Following the financial roller coaster that was 2020, many 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 shortfalls, even though these so-called quick fixes would likely make matters worse over the long term. Ocean State lawmakers, like many others, have proposed legislation proposed that would hike the state’s minimum wage. More specifically, Senate Bill 689 proposes raising the state’s minimum wage from $11.50 per hour to $16 per hour, by January 1, 2023. If passed, the minimum wage hike would begin incrementally, with an increase to $13 per hour on October 1, 2021. The minimum wage would then increase to $15 per hour on January 1, 2022, ultimately hitting $16 per hour on January 1, 2023.
Furthermore, Senate Bill 689 contains provisions for cost-of-living increases to factor into the state’s minimum wage moving forward. Per the legislation, beginning January 1, 2024, and every January 1 thereafter, the minimum wage shall be increased by a percentage increase, if any, in the cost-of-living. This cost-of-living increase would be based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or its successor index as published by the United States Department of Labor.
As aforementioned, every state experienced some degree of lockdown due to the sudden onset of 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. According to the National Federation of Independent Businesses, 22 percent of Rhode Island small business owners reported sales are down 50 percent year-over-year. Furthermore, 13 percent of small business owners in Rhode Island report that they are in jeopardy of going out of business if current economic conditions do not improve. If these small business owners are already on the verge of bankruptcy, there is clearly little room for minimum wage increases.
Given the economic and social upheaval over the past year, it is not surprising that some Rhode Island lawmakers are considering implementing minimum wage increases in an attempt to provide relief to their struggling constituents. However, this is a deeply flawed and ineffective way to improve the economy. Moreover, arbitrary minimum wage hikes produce unintended consequences that often inflict even more pain upon the very people they are supposed to benefit. Sadly, minimum wage hikes are one of the most significant reasons grocery stores and fast-food restaurants 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.
What’s more, minimum wage hikes rarely meet the expectations policymakers claim they will. 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, especially among teenagers and those at the bottom rungs of the income ladder.
Minimum wage hikes also impose a myriad of unintended consequences upon all businesses, especially small businesses—the lifeblood of the American economy. Minimum wage increases force businesses to reallocate capital 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 less hiring, a reduction in work hours, and higher prices for consumers. For many small businesses, a minimum wage hike would lead to bankruptcy, as they are no longer able to remain profitable due to substantially increased labor costs.
At the national level, a recent report from the Employment Policies Institute (EPI) found that a minimum wage hike would cost the U.S. economy two million jobs when analyzing the economic effects of a federal minimum wage hike. The EPI study notes that of those two million, the jobs most likely to vanish are those in the restaurant and hospitality industries. These two sectors were decimated by the pandemic. Forcing businesses in these industries, particularly small businesses, to drastically raise their labor costs would devastate the few that have hung on during this harrowing period.
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, arbitrary minimum wage hikes could result in further reducing revenue to the state, exacerbating the deficit caused by the coronavirus pandemic in the first place. While politically popular, the downstream effects of a minimum wage increase would certainly create long-term challenges for Rhode Island’s state budget.
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 among 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.
It is unwise for Rhode Island lawmakers to push minimum wage hikes, which result in business closings and increased unemployment, especially when joblessness remains high. According to a brief published by the Congressional Research Service, during the pandemic, the unemployment rate reached catastrophic levels, unseen in decades. Even more worrisome, the U.S. labor participation rate has fallen precipitously since the onset of the pandemic.
It is disingenuous for Rhode Island lawmakers to push minimum wage hikes, which result in business closings and increased unemployment, especially when unemployment has skyrocketed due to the pandemic. According to Wallethub, Rhode Island experienced a 78.6 percent increase in unemployment from March 2019 to March 2021.
Although attempts to bolster a minimum standard of living and protecting low-skilled workers are laudable, the overall economic effects of proposed minimum wage hikes accomplish neither of those worthy goals. Arbitrary minimum wage hikes, out of sync with the laws of supply and demand, would do little to lift struggling individuals and families in Rhode Island from poverty while destroying untold jobs. As such, Rhode Island State senators should consider all of the economic and social harm associated with Senate Bill 689.
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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