from Liberty Unyielding
The Democratic leaders in both houses of Virginia’s legislature have just introduced legislation that would raise the Virginia minimum wage from $12 to $15. The bill also retains provisions that make the minimum wage rise with inflation, while preventing it from ever falling due to deflation. As a result, it could rise further in real terms in the future. This minimum wage increase and further increases in the future could lead to a big spike in unemployment in the next recession.
But the Democrats’ $15 minimum wage bill ignores that painful lesson from the Great Depression, when the rising real wages of some workers caused unemployment to rise even faster, as that most famous of economists, John Maynard Keynes, noted. The Democrats’ bill mandates that the minimum wage will only increase, and never decrease. It says that the “state hourly minimum wage” shall be increased by “the percentage by which the United States Average Consumer Price Index…has increased during the most recent calendar year.…The amount of each annual adjustment shall not be less than zero.” So if there were deflation, the minimum wage would increase in real terms, by remaining the same in nominal terms even as prices fall.
That is a bad idea. Even in a growing economy, minimum wage hikes eliminate some jobs, and shrink some other employees’ work hours, reducing their wages. The Congressional Budget Office estimated that as many as 3.7 million jobs could be lost if the federal minimum wage were raised to $15. New York City experienced its worst decline in restaurant jobs since 9/11 after a $15 minimum wage was enacted there. Some restaurants and bars closed in West Hollywood this year after it increased its minimum wage. In 2017, Reuters reported that a “Seattle law that requires many businesses to pay a minimum wage of at least $13 an hour” had “left low-wage workers with less money in their pockets because some employers cut working hours.” A senator who supported a $15 minimum wage cut his staffers’ hours in order to afford the higher wage. Illinois businesses such as Hopper’s Poppers announced plans to close up, move out of the state, or curb their expansion in the state, after the state passed a gradual minimum wage increase.
Minimum wage hikes can lead to tax increases. In 2016, California’s legislative analyst estimated that the gradual increase in California’s minimum wage to $15 an hour would cost taxpayers $3.6 billion more a year in government pay alone. Easy-to-perform, unskilled jobs in state and local governments historically often paid less than $15 per hour. States had no difficulty hiring people for far less than $15 per hour, because those government jobs were not demanding, and often came with excellent benefits.
Raising the minimum wage to $15 an hour is especially likely to cause job losses in counties with low median wages. In such regions, living costs are often low, too. There are dirt-cheap counties in Virginia where the average hourly income is less than $20 an hour, and the median hourly income is even less, yet most people there own their own home, and have a decent quality home that is bigger than the average European lives in, because it costs so little to live there. For example, average weekly wages in Grayson County are only $686, which works out to about $17 per hour, but it is cheap enough to live there that 80% of people own their own home. If the average worker in Grayson County only gets $17 per hour, and is able to make do on that, it is hard to see why an unskilled, entry-level employee who is worth less to their employer should get $15 per hour. Similarly, the average worker makes $730 per week in Mathews, Carroll, and Floyd counties and only $722 per week in Patrick County.
Entry-level employees who are paid the minimum wage often are single and have no family to support, meaning they need less to live on. What they need most is to get on the bottom rung of the economic ladder to start climbing it, rather than being priced out of the job market by high minimum wages that make it unaffordable for an employer to hire them, and thus leave them unable to get on the ladder at all. An entry-level employee making only $12 per hour can save some money if he lives with his parents, and just having a job may give the entry-level worker access to job training and valuable experience he can use to start climbing the economic ladder and getting a higher wage. As the Bureau of Labor Statistics notes, “Minimum wage workers tend to be young” and “unmarried.”
In regions where a typical worker is paid $15-$20 per hour, employers cannot possibly pay all their employees — including entry-level, unskilled workers who are worth much less than the typical employee — over $15 per hour. In such areas, employers typically don’t make more than a couple dollars per hour in profit on an employee. For example, grocery stores have a typical profit margin of between 1% and 3% per item, a small profit margin which can be wiped out by even modest wage increases. So if they are currently paying their average employee $12 per hour, they are not going to be able to raise that to $15 per hour — especially not for bottom-level, newly-hired employees who are still learning the ropes, and need help doing their job. Retail stores have small profit margins: when Venezuela imposed a large increase in its minimum wage, 40% of its stores were forced to close, because they simply could not afford to pay the higher wage.
A $15 minimum wage is popular, because people wrongly believe that companies have lots of spare cash that they can spend on increased wages. The public mistakenly believes that the average corporate profit margin is a whopping 36%.
Many economists have said that a $15 minimum wage is a bad idea, because it would eliminate a significant number of jobs. A poll of professional economists found “74 percent of respondents opposing a $15 per hour minimum wage.” Eighty-four percent believed “it would have a negative impact on youth employment levels.” That included Democratic and independent economists, not just Republicans; only 12% of the economists polled were Republicans. Even the minority of economists who support a $15 minimum wage often concede that it will increase unemployment. An economist at Moody’s estimated that up to 160,000 jobs would be lost in California’s manufacturing sector alone from its gradual increase of the minimum wage to $15.
Moreover, much of the benefit of the wage hike to low-income workers who manage to keep jobs at the increased minimum wage is lost due to increased federal taxes and reduced federal earned-income tax credits and food stamps, as a writer noted in The Wall Street Journal in 2016:
[T]he tax implications of going from a $10- to a $15-an-hour minimum wage … [are] very significant. For a family of four with both spouses making the minimum wage, their federal tax will increase from $4,106 to $7,219, payroll tax will increase from $2,579 to $3,869, their earned-income tax credit (EITC) will be reduced from $596 to zero … and the $2,400 food-stamp credit will be lost. Of the $20,800 increase in income in going from $10 to $15 an hour, $7,778 will be diverted to the government, which doesn’t include loss of other income-dependent government welfare programs and added costs due to the resulting inflation. Over one-third of the wage increase will flow to the [federal] government.
So a state minimum wage increase may effectively siphon money out of the state, sending it to the federal government.
Some economists predicted that wealthy Maryland would eventually lose up to 99,000 jobs due to its gradual increase in the minimum wage to $15. Virginia has a larger population and labor force and thus could lose even more jobs than Maryland from a $15 minimum wage.
Republished with permission from Liberty Unyielding.