When it comes to the minimum wage, we may never know the answer.
Many states already have increased minimum wages, and the “Fight for $15” crowd wants a nationwide increase.
So let’s explain, for the umpteenth time, why this is misguided.
We have lots of data and anecdotes to review, so let’s begin with some scholarly research from Europe.
“This paper estimates the long-run impact of youth minimum wages on youth employment by exploiting a large discontinuity in Danish minimum wage rules at age 18 and using monthly payroll records for the Danish population. … On average, the hourly wage rate jumps up by 40 percent when individuals turn eighteen years old. Employment (extensive margin) falls by 33 percent and total labor input (extensive and intensive margin) decreases by around 45 percent, leaving the aggregate wage payment nearly unchanged. Data on flows into and out of employment show that the drop in employment is driven almost entirely by job loss when individuals turn 18 years old. We estimate that the relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is about -0.8.”
Below is the most relevant chart from the study, which shows a rather remarkable drop in employment, as you can see.
Speaking of academic research, a new report from the European Central Bank confirms that higher minimum wages have a negative impact on both employment and consumer costs.
“Rises in the minimum wage determine not only the bottom part of the earnings distribution but also labour costs in general, and this could potentially cause headcount reductions. … We address this topic using a unique firm-level cross-country survey dataset compiled from a survey … Firms in eight Central and Eastern European (CEE8) countries, namely Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovenia, were asked about the particular adjustment strategies they had chosen following a specific instance of a rise in the minimum wage … The most popular adjustment channels are the increase in product prices … employment effects are realised mostly through reduced hiring, rather than direct layoffs.”
This chart from the study is actually somewhat encouraging since it shows that employers bend over backwards to try to save jobs.
Now let’s look at real-world examples from the United States.
A landmark restaurant in Boston is closing, in part because the minimum wage was increased.
“One of Boston’s most historic restaurants is closing its doors … Durgin-Park in Faneuil Hall … disappointed customers are trying to get in their final meals. … ‘This is another passing of a great institution,’ said Berg. Rachelle Mazzone is Durgin-Park’s bartender and says dozens of long-time workers were told the restaurant would be closing next weekend. She was told it’s no longer profitable. … According to Ark Restaurants CEO Michael Weinstein, the restaurant wasn’t profitable anymore. He says … increase in minimum wage and health care costs … were all factors in the restaurant’s downfall. … Since 1827, the business attracted faithful diners and tourists to its Faneuil Hall location, winning several culinary awards.”
An increase in the minimum wage may have been the straw to break the camel’s back for three restaurants in New York.
“The rising minimum wage is getting at least part of the blame for the abrupt closure of three St. Lawrence County restaurants. … About 60 people have lost their jobs. ‘The minimum wage increase has been a big burden on our business. At one point we were up to 100 employees and the minimum wage has just increased every year since I opened in 2009. It’s been harder and harder to do business in New York state every year,’ said Marc Morley, owner of the restaurants. … Morley said he told the restaurant managers to notify the workers. ‘They held all the contact information for all their individual employees,’ he said. ‘It was an abrupt decision on our end. It wasn’t something we were planning on doing. We just got to the point where the businesses weren’t profitable and we were losing money every week.’”
Here are some results from a study on the higher minimum wage in Minnesota:
“Beginning in 2014, the state of Minnesota began a series of minimum wage increases. … While the effects of minimum wages changes remains a controversial topic, comparing relative outcomes in Wisconsin and Minnesota suggests that the minimum wage increases led to employment losses in Minnesota, particularly in the restaurant industry and youth demographic most affected by the changes. … Following the minimum wage increases limited service restaurant employment fell by 4% in Minnesota relative to Wisconsin. Further, youth employment fell by 9% in Minnesota following the minimum wage increases, while it increased by 10.6% in Wisconsin over the same time period. In addition, part of the increased wage costs employers faced have been passed on to consumers through higher prices. The relative price of restaurant food in the Minneapolis metro area had fallen by 2% in the four years preceding the minimum wage hikes, but it has risen by 6% in the four years since.”
This chart from the study shows the impact on employment levels. The gap between the two lines is a measure of the foregone jobs in Minnesota.
As I’ve noted before, some groups are more victimized than others.
Here are excerpts from an article by Black Entertainment Television:
“… economists William Even from Miami University and David Macpherson from Trinity University report that when a state, or the federal government, increases the minimum wage, Black teens are more likely to be laid off. The duo analyzed 600,000 data points … The report focused on 16-to 24-year-old males without a high school diploma and found that for each 10 percent increase in the federal or state minimum wage employment for young Black males decreased 6.5 percent. By contrast, after the same wage boost, employment for white and Hispanic males fell respectively just 2.5 percent and 1.2 percent. The real hit for Black teens occurred, however, in the 21 states that had the federal minimum wage increase in 2007, 2008 and 2009. The findings reveal that while 13,200 Black young adults lost their jobs as a direct result of the recession nearly 40 percent more, a total of 18,500, were fired because of the rise in the federal minimum wage.”
Now let’s look at a video on the Seattle minimum-wage hike.
Now that we’ve dug through lots of data and research on why it would be bad news for workers if the minimum wage went up, it would be appropriate to make the obvious point that higher wages would be a desirable outcome.
And as Andy Puzder explained in The Wall Street Journal, that is why there is no substitute for economic growth.
“The formula is simple: When the economy accelerates, employers compete for employees and wages increase. I experienced this during my 17 years as CEO of a national quick-service restaurant chain. The stronger the economy, the harder it was to get good employees. Conversely, when growth is weak, as it was during most of the Obama presidency, employees compete for jobs and wages stagnate. … The left’s proposed solution to wage stagnation has been for government to mandate increased wages by more than doubling the minimum wage from $7.25 to $15 an hour. That causes employers to eliminate jobs and reduce hours to offset their increased costs. To increase wages without these unintended consequences, you need economic growth. … With regulatory relief, tax cuts and the increased business that comes from economic growth, employers now have the resources to bid up wages. …the competition for employees and the associated wage increases will continue—if government stays out of the way.”
I basically said the same thing at the end of this interview from a few years ago.
P.S. This video is a great summary of why minimum wage laws should be eliminated.
Daniel J. Mitchell is a top expert on tax reform and supply-side tax policy and is Chairman of the Center for Freedom and Prosperity. Mitchell is a strong advocate of a flat tax and international tax competition.