Category Archives: Minimum Wage

Federal Minimum Wage Hike will Force Cuts Elsewhere

This is a CEI press statement from February 26, 2021.

With the Democrat-controlled Congress aiming to imminently pass a plan to increase the federally-mandated minimum wage from $7.25 to $15 per hour nationwide as part of a $1.9 trillion Covid-related spending bill, CEI experts warn that foisting that labor cost increase on employers will force them to make painful cuts elsewhere.

Statement by Sean Higgins, CEI Research Fellow

The Raise the Wage Act will make the federal minimum wage $15 an hour because “fight for 15” is a catchy slogan, not because there is definitive economic research saying that is the optimal level to help the working poor. The best the legislation’s fans can say is that they don’t think $15 will hurt that much — evidence contradicted by the Congressional Budget Office report that the legislation will eliminate 1.4 million jobs. The workers who do keep their jobs would likely get fewer hours and benefits and face higher prices as employers adjust. Congress could do better if it asked, “How do we help ensure an economy that creates jobs paying more than the minimum wage?”

Statement by Ryan Young, CEI Senior Fellow

Congress should keep two things in mind about raising the federal minimum wage: regional differences and tradeoffs. Midtown Manhattan and rural Kansas have different costs of living. They should not have the same minimum wage. Second, the tradeoffs to minimum wages go beyond job losses. Workers also make non-wage pay, which employers will cut to offset some of the wage increase. That includes things like insurance, free food or parking, paid time off, and other perks. These non-wage cuts will reduce the impact of any wage increase.

Related:

Minimum Wages Have Tradeoffs: Unintended Consequences of the Fight for 15

The problem with a one-size-fits-all federal minimum wage hike

The Regional Differences Argument against a $15 Minimum Wage

The strongest political argument against increasing the federal minimum wage is the regional differences argument. Basically, while a $15 minimum wage might not be a big deal in an expensive place like New York or San Francisco, the tradeoffs would be much steeper in lower-cost places like small towns and rural areas. That tends to matter to politicians more than the usual economic arguments. Over in The Hill, I explain why the regional differences argument means there should be no federal minimum wage.

House members often represent heavily urban or heavily rural districts, so they don’t have to worry much about regional differences. Senators do, because they represent entire states. They have constituents in expensive big cities and constituents in lower-cost small towns. Something barely felt in downtown Chicago might not play as well in Peoria. This is one reason why minimum wage bills such as the Raise the Wage Act routinely pass the House yet stall in the Senate.

Regional differences are also why President Biden, whose constituency is the entire country, said that it “Doesn’t look like we can do it” about including a $15 minimum wage in the next COVID-19 spending bill.

The regional differences argument is in addition to the other problems with minimum wages. The tradeoff of higher wages is lower no-wage compensation, which includes cheaper insurance, fewer breaks, less vacation time, fewer resources put into better working conditions, and more.

Big companies such as Amazon and Costco already pay $15 minimum wages to their workers, yet favor it for their competitors, too. This is rent-seeking by using government to raise smaller competitors’ costs and lock in their own dominance. Minimum wages often act as a tax increase on lower-income workers. Their total compensation shifts toward higher taxable wages and lower untaxed benefits and perks. Even if their total compensation remains roughly unchanged, those extra taxes can mean a cut in take-home pay.

Read the whole thing here. For more arguments against minimum wage legislation, see my paper “Minimum Wages Have Tradeoffs.”

Event: Reviving America after a Year of Chaos

Yesterday I spoke on a panel discussion hosted by the Pacific Legal Foundation. The topic was opportunities and challenges for enacting sound policy in the year to come. PLF president Steven Anderson moderated, and the other panelists included the State Policy Network‘s Jennifer Butler and Greg Brooks of the Better Cities Project.

The event is viewable on YouTube here.

Minimum Wage Tradeoffs Go beyond Jobs

I’m quoted in a Daily Signal writeup on several policy issues the new administration will be active on in the coming months. My quote is on the minimum wage:

However, the economic impact isn’t limited to jobs, said Ryan Young, a senior fellow at the Washington, D.C.-based Competitive Enterprise Institute. 

“The biggest trade-off and negative effect would not be job loss, but non-wage pay decrease,” Young told The Daily Signal. “Employers would cut tuition payments, benefits, and it would mean more work for the employees if positions aren’t filled.”

Young added that the economic impact could be harsh, but noted that the average for state minimum-wage laws nationally is “in the neighborhood” of $12 per hour. So, the proposed increase itself for many states would not be more than double. 

Read the whole thing here.

Federal Minimum Wage Hike to $15 an Hour Will Hurt Small Businesses, Lead to Lost Jobs

This news release was originally posted at cei.org.

President-elect Joe Biden today announced a $1.9 trillion COVID-19 recovery plan that includes not only $1,400 stimulus checks to many Americans but a federal minimum wage hike to “at least $15 an hour.” CEI economic and labor policy experts warned against the real-world impact that new mandate would have on businesses and jobs.

Ryan Young, Competitive Enterprise Institute senior fellow:

“Adding a $15 per hour minimum wage to the next COVID-19 relief bill would be a mistake because the timing is terrible and the tradeoffs are not worth it. Small businesses often have a hard time making payroll as it is, with bills and rent still piling up amid COVID-related slowdowns. A higher minimum wage would do no good for the workers who would be let go because of it.

“A $15 minimum wage would also give big businesses an unfair advantage. Many big companies such as Amazon, Target, and Costco already have $15 minimum wages for their employees. Other big companies can afford to automate some jobs and have the cash reserves to absorb extra payroll for the rest. Smaller competitors might not be able to keep up, especially during hard times like right now.”

Sean Higgins, Competitive Enterprise Institute research fellow:

“Ironically, it was only a few years ago that Neera Tanden, President-elect Joe Biden’s pick to be the next director of the Office of Management and Budget, was warning Democrats against a $15 minimum wage. Tanden, speaking as president of the Center for American Progress, told Hillary Clinton’s campaign in an April 15, 2015 email, ‘Substantively, we have not supported $15—you will get a fair number of liberal economists who will say it will lose jobs.’

“Tanden was right back then: setting the federal wage that high will result in employers cutting back in hiring and limiting workers’ hours to adjust to the higher labor costs. Ultimately, the workers will see little benefit. Consumers, on the other hand, will see higher prices across the board as companies turn to higher prices for their goods and services.”

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.