Minnesota’s 2021 minimum wage hike: bad policy coinciding with very bad timing

The new year has brought some changes.

For one, 25 states, including Minnesota, have raised their minimum wage effective January 1, 2021. More than half of these states are raising their wages to $15 or more. Minnesota’s minimum wage hike is one of the lowest among the states, only going up by $.08 for big employers and $.06 for small employers. However, the Twin Cities have scheduled their minimum wage hikes for later in the year. 

This should be concerning for a number of reasons. Economic theory, coupled with years of research evidence, already tells us that minimum wage hikes kill jobs. Even more unfortunate, the pandemic has made certain businesses fragile, which will likely increase the likelihood of job losses once these minimum wage hikes take effect.

Minimum wage is bad policy

Econ 101 tells us that price ceilings or floors are bad policy because they discourage voluntary, mutually beneficial exchanges from taking place. This leads to deadweight loss or inefficiency.

Consider the following. Peter is willing to get a job at $8. Totino’s Pizza would like to give him the job, also for $8. However, because the state requires a $10 minimum wage,  Peter loses out on a job, and Totino’s loses out on the productivity that Peter would have brought.

Certainly, Totino’s could raise their wage to $10, but that would likely require price hikes or fewer jobs to go around. Minimum wage hikes are especially brutal for low-skilled and young workers (such as Peter) who tend to be less productive, but are denied entry-level jobs due to the high cost of labor.

Econ 101 describes the phenomenon as follows.

The minimum wage is a price floor (red line). So, employers cannot legally hire any person at a price below the mandated wage, even if it is above the market wage. Due to the higher price, therefore, employers will demand fewer workers (shown by the leftward shift on the demand curve, blue line). At the same time, workers will supply more hours (shown by the rightward shift on the supply curve, green line. The market ends with a surplus of workers, usually low-skilled workers, forcing them out of the job market.

Source: Marginal Revolution University

This is particularly bad timing

The economy is struggling, and small businesses are in an especially dire predicament. So, this is a particularly bad time to raise the minimum wage,  especially given that most minimum wage workers are in industries that have been heavily affected by the pandemic.

While one might argue that Minnesota’s minimum wage hike is significant, these costs add up. To most small businesses that have suffered from the lockdowns, cumulatively higher labor costs are a significant burden to operating efficiently.

As we already know, the minimum-wage workforce is made up of young, low-skilled workers who are less likely to be married. This makes raising the minimum wage an ineffective tool to reduce household poverty. Additionally, research has shown wages have grown significantly, not due to minimum wage laws. Growth in wages has instead followed growth in income and production. Therefore, raising the minimum wage, especially at a time when small businesses are hurting, is just a sure recipe for disaster.