What We Don’t Know About a $15 Minimum Wage Is Scary

(Bloomberg Opinion) -- It is a testament to the growing extremism in the debate over economic policy that many Democrats are in favor of increasing the U.S. minimum wage to $15 per hour.

To gain perspective on the current discussion, go back to 2014, when the nonpartisan Congressional Budget Office analyzed the labor market effects of increasing the federal minimum wage from its current $7.25 per hour to $10.10 per hour.

The CBO found that this increase, proposed by President Barack Obama, would reduce employment by 500,000 workers, while giving 16.5 million workers a pay increase. About $2 of every $10 of additional earnings generated by the higher minimum wage would accrue to families in poverty, with the rest going to families above the poverty line. About $3 of every $10 would go to families earning $72,000 per year or more.

These findings are reasonable, and highlight two important considerations regarding minimum-wage increases: First, they reduce employment while raising earnings. Second, most of the benefits go to families that aren’t in poverty, while most of the costs are borne by the least-skilled and least-experienced workers in the labor market.

So the debate becomes — or should become — about these trade-offs. Is mandating a pay increase for working- and middle-class families worth erecting a barrier to economic opportunity for a half million lower-skilled workers trying to earn a living and young workers trying to get their start in the labor market? Reasonable people can disagree.

What happens when we’re talking about a $15 hourly minimum wage instead of the $10.10 rate? It becomes hard to have an informed debate about the trade-offs of the increase because $15 per hour is so far outside the national and international evidence base. Economic research based on previous minimum-wage increases is of limited value because they have been much smaller, and their effects could be different.

It’s hard to overstate how high a $15 wage floor would be. Consider that over half of all workers in Mississippi and Arkansas make less than $15 per hour. Twenty states have a median wage of less than $17 per hour. At the national level, around one-third of workers earn less than $15 per hour.

To absorb the higher wage costs, businesses can react in a number of ways. The response that gets the most attention is to reduce the number of people they hire and employ. Importantly, they can also raise the prices they charge for their goods and services. (Since many customers of low-wage employers are also low-wage workers, this blunts the benefits to workers of a higher minimum wage.)

Some of the cost could be absorbed if workers become more productive in response to higher pay, and through reducing turnover and training expenses if the higher wage makes existing workers less likely to leave for a new job. And companies might reduce profit margins to help finance the cost.

All of these options become much more difficult to implement when the federal minimum wage is more than doubled. The market will bear prices that are only so much higher, profit margins can be reduced only so far, and so on. Many businesses would have no choice but to cut jobs. Indeed, some recent research, including a study by me and the economist Jeffrey Clemens, finds that larger minimum-wage increases are associated with disproportionately larger employment reductions. 

At fast-food outlets and retail stores, a $15 wage will likely accelerate the shift away from workers and toward machines for customer orders and checkout functions, for example. Employers are also likely to demand that the workers they do hire have more skills, education and experience than would otherwise be the case. This would make finding a job even more difficult for many workers living in poverty.

Some proponents of a $15 minimum wage are even calling for it to be indexed to a measure of inflation. This will likely further encourage employers to invest in technology instead of hiring workers.

Minimum wages are typically raised to a specific dollar amount and left there until there is a subsequent increase, often years in the future. Following a hike, this means that as overall prices throughout the economy rise, the inflation-adjusted value of the wage declines. Because of this, businesses may view the higher cost of production from a minimum-wage increase as temporary: Inflation will erode the cost over time.

The temporary nature of nominal increases may make businesses less likely to respond to them by undergoing expensive changes to their operations. But if the minimum wage automatically goes up with prices, then inflation will not reduce the value of the wage over time. In this case, employers may be more likely to reduce employment when the minimum wage goes up. (Another paper of mine finds exactly this.)

None of this is to say that public policy should not do more to encourage work and fight poverty among low-income households. But other policies — for example, subsidizing their labor market earnings — can accomplish both goals without the employment cutbacks associated with modest minimum-wage increases, to say nothing of the more severe reductions that would likely come from a $15 wage.

In this populist moment, extreme proposals are becoming the norm. If enacted, many could do harm. Double the minimum wage? Workers deserve better than a policy that would put so many of them out of work.

To contact the editor responsible for this story: Katy Roberts at kroberts29@bloomberg.net

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

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”

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