Will a new minimum-wage law trump the law of supply and demand in the labor market? Despite recent experiences in Seattle, California, and other places that have hiked the minimum wage, activists lobby through the “Fight for Fifteen” movement still agitate for a drastic increase in the base rate. In a new Heritage Foundation “issue brief,” James Sherk estimates that the impact of such an increase would be the loss of seven million jobs nationwide.
The most obvious problem is a sudden increase in costs for businesses that force an evaluation of staffing (via Jeff Dunetz):
Companies hire workers when the additional earnings their labor creates exceeds the cost of employing them. Starting wages of $15.00 per hour mean full-time employees must create at least $38,700 a year in value for their employers (including wages, employer payroll taxes, and Obamacare-mandate penalties). Such a high hurdle would make it much harder for less-experienced and less-skilled workers to find full-time jobs. Many of these workers are not yet productive enough to create that much value for their employers and businesses will not hire them at a loss.
Consequently, many businesses might respond to a $15 mandate by eliminating positions, cutting hours, and looking for new ways to implement labor-saving technology. Some companies might have to face shutting down or leaving America entirely to cope with the additional expenses.
This process has already begun in California. Shortly after Los Angeles raised its city minimum wage to $15 per hour, American Apparel eliminated 500 clothing manufacturing jobs in the city.The Los Angeles Times reports the company planned to relocate those jobs within California. After California raised minimum starting wages statewide, however, American Apparel began examining options to move production outside California.
Sherk doesn’t exaggerate the Los Angeles story. Back in April, the LA Times headlined this story by declaring “the exodus has begun.” The garment trade had already experienced difficulties with the expenses of manufacturings in LA and California, and the minimum-wage hike was the last straw:
In the last decade, local apparel manufacturing has already thinned significantly. Last year, Los Angeles County was home to 2,128 garment makers, down 33% from 2005, according to Bureau of Labor Statistics data. During that period, employment also plunged by a third, to 40,500 workers. Wages, meanwhile, jumped 17% adjusting for inflation, to $698 per week — although that can include pay for top executives, as well as bonuses, tips and paid vacation time.
Many apparel companies say Los Angeles is a difficult place to do business. Commercial real estate is expensive and limited, the cost of raw materials continues to rise and it can be difficult to find skilled workers who can afford to live in the city. They expect things will become even more challenging after the minimum-wage hike further raises their expenses.
American Apparel had actually convinced other manufacturers to make a go of it in Los Angeles. They paid workers higher than the minimum wage in order to ensure higher quality. The risk paid off … at least until the city and then the state hiked the wage floor above what founder Dov Charney was already paying.
The demand for a $15 an hour minimum was at one time considered a fringe demand, Sherk notes. Now, however, Bernie Sanders has a bill on the Senate calendar to make it law by 2021, and it has become the Democratic Party’s official position.
So what would this cost? Sherk estimates the “employment response” based on the costs involved and the extent of the workforce in each state that would be directly impacted by the rate hike. The devastation to employment would be massive:
However, economists have extensively studied how businesses respond to higher wages overall, not just minimum-wage increases. On average these studies find a 10 percent increase in labor costs causes firms to reduce employment of less-skilled workers by 6.8 percent in the long run.This is not a precise estimate—some studies find greater job losses, others find lower. This figure does indicate, however, the approximate magnitude of job losses that occur when labor costs rise.
Table 1 uses this employment response to estimate the impact of a $15-per-hour state minimum wage in each state. The table shows the total proportion of employees directly affected by minimum starting wages of $15 per hour in 2021 in each state. It also shows the total number of full-time-equivalent (FTE) jobs such a mandate would cost each state, relative to the employment that would have occurred if each state left its minimum wage at 2015 levels.
Nationwide, such state minimum-wage hikes would result in the loss of approximately 9 million jobs.
Do we have some data to validate this projection? In fact, we do — from Seattle. Three weeks ago, the Washington Post reported on a survey that found that average wages increased by only 9% of the wage increase, and may have actually cost workers rather than boosted salaries. Bear in mind that the regulatory increase was $1.53 an hour, which should have produced a weekly increase of $61.20 — if these mandated increases actually work:
The average hourly wage for workers affected by the increase jumped from $9.96 to $11.14 [$47.20 for a week — Ed] , but wages likely would have increased some anyway due to Seattle’s overall economy. Meanwhile, although workers were earning more, fewer of them had a job than would have without an increase. Those who did work had fewer hours than they would have without the wage hike.
Accounting for these factors, the average increase in total earnings due to the minimum wage was small, the researchers concluded. Using their preferred method, they calculated that workers’ earnings increased by $5.54 a week on average because of the minimum wage. Using other methods, the researchers found that the minimum wage hike actually caused total weekly earnings to drop — by as much as $5.22 a week.
Going from a promise of $61 to a reality of a $5 increase — or decrease — is the clearest example of the difference between utopian economics and actual economics in some time. As I noted at the time, Seattle’s enforced wage-floor increase was a disaster for workers:
Let’s just focus on the upside for a moment. In a forty-hour week, an increase of $5.54 would amount to … fourteen cents an hour. That means that only 9% of the increase in minimum wage has effectively reached workers. Ninety-one percent has dissipated in the need for businesses to counter the increased costs, either through reductions in hours or lost jobs. And that’s the best-case scenario.
The economics of business and labor costs are really not that difficult to figure out. If businesses have to absorb an artificial and sudden increase in costs, either prices have to rise or other costs have to get cut. That would still be true if government forced businesses to index the minimum wage, as Democrats demand, although the failures would be more difficult to track. In the industries most directly impacted by minimum-wage hikes, cost competition is usually too great to allow for significant price increases, so businesses cut costs instead.
Here’s the main point of this sad story from Seattle. Minimum wage increases do not increase buying power — not in the long run, because prices reset to counter the increased costs and wipe out any theoretical gains for low-income workers. As this study shows, it doesn’t increase buying power in the short run either for workers that supposedly should benefit from the policy. Even the best-case scenario only produces a bump high enough to get an extra latté a week from Starbucks — until Starbucks has to raise its prices, or force longer wait times with smaller staffs, which is a cost of another kind.
The continual push for minimum-wage hikes flies in the face of all evidence, and of all results. If this policy were effective, we wouldn’t need to keep raising the level of pay; we would have solved poverty decades ago. It’s wishcasting at best, and it’s destructive political pandering at worst — and as we see in Seattle, usually it’s the worst.
Let’s return to Sherk’s analysis. Over a tenth of all job-equivalent losses would occur in Texas, which probably doesn’t keep progressives up at night, but other big losers would include California (981K jobs lost), New York (434K lost), and the key swing state of Florida (727K lost). Fight for 15 wouldn’t reduce poverty — it would expand it, while accelerating inflationary pressure and forcing small businesses into closure. The only real beneficiaries will be the few who can still get and keep a job — and the unions whose contracts are indexed to the minimum wage.