New research finds that minimum wage hikes reduce employment, increase homelessness, don’t reduce poverty
Most of the consequences of any action are unintended consequences. Hiking the minimum wage, for example, is intended to raise the wages of workers, but other — unintended — consequences are, according to research, not just lower employment, but also increased crime and reduced employer provision of health insurance. A number of new papers explore some more of these unintended consequences.
Let us start with employment, which is, after all, where the initial impact of any minimum wage hike is to be found. In a new paper titled “Effects of the Minimum Wage on the Nonprofit Sector,” economists Jonathan Meer and Hedieh Tajali note that “The nonprofit sector’s ability to absorb increases in labor costs differs from the private sector in a number of ways.” Specifically:
In the private sector, labor cost increases induced by the minimum wage are borne by some combination of owners, through lower profits; consumers, through higher prices; and workers, through reductions in other margins of compensation or adjustments to employment. Given its structure, the nonprofit sector has fewer margins through which these cost increases can be borne. By definition, nonprofits do not disburse profits that can be reduced. Many nonprofits do not sell an output whose price can be increased, while others, like hospitals, serve a mix of paying and non-paying customers. Further, nonprofit firms tend to be concentrated in more labor-intensive industries, such as human services and health care (Bureau of Labor Statistics, 2019), and are therefore potentially more sensitive to increases in labor costs.
The authors “analyze the impact of minimum wage increases on the nonprofit sector, which makes up approximately 5% of GDP in the United States (McKeever, 2018) and 10% of total U.S. private sector employment (Bureau of Labor Statistics, U.S. Department of Labor, 2021).” Their results:
…show a negative impact of state minimum wage changes on employment and
the number of nonprofit establishments, driven by states with large statutory minimum wage increases. These effects tend to be concentrated among the smallest nonprofits as measured by number of employees. There is some evidence that nonprofits reduce fundraising expenditures and see lower revenues.
This was not intended by the people enacting minimum wage hikes, of course, but it happened all the same.
If Meer and Tajali’s paper adds more texture to the picture of the unintended consequences of minimum wage hikes on employment, a new paper, “Minimum Wages and Homelessness” by economist Seth J. Hill, adds more to the picture of the knock-on effects of that.
Hill notes that:
If there are negative distributional consequences of minimum wages, they most likely
fall on the lowest-skilled workers whose marginal revenue product falls below the wage
In other, blunter, words, the negative effects of minimum wage hikes fall disproportionately on those with the least ability to generate revenue for their employers. Their wage goes above the revenue they generate and the employer is losing money on the hire.
Estimating “the effect of minimum wages on American homeless populations,” Hill found that:
…minimum wage increases lead to increased point-in-time homeless population counts.
Again, this wasn’t intended, but it happened.
Both these papers are part of a bigger picture. This is investigated in another new paper from economists Richard V. Burkhauser, Drew McNichols, and Joseph J. Sabia titled “Minimum Wages and Poverty: New Evidence from Dynamic Difference-in-Differences Estimates.” “Advocates of minimum wage increases have long touted their potential to reduce poverty,” they write, “This study assesses this claim.”
“This study asks three questions,” they write;
(1) How sensitive are the large poverty-reducing effects of minimum wage increases found by Dube (2019) to empirical specification choice, the definition of poverty, and the sample period under study? (2) Did minimum wage increases enacted during the decade following the Great Recession reduce poverty? (3) How well targeted are newly proposed federal minimum wage increases to the working poor? The answers to these questions are Very fragile, No, and Quite poorly
Milton Friedman, one of the great economists of the 20th century, wrote that “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” Judges this way, minimum wage hikes are bad policy. We should not persist with this harmful policy because it is well intended.