Minimum Wage Hikes Come with Consequences

This year, 21 U.S. states and the District of Columbia are raising their minimum wages, affecting employees from Alaska to Maine. Washington, D.C.—which already boasts the highest minimum wage in the country—will increase theirs to $14 an hour in July, and $15 per hour come 2020.

Proponents see the minimum wage as an effective tool to combat poverty and reduce income inequality. Indeed, minimum wage hikes do boost net earnings for some workers in certain localities.

But they are not without trade-offs. As economist Milton Friedman often quipped, “There’s no such thing as a free lunch.” In other words, you can’t create something out of nothing. When the government—whether local, state, or federal—mandates a minimum wage hike, it is forcing employers to pay their workers more on an hourly basis. The government does not bear this cost; the business does.

After a minimum wage hike, job creators are faced with higher labor costs and, by extension, lower profit margins. They are left with fewer resources to invest in and grow their businesses. It’s Economics 101: If you’re forced to pay your employees more, there is less money left over to hire new workers or even raise wages organically—that is, without a government mandate.

Let’s take Seattle, Washington as a case study. In 2016, the city’s minimum wage for large employers increased to $13 an hour—37 percent higher than the statewide minimum wage at the time. When that happened, hourly wages paid to some low-wage employees did rise, as intended. That’s the good news.

The bad news? According to a University of Washington (UW) study, the higher minimum wage resulted in the elimination of more than 5,000 low-wage jobs. UW’s researchers put it like this: “In percentage terms, the loss of jobs was significantly larger than the gain in hourly wages.”

It gets worse. In their words: “While some low-wage workers may have earned more, we estimate that the net earnings per low-wage job in Seattle fell by an average of $125 per month. For low-wage workers, this is a substantial loss.” It is indeed, including for millennials on the first rung of the career ladder.

So, are Seattle’s workers better off now? It depends on who you ask, but one thing is clear: If one employee sees higher earnings at the expense of two co-workers who are laid off, then a minimum wage hike isn’t really combatting poverty or reducing income inequality writ large.

Nonetheless, some in Congress are moving forward with a proposal to increase the federal minimum wage from $7.25 to $15 an hour—a 107 percent increase. Left-leaning think tanks like the Economic Policy Institute claim the move would “lift wages for 41 million American workers.”

Yes, it may benefit some workers. But what about those who lose out? What about the millions of Americans left with fewer career opportunities?

Federal mandates also fail to take into account geographic differences and economic discrepancies. A $20 minimum wage that may not devastate businesses in Silicon Valley, for example, is less likely to work in Jackson, Mississippi or Little Rock, Arkansas.

For a long time, this was commonly understood. Look no further than this 1987 editorial from The New York Times, claiming the “right minimum wage [is] $0.00.” The Times’ editorial board explained then that “raising the minimum wage by a substantial amount would price working poor people out of the job market,” citing an “increase [in] unemployment.” Again, it’s Economics 101: “Raise the legal minimum price of labor above the productivity of the least skilled workers and fewer will be hired.”

That lesson is as true now as it was then. Today’s policymakers would be wise to learn it.