Category Archives: Minimum Wage

CEI Experts on COVID-19 Relief Bill

My colleagues and I have a generally dim view of the proposed coronavirus stimulus bill. A roundup of our reactions is here. Here’s my contribution on its minimum wage proposal:

Senior Fellow Ryan Young:

“The Democrats’ demands require firms seeking federal aid to pay a minimum wage of $15 an hour. Small businesses across the country are struggling to make payroll. An unexpected increase in payroll costs could put far more workers at risk of losing their job than under normal times. At the very least, workers would see cuts to their non-wage pay such as insurance, meals, parking, and other benefits. These tradeoffs would appear at precisely the worst time.​”

The Minimum Wage Tax Increase

By far the most common criticism of minimum wages is that they cost jobs. This is incomplete—the data often show smaller job losses than one would expect after minimum wages go up. This is because workers earn more than wages—they also get non-wage pay such as insurance, free food and parking, and more. When regulations cause wage pay to go up, employers cut non-wage pay to pay for it. Job cuts happen, but they tend to be a last resort. I recently wrote a paper on these underappreciated tradeoffs.

The most underappreciated minimum wage tradeoff is a tax increase on the poor, which for some people would exceed $2,000. When untaxed non-wage pay is converted to taxable wages, workers pay higher taxes, without necessarily making more money. If a $15 minimum wage passes, it could cost some workers more than $2,000 in taxes, in addition to all the other non-wage pay cuts that come with a minimum wage increase.

I try to shine some light on this in an op-ed for Inside Sources:

To afford higher wages, employers cut back on other benefits, like health insurance, workplace leave flexibility, free meals, free parking or tuition reimbursement. That’s a real loss to workers, considering that non-wage pay is mostly tax-free.

By incentivizing employers to convert nonwage benefits to wages,  minimum wage advocates are, probably unknowingly, proposing a massive tax increase on the poor.

For some workers, this would mean a tax increase of up to $2,370 per year at a $15 per hour minimum wage. Depending on which state a worker lives in and other factors, shifting untaxed non-wage pay over to taxable wages could also expose some minimum wage earners to income tax liability, sales taxes and other taxes.

Read the whole thing here. My paper “Minimum Wages Have Tradeoffs” is here.

Minimum Wages Rise Across the Country

Twenty four states rang in 2020 with minimum wage increases. Most of the increases are modest, so the tradeoffs will be, too. But there was curiously little discussion of those tradeoffs. This is a common tendency among both the media and the general public. They often prefer to either deny that tradeoffs exist, or else play them down. This is unfair to affected workers.

The New York Times editorial board, for example, in a recent editorial titled “Double the Federal Minimum Wage,” opens:

Opponents of minimum-wage laws have long argued that companies have only so much money and, if required to pay higher wages, they will employ fewer workers.

Now there is evidence that such concerns, never entirely sincere, are greatly overstated.

Not only does this piece downplay unemployment tradeoffs, it is one of only two types of tradeoffs it mentions. The editorial also calls for increasing tipped workers’ wages, but those workers mostly disagree, preferring sometimes-informal tipped income over a higher formally reported wage.

Regarding unemployment, the Times piece cites the famous 1993 Card and Krueger study that found no unemployment increases in the aftermath of a New Jersey minimum wage increase. That study relied on survey data, in which business owners sometimes give less-than-honest answers, so as not to appear stingy or heartless. Card and Krueger also did not control for outside economic factors, or what statisticians call “the dreaded third thing.” These relevant third things include macro-level financial, economic, and monetary policy conditions, and local government policy changes other than minimum wage increases. By focusing on only one industry, fast food, Card and Krueger also did not see how other sectors responded to the same increase and possibly affected each other’s behavior.

Job cuts are one of the rarest tradeoffs to minimum wages. It is a drastic measure employers will take only if they have to. Instead, employers typically make much subtler, but more widespread cuts in other areas so they can avoid firing people. This is why, while most studies do find job losses from minimum wage increase, they are typically modest. This is not a victory for minimum wage increase advocates. It means they are not looking very hard for tradeoffs.

My recent paper focuses on those many tradeoffs. When wage pay goes up, non-wage pay goes down to roughly cancel it out. That means cuts to vacation time and perks like free food or parking, less generous insurance, less workplace flexibility, less attention paid to working conditions, and on and on. The mix of tradeoffs is different at every company, and for every affected worker inside a given company, but their rough effect is to roughly cancel out the benefits of the increase. Moreover, larger companies take advantage of minimum wage laws to artificially hobble smaller competitors by raising their labor costs. That is where the debate should be. Jobs are a small part of a much larger picture.

