Minneapolis Fed studies find that Twin Cities minimum wage hikes cost jobs

Over the last few years, I have written a fair bit about the minimum wage hikes in the Twin Cities of Minneapolis and St. Paul.

Simply put, all a minimum wage law does is make it illegal to hire anyone who, for whatever reason, cannot generate the revenue for their employer to cover the government mandated minimum. If hiring a worker adds $10 per hour to employer revenues but the government makes it illegal to pay them less than $11 per hour, then the business will be losing $1 each hour on the hire. No business that wants to stay in business does things like that.

We would expect, then, minimum wage laws and minimum wage hikes to have negative effects on employment, especially as those rates reach higher and higher levels. This is not always clear in the empirical literature. Many minimum wages are at levels near the market rate and hikes can be small enough that their effects cannot be discerned from statistical noise. There are also other ways employers can respond to minimum wage hikes without laying workers off.

In the Twin Cities, however, it appears that minimum wage hikes did drive declines in employment in the restaurant industry in both cities. This is according to a pair of studies from the Federal Reserve Bank of Minneapolis into the effects of the minimum wage hikes in Minneapolis and St. Paul.

In Minneapolis, from January 2018 to March 2020, the minimum wage rose from $10 an hour to $12.25 an hour for employers with more than 100 workers, with the long-term goal of reaching $15 an hour by 2022 for large businesses and 2024 for smaller ones with less than 100 workers. Over the same period, the number of jobs at “full-service” restaurants — i.e., sit-down establishments — dropped in the city by 12 percent more than it would have if the minimum wage had not been increased. Over that same period, jobs at “limited service restaurants” — counter-order places — fell 18 percent.

St. Paul’s minimum wage hike didn’t actually kick in until 2020, but the research found “anticipation effects” in the city. The minimum wage in the city rose to $11.50 for big companies with more than 100 workers, and to $10 for small businesses with 100 employees or less with the aim of reaching a $15 minimum wage for all businesses by 2028. From 2018 to 2019, the Federal Reserve researchers found that anticipation of the minimum wage boost appears to have driven declines in jobs, hours, and overall earnings for restaurant workers.

This was not supposed to happen. By hiking the minimum wage, lawmakers in Minneapolis and St. Paul thought they could make low wage workers better off with the wave of a magic legislative wand. They can’t. Wages are prices, and like any other price, they reflect market forces. We can continue to pursue magical thinking in the realm of public policy, or we can acknowledge this fact.