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Economics argues against $15

This appeared February 14, 2018 in The Villager. 

Bad news for St. Paul’s low skilled workers: newly elected mayor Melvin Carter seems set to follow through on his plan to hike the city’s minimum wage to $15 an hour.

If you raise the price of something people will buy less of it. In the case of labor specifically, if wages are raised to a rate above the worker’s contribution to revenue they will not be employed. If they were, the employer would be adding more to their costs (the wages) than their income (the revenue). A business that operated like this would not be in business very long.

This is often derided as simplistic theorizing, ‘Econ 101’. However, this theorizing is supported by the weight of empirical evidence. In 2008, economists David Neumark and William L. Wascher surveyed two decades of research into the effects of minimum-wage laws. They found that “minimum wages reduce employment opportunities for less-skilled workers…[that] a higher minimum wage tends to reduce rather than to increase the earnings of the lowest-skilled individuals…[that] minimum wages do not, on net, reduce poverty…[and that] minimum wages appear to have adverse longer-run effects on wages and earnings.”

And what problem is raising the minimum wage supposed to solve? Wages in Minnesota are rising without political diktats. Data from the Minnesota Department of Employment and Economic Development show that after years of stagnant pay (median wages actually declined by 1 percent between 2003 and 2014), Minnesotans’ median wages have been rising in recent years, growing by 4 percent in real terms between 2014 and 2016. This is, in part, a consequence of the supposed labor shortage in the state: as the demand for something rises in relation to the supply of it the price rises. Econ 101 is validated once again.

Economic theory and empirical evidence show that the minimum wage is bad public policy which disproportionately harms those it is supposed to help. But, thanks to current economic trends in Minnesota, it is also irrelevant public policy, as the tightening labor market drives up wages. Why does Mayor Carter persist in pushing such a bad idea?

John Phelan is an economist at Center of the American Experiment.

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