Opinion: The downside of raising the minimum wage
Take California, for example. At $16 per hour, the Golden State has the second-highest statewide minimum wage. It recently imposed a special minimum wage of $20 per hour for fast-food workers. Already, it’s been a minor disaster.Since the hourly pay raises, scores of fast-food businesses have shut down across the state. The Wall Street Journal reported that some fast-food establishments didn’t even wait for California’s new wage law to go into effect and began laying off staff and scaling back workers’ hours before the law went into effect.
And that’s not just true in California. Across the country, some of the hardest hit among the millions of people impacted by job losses or reduced hours following minimum wage increases are fast-food workers.
A McDonald’s advertising campaign boasts that one in eight Americans has worked at the fast-food chain. That figure holds true for my household of eight. My husband was once a McDonald’s employee. My first foray into the workforce was also as a fast-food worker, as a Pizza Hut employee. But while we both started off in minimum-wage jobs, I’m happy to report that neither of us is still at the bottom rungs of the earnings ladder. Our fast-food jobs were an important entree, however, into the world of work.
That’s true for many Americans. They start out in minimum-wage jobs, but don’t stay there for long. Today, fewer than one out of every 1,000 workers earns the minimum wage, and 60% of those who do are under age 25.
That’s a good thing, because the minimum wage can’t support a family. But minimum-wage jobs are important stepping-stones, allowing workers to gain experience and move up to higher-paying jobs. Those jobs will become increasingly inaccessible however if lawmakers continue to increase the wages employers must pay to fill them.
Numerous cities and states are going full steam ahead with plans to raise wages for entry-level workers. On July 1, Chicago’s hourly minimum wage increased to $16.20. Oregon’s minimum wage rose to $17. And where I live—in Montgomery County, Maryland just outside of Washington, DC — the minimum wage rose to $17.15 for companies with more than 50 employees.
In Congress, some two dozen Democratic senators, including US Sen. Bernie Sanders, a longtime champion of the $15 minimum wage, are now pushing for a federal minimum wage of at least $17 per hour.
Rising wages are a great thing when they are the natural result of workers becoming more productive. Pay increases that result from government mandates can eliminate entry-level job opportunities and lead to a cascade of other unintended consequences.
Consider how inflation recently increased the costs of everything from groceries to gas to rent. People resent paying more for the things they’re used to buying. They either have to do without, find less expensive alternatives or figure out a way to make more money. The same is true for employers. When their labor costs go up, they either have to cut their costs or increase their revenues. That can include reducing employee benefits or eliminating jobs, increasing their use of automation, or raising their prices for consumers.
In a report published by the National Bureau of Economic Research, economists who examined every study on the minimum wage in the US over the past three decades concluded that there was a “clear preponderance” of employment losses as the minimum wage rose, with teens, young adults, and less-educated workers experiencing the greatest losses. In other words, increases in the minimum wage often hurt the very people they’re meant to help.
In short, high minimum-wage laws cut off the bottom rung of the career ladder, effectively pricing the least-advantaged workers out of employment. In South Carolina, researchers found that the most recent minimum wage hike reduced employment by 8.9% for teens, and by 15.5% for workers with less than a high school diploma.
A $17 minimum wage — as called for in the federal Raise the Wage Act of 2023 — means that employers would pay about $42,000 per year for a full-time worker when including all mandatory wages, benefits and taxes. Since many young and less educated workers are simply not capable of producing that much value right out of the gate, they could be priced out of the job market entirely. The Congressional Budget Office estimated that a $17 minimum wage would cause 350,000 disproportionately younger and less educated individuals to drop out of the labor force entirely.
Even workers who keep their jobs and receive higher wages can end up worse off, because employers may make up for higher wage costs by reducing employee benefits. A recent study of retail workers in Texas and California found that a $1, or 9.1% minimum wage increase translated into an 11.6% decrease in total compensation for the average California worker.
Some employers compensate by automating low-skill functions, like replacing workers with self-service kiosks. Or, as mentioned above, they raise prices. Since lower-income families spend a higher percentage of their incomes at places like grocery stores and fast-food restaurants, where low-profit margins necessitate larger price increases, they can be disproportionately hurt by minimum-wage-induced price hikes.
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Moreover, my analysis found that a $17 minimum wage would increase child care costs by more than $7,000 per year for families in low-cost states like Iowa and Kansas, but by less than $900 in high-cost states like Massachusetts and California. In short, family-supporting wages are fundamental to personal and societal well-being, but all that minimum wage laws can accomplish is to make it illegal for employers to hire individuals who don’t yet have enough experience and education to cover the cost of employing them at artificially high minimum wages.
Instead of wage mandates, policymakers should help workers achieve real and lasting income gains without unintended consequences. That should start with expanding alternative education options like apprenticeships, reducing unnecessary burdens on employers that subtract from workers’ wages and eliminating government-imposed barriers to employment, such as unnecessary occupational licensing standards and restrictions on flexible independent work.
To prevent employers from giving pink slips to people who want and need to work, policymakers should give pink slips to minimum wage hikes that simply don’t work.
The increased minimum wage in California has led to numerous fast-food establishments reducing staff and hours, according to reports. This trend is not exclusive to California; across the country, fast-food workers have been among the hardest hit by job losses or reduced hours following minimum wage increases.
Economists who examined studies on the minimum wage in the US concluded that there was a "clear preponderance" of employment losses as the minimum wage rose, with teens, young adults, and less-educated workers experiencing the greatest losses.
