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We want higher wages, but higher minimum-wage laws are not the answer

This op-ed appeared August 3, 2018 in the Pioneer Press

Recently, the Pioneer Press published an article in which nine St. Paul business owners gave their thoughts on the city’s proposed $15-per-hour minimum wage. One restaurateur dismissed concerns that hiking the hourly legal minimum wage by 55 percent for large employers and 90 percent for small employers would cost jobs. “Every time the minimum wage goes up, it’s the exact same argument from the exact same people,” the restaurateur said.

Perhaps it is. The question is, are they right? New data on the impact of minimum wage hikes suggest the nay-sayers are correct.

Economist Noah Williams at the Center for Research on the Wisconsin Economy at the University of Wisconsin-Madison has produced a policy brief titled “Evidence on the Effects of Minnesota’s Minimum Wage Increases.” He notes that since 2010, the minimum wage in Wisconsin has held constant at the federal level of $7.25 per hour. In Minnesota, it has risen to $9.65 and the workers affected were “heavily concentrated in the restaurant industry and among the youth demographic.”

Looking at employment in the restaurant industry, Williams finds that “from the beginning of 2010 until July 2014, fast-food restaurant employment in the two states grew at the same rate. However beginning with the first minimum wage hike in Minnesota, there has been a divergence which has grown over time. The employment differences between the states have become especially notable over the past year, as fast food employment in Minnesota stagnated while it has continued to increase in Wisconsin. In total, from July 2014 to May 2018, fast food restaurant employment grew by 4.8 percent in Minnesota but 8.8 percent in Wisconsin. While other factors may have played a role, the timing of the trend break suggests that the minimum wage increases in Minnesota accounted for much of this 4 percentage point divergence.”

Williams goes on to look at the effects on youth employment, restaurant prices, and restaurant earnings. He concludes that “the minimum wage increases led to higher incomes for some workers, but lower employment particularly among young and low-skilled workers, and higher prices for the products of low-skilled labor”.

This supports the broader consensus in empirical literature. 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.” In 2014, along with economist J.M. Ian Salas, they examined the subsequent literature and concluded “that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.”

We all want to see higher wages. They’re are the best way of guaranteeing a good standard of living. But, to be sustainable, they need to come from higher productivity, not the wave of legislators’ magic wand. The policies that would encourage higher wages would focus on increasing the quality of labor, education, the quantity of capital it has to work with, investment, and the quality of the capital itself, innovation. These policies do not fit on a placard quite so easily as “$15 now!” But they do have the virtue of actually working.

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

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