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Let’s consider a thought experiment: What would happen if the federal government more than doubled the cost of a critical component of the economy like gasoline from the current national average of $2.25 to $4.66? Uproar, outrage, and perhaps even riots in the street (see “yellow vests” protests in France). Few would call that good economic policy.
Yet this seems to be what some have in mind when it comes to the minimum wage. The House Education and Labor Committee held a hearing on legislation that would increase the federal minimum wage from $7.25 per hour to $15.00 per hour. While one can have a legitimate conversation about the “right” minimum wage level, $15.00 would seem motivated more by politics than actual economics. The arguments against such a dramatic spike are well known, and supported by the bulk of economic research. These include:
- Small businesses do not have the resources to absorb such a dramatic increase in costs.
- A $15 wage will lead to reduced hours, fewer jobs created, cut backs in operations, and quite likely job losses.
- Increasing the minimum wage will require employers to raise the wages of millions of employees making between the current minimum wage and the new wage, not just those who are currently making the minimum wage, resulting in an impact far greater than advocates acknowledge.
- Increasing the minimum wage, which is effectively a starting wage level for low and unskilled workers, will freeze those workers out of the market as employers look for employees who can justify being paid the higher wage.
What has not received enough attention is the impact such an increase will have on charitable non-profits, which would be subject to this increase like any other employer. These are the groups providing aid and comfort to our neighbors and fellow citizens in their most dire hours of need. An increase like the one proposed would literally force them to cut back on the services they offer.
One economic data point that is impossible to capture is the job not created. When employers decide whether to create a new position, all the costs need to be lined up against what that new person can contribute to the enterprise. If the costs are too high, that job is never created. This decision making process happens in private and does not show up in any statistics.
Advocates for increasing the minimum wage frequently refer to this as an economic stimulus. This view actually reverses how the economy works. Economic growth is what allows employers to pay higher wages, not mandates from on high. And what we’re seeing in the economy now, higher rates of growth than in past years, is indeed being accompanied by companies announcing increased starting wage levels.
Rather than a political number that doesn’t work for most of the country, a smarter approach to the minimum wage is to seek a level based on economic data and to remember that the federal minimum wage is intended to set the floor. Finally, if legislators really want to see a minimum wage bill pass, it must include reforms of outdated laws and other provisions that will help employers deal with the cost.
Despite the advocates’ certitude about increasing the minimum wage to $15/hour, the debate on whether to increase the minimum wage, and by how much, is just getting started. Where it goes from here will be very interesting.