John Locke Update / Research Brief

Hiking the minimum wage breaks the first rule of public policies to help the poor

posted on in City & County Government, Economic Growth & Development, Law & Regulation, Rights & Regulation
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If you’re a fan of Subway, perhaps you like getting a “five-dollar footlong.” Maybe you even like the jingle. But in Seattle, you’d be singing a different tune when you saw you can’t buy a five-dollar footlong.

Seattle’s minimum-wage hikes have made labor costs too expensive for a Subway franchise to afford to do the five-dollar footlong promotion. Seattle already has the highest minimum wage in the nation and is planning to increase it further.

Maybe you think, who cares? I don’t need a footlong sub. I’d rather whip up something healthy at home. If I’m eating out, I’m getting better fare than that.

Maybe you can afford to think that way. Not everyone can.

Low-wage workers might not be able to, at least not as much as before.

Low-wage workers who’ve recently seen their hours cut would be even less able to.

Low-wage workers with significantly lower take-home pay per week than before would be even less able to.

And what about people who lose their jobs and can’t find new ones because there aren’t as many jobs as before, but there are more would-be workers competing for them? They just can’t.

Unintended negative consequences overcoming the intended help

Those aren’t hypothetical scenarios, by the way. They refer to the findings from a recent National Bureau of Economic Research study, conducted by researchers at the University of Washington, of the effects of the second part of Seattle’s phase-in of its plan to hike the city minimum wage to $15 per hour.

Seattle plans for the city minimum wage to be $15 per hour through a series of incremental hikes. In 2015, it was raised from $9.47 to $11 per hour. In 2016 (the second part of the phase-in), it was raised to $13 per hour.

As explained in the new issue of Regulation, the study was a sobering wake-up call to well-intentioned advocates for helping the poor by phasing in significant hikes to the minimum wage.

The University of Washington results are striking. The researchers found the first minimum wage increase from $9.47 to $11 in 2015 resulted in statistically insignificant reductions in hours worked and jobs. But the second increase to $13 had dramatic effects.

Hours worked fell by between 8.7% and 10.6%, and the total number of low-wage jobs decreased by between 5.1% and 6.3%. Employers in Seattle cut back on both the number of low-wage employees and the hours that retained employees worked relative to the synthetic control of weighted counties in the rest of Washington. The result is that the average person affected by the law was $125 per month worse off because of the policy change.

Here is a brief summary of their findings:

  • total amount of low-wage jobs fell by over 5,000 (fewer jobs available to low-wage workers)
  • hours worked in low-wage jobs fell off at a rate three times greater than wages increased (fewer hours worked by still employed low-wage workers; the loss outdoing their gains in hourly pay)
  • total pay for low-wage jobs fell
  • low-wage workers earned $125 per month less — i.e., $1,500 per year less

These, in short, are not the results an advocate for the poor would knowingly seek out. After all, the first rule about public policies instituted to help the poor is:

Policies put forth to help the poor should actually work to help the poor.

Still, over the past week, editorial boards at the Greensboro News & Record and The News & Observer have opined strongly for raising this state’s minimum wage higher than the federal minimum wage. They base their arguments on many things: other states have done it, the federal rate hasn’t been changed since 2009, it’s not fair that businesses get tax cuts, it’s not fair that CEOs get overpaid, and of course higher wages are better for people.

One thing their arguments are not based in, however, is mainstream economics. But the negative impacts of the minimum wage is one of the items about which economists are in greatest agreement.

For that matter, the very knowledge that there are negative effects is clearly within the mainstream of economic thinking on the minimum wage.

Furthermore, those negative impacts aren’t randomly distributed. The disemployed tend to be the least skilled, the poorest, the least educated.

That is, the ones who most need the work.

Neither editorial board states definitively how high they think the state minimum wage should be hiked. At one point the N&R editors refer to a Pew Research Centers study of people who earn between the minimum wage and $10.10 per hour (a wage hike suggested at the time by President Barack Obama), whereas the N&O editors discuss state Senate Democrats’ legislation last year to raise the state minimum wage incrementally to $15 per hour.

What kind of effects would those hikes have? Well, raising the minimum wage to $10.10 per hour could cost North Carolina nearly 50,000 jobs, according to a study published in the Journal of Labor Research.

Going considerably higher to $15 per hour — a wage greater than what over 40 percent of the wage and salaried workforce in North Carolina earn — could cost over 350,000 jobs., according to Heritage Foundation estimates.

For advocates of good public polices for the poor, even though it doesn’t seem it, the proper policy is to keep the state minimum wage no higher than the federal minimum wage. Make sure we create no greater harm to the poorest, least skilled, and least experienced workers in North Carolina.

Seem is the thing. In North Carolina, we favor actually being as opposed to seeming.

Jon Sanders is an economist studying state regulations, that spreading kudzu of invasive government and unintended consequences. As director of regulatory studies and research editor at the John Locke Foundation, Jon gets in the weeds of all kinds of policy… ...

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