Slow wage growth remains a major challenge for the continuing economic recovery from the Great Recession. Since 2009, real wages have risen at a rate of just 0.6 percent per year, according to the Bureau of Labor Statistics.[i] It is understandable, then, that many states and cities have sought to increase earnings by raising the minimum wage. Several cities, including Seattle and Los Angeles, have raised their minimum wages to $15 per hour, and recently California passed legislation to do so by 2022.
Such brute-force solutions allow lawmakers to claim victory over stagnant wages while not adding more spending to already-strained budgets. But the costs of such policies are real, and they disproportionately fall on small businesses and young jobseekers. For the workers who keep their jobs, higher minimum wages will mean a welcome boost in earnings. But many more people, particularly the young, will find themselves out of work as employers cut back on hiring.
Low wages are a problem. But not having a job is an even bigger problem. According to the Census Bureau, in 2014 just three percent of prime-age people with a full-time, year-round job were in poverty. For prime-age people with no job at all, the poverty rate was 34 percent.[ii]
Low wages are a problem. But not having a job is an even bigger problem.
Proponents of higher minimum wages often argue that job losses from higher wage floors are a myth. They often point to a 1994 study by economists David Card of UC-Berkeley and Alan Krueger of Princeton, which found no adverse employment effects after New Jersey raised its minimum wage and neighboring Pennsylvania did not.[iii] While some scholars have criticized the mechanics of Card’s and Krueger’s study, one of its major weaknesses was simply the time frame: it only looked at a nine-month period after New Jersey’s minimum wage increase.
More recent research suggests the negative effects of minimum wage increases take longer to show up. Some of the best recent research on this has been done by Jeffrey Clemens and Michael Wither of UC-San Diego.[iv] In a 2014 study, Clemens and Wither used a dataset that followed individuals affected by minimum wage rises for three years after the increases took effect.
The results were startling. The individuals most affected by the increases saw their average monthly incomes fall by a total of $150 over three years, the equivalent of 90 cents per hour for a full-time job. Rather than boosting earnings, the minimum wage reduced them. A follow-up study by Clemens in 2015 found that federal minimum wage increases in the late 2000s accounted for nearly half of the job losses suffered by young, low-skilled workers during the Great Recession.[v]
How did this happen? Workers with the least job experience, unsurprisingly, have the most to gain from job experience. A few months on the job, even a minimum wage job, provide workplace skills and employer references that cannot be replicated. The first job enables a young worker to get his second. This is why taking a long-term view of minimum wages is so important—they affect not only the first job but others later on in a young worker’s career.
Minimum wages have a higher cost than many policymakers acknowledge. When employers are forced to pay more, in the short term they may deal with the extra costs by raising prices or cutting back on other benefits. But in the longer term, fewer businesses will open if they face daunting labor costs—particularly on the order of $15 per hour. Existing businesses will close faster as it becomes more difficult to raise revenues sufficient to cover operating expenses. This would exacerbate an already-troubling trend: from 2009 to 2011, more American businesses closed than opened for the first time in generations.[vi]
Fewer businesses will open if they face daunting labor costs — particularly on the order of $15 per hour.
What can be done about this? We all want people to have higher earnings, and minimum wages are not the only, nor the most effective, solution. One idea is expanding the earned income tax credit—a cash transfer conditional on work. Rather than limiting employment, the earned income tax credit draws more people into the labor force. Such a scheme costs money upfront, but in the long term it places a much lighter burden on the social safety net. It is cheaper to help people if they have low-wage jobs than if they have no jobs at all.
Another idea is the youth minimum wage, a program which allows young people to work for wages below the standard minimum. Young people, for whom wage floors are most likely to destroy employment opportunities, would benefit from more entry-level job openings, while policymakers could still maintain higher minimum wages for older workers, with fewer adverse effects.
Slow wage growth, particularly for those at the lower end of the income spectrum, remains a defining challenge of this economic recovery. But the most obvious solution – a higher minimum wage – has serious drawbacks. Policymakers should look for solutions which both rejuvenate wage growth and maintain employment opportunities. A higher minimum wage does not fit the bill.
Preston Cooper is a Policy Analyst at the Manhattan Institute.
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[i] Data are from the Current Employment Statistics survey and adjusted for inflation using the Personal Consumption Expenditures index.
[ii] “Income and Poverty in the United States: 2014: Table 3.” U.S. Census Bureau, September 2015. https://www.census.gov/content/dam/Census/library/publications/2015/demo/p60-252.pdf
[iii] David Card and Alan Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” American Economic Review, September 2014. http://davidcard.berkeley.edu/papers/njmin-aer.pdf
[iv] Jeffrey Clemens and Michael Wither, “The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers.” NBER Working Paper No. 20724, December 2014. http://papers.nber.org/tmp/91897-w20724.pdf
[v] Jeffrey Clemens, “The Minimum Wage and the Great Recession: Evidence From the Current Population Survey.” NBER Working Paper No. 21830, December 2015. http://papers.nber.org/tmp/66431-w21830.pdf
[vi] Ian Hathaway and Robert Litan, “Declining Business Dynamism in the United States: A Look at States and Metros.” Brookings Institution, May 2014. http://www.brookings.edu/~/media/research/files/papers/2014/05/declining%20business%20dynamism%20litan/declining_business_dynamism_hathaway_litan.pdf