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Research & Commentary: As Sessions Begin, No State Legislatures Should Consider Minimum Wage Hikes

January 15, 2021

In this Research & Commentary, Samantha Fillmore examines what minimum wage hikes will do to small businesses and why state legislatures should not pursue such hikes while in session.

State legislatures are kicking off 2021 with legislative sessions focused on economic recovery after a highly tumultuous 2020 and the accompanying economic fallout of the coronavirus pandemic. Every state in the union experienced a shortfall in previously projected tax revenues due to state and federally imposed lockdowns and shelter-in-place orders. Every American is hopeful that 2021 will pose fewer economic challenges and lawmakers know this. Therefore, it is not surprising that some lawmakers are considering implementing minimum wage increases in an attempt to provide relief to their struggling constituencies. 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 people they are supposed to benefit.

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, a $15 per hour minimum wage would boost the wages of 17 million workers. However, it would also push 1.3 million workers out of a job. In almost every scenario, minimum wage hikes result in some workers seeing their wages rise, while many more lose gainful employment.

Minimum wage hikes have a myriad of harmful unintended consequences to all businesses, especially small businesses, the backbone of the American economy. Minimum wage increases in any state 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 reduction in work hours, and increasing prices for consumers. This is often the small margin between staying open and bankruptcy for small businesses that already operate on slim profits.

Indeed, 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. While seemingly politically popular, the downstream effects of a minimum wage increase will certainly create challenges for municipal and state budgets.

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.

Minimum wage hikes are never a viable economic solution. Furthermore, given the struggles of small businesses over the past year, 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.

Despite this, more than 20 states saw minimum wage increases brought about by the new year according to the Congressional Review Service. In addition, wages also increased in 32 cities and counties, according to the National Employment law Project.  

It is disingenuous for lawmakers across the nation to push minimum wage hikes, which as a function of themselves result in businesses closing and increased unemployment, especially when unemployment has skyrocketed due to the ongoing pandemic. According to a brief published by the Congressional Research Service, during the pandemic, the unemployment rate has reached catastrophic levels, unseen in decades. Even more worrisome, the U.S. labor participation has fallen precipitously since the onset of the pandemic.

Although attempts to bolster a minimum standard of living and protecting low-skilled workers in a pandemic-world are laudable, the overall economic effects of proposed minimum wage hikes will do more harm than good in a time when every state cannot afford additional economic hardship. As such, legislators should consider all of the economic and social harm that arbitrary minimum wage hikes bring about.

The flowing documents provide more information about minimum wage laws. 

Busting 5 Myths about the Minimum Wage

 http://blog.heritage.org/2013/03/05/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

 http://mercatus.org/publication/unintended-consequences-raising-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

 https://www.heartland.org/publications-resources/publications/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

https://www.cbo.gov/system/files/2019-07/CBO-55410-MinimumWage2019.pdf

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

https://www.pewresearch.org/fact-tank/2019/07/30/two-thirds-of-americans-favor-raising-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.

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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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Author
Samantha Fillmore is a State Government Relations Manager for The Heartland Institute.
sfillmore@heartland.org @GRHeartland