The Economic Cost of Minimum Wage Hikes

Original Article:

  • Author: Michael Saltsman

  • Publication Date: July 2013

  • Newspaper: The New York Daily News

  • Topics: Minimum Wage

Democrat Bill de Blasio, in an effort to call attention to his campaign for mayor, has joined six city councilmembers in a pledge to live for a week on the minimum wage.

It’s a flawed concept from the start, ignoring the fact that the majority of minimum wage earners are not living in poor families, and that those who do support families on their own have thousands of dollars in additional income available via policies like the Earned Income Tax Credit.

But more importantly, this effort to highlight the experiences of minimum wage employees leaves out the other half of the story. Immortalized in local newspapers, small business owners have explained in painful detail the steps they’ve been forced to take to adapt to past government-mandated labor cost increases. Their quotes serve as a powerful and tangible reminders of the consequences of misguided policymaking.

Consider a few stories of minimum-wage induced layoffs and hardships from the recent past. Following the 40% federal minimum wage hike between 2007 and 2009, one Kansas business owner lamented that she “had to lay off a few of her dishwashers because she couldn’t pay all of her 22 workers more.” A nearby Missouri restaurant owner said the same thing: “As an independent restaurateur, I can’t survive [the minimum wage increase] without staff cuts.”

There’s also the story of a Michigan Goodwill, which at one point had hired 57 underprivileged kids to work at a local training center over the summer. Yet following a statewide wage hike in 2007, they could only afford to hire less than half that original number.

Similarly, a 2006 wage increase in Arkansas left one entrepreneur asking, “Where am I going to cough up $17,000 to pay these people?” Unable to find the money, he had to “cut four or five” employees in order to stay in business.

Such cuts are a simple reflection of the economic realities that many stores face. Businesses that hire minimum wage employees, such as restaurants, retail stores and amusement parks, keep just a few cents in profit from each sales dollar. When faced with an increase in labor costs, they’re forced to raise costs or provide the same product with less service.

Raising their prices isn’t an option in cost-conscious times, however. For instance, one San Francisco restaurant chain “raised its food prices 8%” following a minimum wage hike, but that only resulted “in fewer customers, which in turn caused a cutback in the number of the chain’s minimum wage earners.”

This leaves businesses with a single choice: More customer self-service — and fewer entry-level jobs for the people who need them. That’s why it’s tragic but not surprising to hear the story of a café owner in Brooklyn who warned last year that an increase in New York’s minimum wage would leave her no option but to cut one-third of her staff.

These job losses often hit teens and young adults the hardest. One Washington business owner lamented that “I went from hiring 20 young people during the summer to hiring none.”

Closer to home in New York State, one Eden farmer who employs 20 people at minimum wage warmed the state legislature that he’d have to “cut back” if the wage was raised, saying it would “hurt the first-time workers, the people in high school and college.”

These stories only give further credence to the recent study from economists at Miami and Trinity Universities that found that more than 114,000 young adults lost their jobs as a consequence of the 2007-09 federal minimum wage hike.

They also provide a tangible example of the thousands of Census Bureau data points over multiple decades that economists have studied to reach a similar conclusion about the consequences of minimum wage hikes. In fact, the economic consensus regarding such hikes is so overwhelming that a full 85% of the credible studies from the past 20 years reached the same conclusion: Minimum wage hikes kill jobs.

The teens and other less-experienced employees who lost their jobs following previous minimum wage hikes don’t have a prominent national stage, and they certainly can’t give money to politicians like the labor unions who support wage hikes. But with an unemployment rate that’s been above 20% for five summers now, perhaps it’s time for a day of action for those left out of the labor force as a consequence of a higher minimum wage.

Saltsman is the research director at the Employment Policies Institute.