by Paige Terryberry
Senior Analyst for Fiscal Policy, John Locke Foundation
In 2020, Virginia’s legislature passed a bill to increase the state’s minimum wage to $15 per hour by January 2026. One Virginia legislator asserted, “Everyone deserves an increase in the minimum wage, full stop.” North Carolina has seen similar wage increase bills (here and here), though none have passed. The Tar Heel state conforms to the Federal Minimum Wage of $7.25 per hour.
In their paper last week titled “Higher Wages, More Jobs,” Carolina Forward claimed that North Carolina trails Virginia economically, as North Carolina overlooks its people by forgoing a minimum wage increase. The authors write, “higher minimum wages actually help fuel local economies, because low-wage workers are disproportionately likely to spend disposable income on necessities.”
This analysis overlooks the basic economic law that an artificially higher price of something (in this case, wages) results in lower demand for that good (low-wage workers).
Though the minimum wage increase might help a few people in the short term, other workers would pay for it with fewer hours or jobs. The Congressional Budget Office estimates that raising the minimum wage to $15 per hour would cost between 1 million to 2.7 million lost jobs.
Long-term wage growth comes from increased productivity or output. Businesses can generally increase pay only if they are able to increase their revenue in parallel.
North Carolina does not need to raise our minimum wage to remain competitive.
Businesses working under a higher minimum wage would be forced to get creative. In California, for example, businesses reacted to a higher minimum wage by hiring more workers to work fewer hours. So the total number of hours worked remained the same, but average hours worked and compensation per worker fell. A study highlighted by Harvard Business Review found that firms would “strategically adjust their scheduling practices to reduce the number of workers eligible for benefits.” The study found “the combination of reduced hours, eligibility for benefits, and schedule consistency that resulted from a $1 increase in the minimum wage added up to average net losses of at least $1,590 per year per employee — equivalent to 11.6% of workers’ total wage compensation.” Minimum wage increases failed to benefit workers in California. In fact, it made them worse off.
In other cases, employers would compensate for a higher mandated minimum wage by reducing other employer-related benefits, like training, sick days, and safety measures.
Indeed, few things can garner broad consensus among economists more than the negative impacts of minimum wage laws.
A minimum wage hike hurts those it claims to help. A higher minimum wage would attract workers with higher skills to jobs they otherwise would ignore, taking jobs away from the less skilled workers with less training or education. A minimum wage hike harms those at the greatest risk of poverty. Low-wage jobs enable at-risk workers to acquire experience, contacts, and skills to escape poverty. A higher minimum wage takes away the first rung of the career ladder for low-skilled workers.
Past Locke Foundation research has highlighted how minimum wage laws hurt the very people they are purported to help.
A working paper by the National Bureau of Economic Research (NBER) evaluating the body of literature on this topic concluded that the evidence “points strongly toward negative effects of minimum wages on employment of less-skilled workers.”
Moreover, a higher minimum wage can make the automation of low-skilled jobs more affordable than paying workers. Another NBER working paper found that increasing the minimum wage “increases the likelihood that low-skilled workers in automatable jobs become nonemployed or employed in worse jobs.”
Worker wages should be a voluntary agreement between employee and employer. While minimum wage increases are top-down and often politically created, long-term wage growth comes from higher productivity and more output.
Minimum wage increases ultimately do not solve the root problem of low or stagnant wages. If the problem is wage growth broadly, inflation is a critical issue that must be solved in order to raise real wages. Real average wages are declining. And government barriers and disincentives to capital investment slow productivity gains, which in turn slow wage growth.
The government is most helpful when it gets out of the way and allows workers to keep more of their hard-earned money. Progressive government policies and money printing caused today’s record inflation that reduces workers’ purchasing power. The poor have been most harmed by these policies.
Thankfully in North Carolina, state leaders have been fiscally responsible and have repeatedly cut income taxes, allowing workers to retain more of their hard-earned wages than before.
To go a step further, North Carolina leaders could help workers avoid more inflation pain by indexing the standard deduction to inflation. North Carolina offers a standard deduction on the personal income tax of $10,750 for single filers and $21,500 for married couples (which is 34% higher than Virginia’s standard deduction, by the way). Some families may be financially worse off, even if they have more nominal income, because their income did not keep pace with inflation. They are then pushed above the standard deduction threshold, despite having a decreased standard of living.
The minimum wage does not create a single job. It only bans jobs paying below an amount set by the government. But we can fight for higher real earnings for all by first allowing North Carolinians to keep more of their hard-earned money.