call for a federal $15 per hour minimum wage increase. At the national level, a recent report from the Employment Policies Institute (EPI) found that a minimum wage of $15 per hour would cost the U.S. economy two million jobs when analyzing the economic effects of a federal $15 per hour minimum wage. Moreover, the trend of job losses associated with minimum wage hikes is not exclusively tied to the $15 per hour figure.
What is lost on the Biden administration and those who push for more than doubling the federal minimum wage is the fact that states such as Oklahoma have lower wage structures that work well for them. Oklahoma is in the bottom quadrant of wage structures that accompany the lower costs of living in the Sooner State. Minimum wage hikes have failed to pass in previous sessions because most Sooner State lawmakers understand the collateral damage that minimum wage increases could bring upon their economy.
Although attempts to bolster a minimum standard of living and protecting low-skilled workers in a pandemic-world are commendable, the evidence is clear: minimum wage hikes do not achieve these goals. Raising the Sooner State’s minimum wage would do little to lift Oklahomans out of poverty while annihilating entry-level jobs throughout the state. As such, legislators in Oklahoma should consider all of the economic turmoil and social harm that Senate Bill 161 would inflict.
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 American 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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