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$15 Minimum Wage Hurts Workers Who Need Help Most

$15 Minimum Wage Hurts Workers Who Need Help Most

(Bloomberg Opinion) -- The Congressional Budget Office estimated this week that a House bill to raise the minimum wage could reduce employment by up to 3.7 million jobs. That’s the equivalent of increasing the current unemployment rate by 2.3 percentage points, from 3.7% to 6%. Nonetheless, the measure, which has over 190 cosponsors in the House of Representatives, has received praise from left-of-center think tanks and economists.

Their thinking is that the boost in incomes for families whose breadwinners keep their jobs will more than make up for the losses to those who are out of work. As a dollars-and-cents calculation, there is truth to this. There’s a lot of uncertainty surrounding the effects of a minimum wage increase, but the CBO’s median estimate of the number of jobs lost and the number of workers raised out of poverty are both equal to 1.3 million. In addition, some workers above the poverty line would also receive wage increases, making the proposal a net positive for workers overall.

But this cold calculation ignores the potential to limit opportunities for the most marginalized workers. Passing the increase would undo much of the hard work these same organizations have done in fighting for full employment.

There are those who argue that workers have been waiting too long for a wage increase and can no longer put their trust in the job market alone. The House bill, however, would increase wages for poor families by an average of $600 a year, less than the increase in the Child Tax Credit that was part of the 2017 tax cut. Expanding the Child Credit by another $1,000 would offer more relief for poor families than a minimum wage increase, and without reducing employment.

$15 Minimum Wage Hurts Workers Who Need Help Most

The House bill, dubbed the “Raise the Wage Act,” would increase the federal minimum wage to $15 by 2025 from $7.25 today. (Many states already have higher minimum wages.) It would also eliminate the lower minimum wage available for teenagers and, most troublingly, the disabled.

The act would also tie the minimum wage to median pay, so that it would rise automatically after 2025.

Economists disagree intensely about the effect of minimum wages. In theory, a minimum wage should lead to lower levels of employment. In practice, economists sometimes find that it does and sometimes find that it doesn’t.

What virtually all economists agree on, however, is that larger increases in the minimum wage are more likely to result in reduced employment. In addition, the effect snowballs. Doubling the size of a minimum-wage increase should more than double the additional job losses.

The minimum-wage increase under the Raise the Wage Act would be quite large. Typically the minimum wage has hovered just under the 10th percentile of wages nationwide, meaning that over 90% of the population made more than the federal minimum wage. The Raise the Wage Act would push the minimum wage to the 20th percentile.

$15 Minimum Wage Hurts Workers Who Need Help Most

An increase in the minimum wage to $12, which was proposed in 2015, would be less likely to have a big impact on employment. At $15, the risk would be much greater. The automatic increases would compound the risk by making it impossible to erode the minimum wage through inflation.

$15 Minimum Wage Hurts Workers Who Need Help Most

In either case, however, raising the minimum wage ignores the progress that the U.S. economy has made in drawing workers off the sidelines and into employment.

When the unemployment rate fell to 4.9% at the beginning of 2016, economists at the Federal Reserve and on Wall Street suggested that the job market was saturated and that the U.S. could only add 60,000 to 100,000 jobs per month. The effect of any additional stimulus on the economy would then be to set off a wage-price spiral in which employers would be forced to bid up wages faster than productivity could improve, and pass the resulting price increases along to customers.

A few voices, including many of them on the center-left, argued that this wasn’t correct. Mainstream economists, they said, were underestimating the potential of the U.S. economy to tap the well of discouraged workers, disabled workers and young Americans with little employment history.

The last two-and-a-half years have proven those voices to be correct. Monthly job growth has averaged 197,000 since the beginning of 2016, and in some months soared over 300,000.

Wages have risen, but not faster than productivity. In contrast, employment has continued to explode, with the U.S. adding 8 million jobs since the first declarations were made that the economy had reached full employment.

The argument for raising the minimum wage relies on the same false premise. It assumes that there are not millions of workers who could still be drawn into employment if the incentive for employers was strong enough.

Employers might not be willing to take a chance on hiring an ex-inmate, for example, at $15 an hour even in a hot economy, but at $9 an hour it could be a no-brainer. That first job might not pay well, but it would build skills and create an employment history.

Young and disabled workers face similar challenges. By eliminating their preferential wage treatment, the Raise the Wage Act takes away the extra incentive employers have to take them on.

A hot job market has the potential to change the lives of marginalized workers, but that can only happen if employers have a financial incentive to take a chance on workers they wouldn’t have looked at a few years ago.

To contact the editor responsible for this story: Jonathan Landman at jlandman4@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.

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