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Research & Commentary: Delaware Considers Commonsense Minimum Wage Economic Impact Analysis Reports

May 19, 2021

In this Research & Commentary, Samantha Fillmore examines a House Bill in Delaware that would require the Comptroller General to run a 5-year economic impact report when minimum wage hikes are proposed.

State legislatures are no strangers to bills that would increase the minimum wage, particularly following the economically tumultuous year that was 2020. However, the First State is setting a refreshing change of pace with House Bill 147. This legislation would amend Chapter 19, Title 29 of the Delaware Code by requiring that the Controller General shall prepare an economic impact analysis on any proposed legislation that would increase the state’s minimum wage.

HB 147 would be a step in the right direction amid the myriad of minimum wage hike bills introduced throughout the nation. As of late, minimum wage hikes have been the default method of many legislators seeking to provide a quick fix for struggling constituents following the economic turmoil of the COVID-19 pandemic.

However, after months of lockdowns that inordinately harmed small businesses, minimum wage hikes 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. small businesses that were forced to close at the beginning of the pandemic have shuttered permanently.

Given the economic upheaval of 2020, it is not surprising that some lawmakers are considering implementing minimum wage increases to provide a sense of economic relief. However, this is a deeply flawed and ineffective way to improve the economy. Arbitrary minimum wage hikes produce unintended consequences that can inflict even more pain upon the very people they are supposed to benefit. For example, 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 entry-level positions. 

Moreover, minimum wage hikes rarely meet the expectations of the well-intended 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,” examined 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 to all businesses, especially small businesses—the lifeblood of the American economy. Minimum wage increases 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 less hiring, a reduction in work hours, and higher prices for consumers. For many small businesses, a minimum wage hike results in 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 $15 per hour federal minimum wage hike would cost the U.S. economy two million jobs. 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 during 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.

Although HB 147 is far from a panacea, it would at least cause lawmakers to think twice before voting for minimum wage hikes in Delaware. The bill would require the Delaware Comptroller General to prepare an economic impact analysis on legislation that would increase the state’s minimum wage. This would include information regarding the background on the minimum wage increase, the effect the minimum wage increase would have on state spending, the effect of minimum wage increases on state employment, inflation-adjusted output in the state, and the impact on the prices of goods and services in the state.

Furthermore, the analysis must scrutinize the economic effects of a minimum wage increase over at least a period of five years. Under this bill, legislation required to have an economic impact analysis under this section may not be considered by the Senate or House of Representative without the economic impact analysis as outlined above. Make no mistake, HB 147 would likely prevent capricious minimum wage hikes and save countless small businesses and jobs in the Delaware economy by implementing commonsense research.

As history shows, minimum wage hikes are almost 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.

What’s more, 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 all too often result in further restricting revenue flow to the state. While politically popular, the downstream effects of minimum wage increases have created long-term consequences for state revenues and budgets.

It is disingenuous for lawmakers to push minimum wage hikes, which result in business closings and increased unemployment, especially when unemployment remains high. According to a brief published by the Congressional Research Service, during the pandemic, the national 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.

Although attempts to bolster a minimum standard of living and protecting low-skilled workers in a post-pandemic world are laudable, the overall economic effects of minimum wage hikes accomplishes neither of those worthy goals. House Bill 147 in Delaware should be seriously considered by lawmakers concerned with long-term economic success in the First State. Moreover, every state in the nation should consider something similar to this commonsense legislation. This is particularly true in a time when we are on the brink of another possible economic downturn fueled by inflation and excessive federal spending.

 

The following 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