While the House passed a $15 federal minimum wage bill last year, the Senate is not likely to take it up. The more than 50 increases that have just taken effect are all at the state and local level, but minimum wages will almost certainly be a significant campaign issue in 2020. Regardless of November’s election results, next year’s incoming Congress will likely attempt another increase next year, just as most Congresses have over the last 80 years or so.

For more on minimum wages, see my paper “Minimum Wages Have Tradeoffs.”

In the News: Target and Minimum Wages

Reason‘s Eric Boehm quotes me in an article about unintended tradeoffs of Target’s $15 internal starting wage.

My recent paper on minimum wage tradeoffs is here.

In the News: Minimum Wages

The Jacksonville Journal-Courier‘s Marco Cartolano quotes me in an article about minimum wage increases in Illinois and Florida.

My recent paper on minimum wage tradeoffs is here.

In the News: Minimum Wage

Ingrid Case at Employee Benefit News has a thorough writeup of my recent minimum wage paper.

The article is here. The paper is here.

In the News: Minimum Wage Tradeoffs

Here is a writeup of my recent minimum wage paper being syndicated to local newspapers by the Center Square. The full paper is here.

On the Radio: Minimum Wage Tradeoffs

I recently appeared on the Conservative Commandos Radio Show to talk about my recent minimum wage paper. My segment starts at about 28:00 into this YouTube video of the show.

In the News: Minimum Wage

Bethany Blankley has a writeup of my recent minimum wage study.

Reason‘s Eric Boehm also included a mention in a daily roundup.

The full paper is here.

New Study: Minimum Wages Have Tradeoffs

Congress nearly increased the federal minimum wage from $7.25 to $15 per hour this year. Though the Raise the Wage Act is unlikely to pass the Senate, 29 states and numerous local governments have passed their own increases. Moreover, the next session of Congress will almost certainly reintroduce the bill. This issue will be alive for a long time to come. Though some workers would benefit from a higher minimum wage, this would only be at other workers’ expense. As I argue in a new paper, minimum wages have tradeoffs.

Moreover, tradeoffs go far beyond the usual complaints of job losses—of which the Congressional Budget Office estimates there would be 1.3 million if the Raise the Wage Act becomes law. The list includes, but is not limited to:

Differing regional impacts, layoffs, reduced non-wage compensation, a tax increase for low-income workers, fewer job openings, longer job searches, reduced hours, stricter policies for arriving late or leaving early, increased automation, higher insurance co-pays, less vacation and personal time, reduced or eliminated on-the-job perks, reduced employee discounts, less flexible hours, higher consumer prices, more outsourcing, higher youth unemployment, fewer minority workers hired, more abusive behavior by bosses, and higher crime rates.

Add them all up, and most economists believe minimum wages are likely a moderate net loss for low-income workers. For an ostensible poverty reduction policy, they are also poorly targeted. Minimum wage earners skew very young, often work part-time, especially if they’re over 25, and mostly live in households above the poverty level. Rather than causing all manner of tradeoffs and distortions by manipulating wages, a policy such as the Earned Income Tax Credit is far more likely to help the people it intends to, and with fewer tradeoffs.

Even assuming minimum wage increases meet the best-case scenario of being zero-sum, there are two ethical factors (beyond the money involved) that tip the scale against an increase. One is the rent-seeking minimum wages enable, and the other is reduced workplace flexibility for workers.

Rent-seeking: big companies including Walmart, Costco, and Amazon often have high internal minimum wages, and that’s great. What isn’t great is when those same companies lobby for legislators to impose higher minimum wages on their competitors. This can stack the deck against smaller businesses that can’t absorb the costs as easily. Worse, many people will actually believe and support the virtuous posturing hiding these rent-seeking grabs, making for a classic Baptists-and-bootleggers story.

Workplace Flexibility: Workers make more than wages. They also receive non-wage compensation ranging from tips to health insurance to employee discounts to free or discounted meals. These don’t always show up on a pay stub, but they still exist. One of the most common tradeoffs to a higher minimum wage is cuts to such non-wage pay. Total compensation doesn’t necessarily increase, it just gets shifted around—and taxed—in ways workers might not prefer.

When Washington, D.C. did away with the “tip credit” in its recent minimum wage increase, workers revolted and the City Council repealed the voter initiative just a few months after it passed. Most servers and bartenders would rather have high tips and a low wage than the package D.C. voters required them to take. Workers should be allowed to make those choices for themselves. Or think of someone who works at a music store or an electronics store in part for the employee discount. They might not like the job very much, but the discount helps to fund a hobby or a side business. For them, that non-wage perk makes the job worthwhile. A higher minimum wage might take that important benefit away.

For more, see my new paper “Minimum Wages Have Tradeoffs: Unintended Consequences of the Fight for 15.” For a shorter version, see the press release.