Steve Bakke

Steve Bakke

Minimum wage debates come and go, and we’re at it again. This time, however, it’s a bit different. The Democratic controlled U.S. House has “gone big” by passing a $15 minimum wage bill. The expressed goal is to create “an economy that works for everyone.” Now it’s up to the Senate to decide.

Recently, percentage wage increases have outpaced a good share of increases for higher paid workers. Economic expansion is high and unemployment is low. Those characteristics aren’t typically present during a major push for increases. That fact may not bode well for the legislation when it reaches the Senate.

Every time we debate the pros and cons of increasing the minimum wage, most hearts are in the right place, no matter the political affiliation. Raising the living standard of the poorest among us is a worthy objective, but we must take time to understand some inevitable negative consequences of this legislation.

A look at some demographics produces a convincing argument most benefits of minimum wage increases don’t end up with the intended beneficiaries. Over 60% of minimum wage workers are second or third earners in families earning at or above the poverty level. As a result, minimum wage increases tend to affect teenagers and secondary wage earners, not families comprising the working poor.

The CBO projects significant adverse impacts resulting from an increase to $15:

  • The CBO estimates 1.3 million people will be lifted out of poverty. That’s great, but at the same time the midrange estimate of job losses is 1.3 million, with a worst-case scenario of 3.7 million jobs lost. I’ve seen job loss estimates as high as 7 million — that high estimate is from the Heritage Foundation.
  • Job losses would be concentrated on those least experienced and poorly educated, and women would be more adversely impacted than men.
  • While 17 million workers would receive wage increases, CBO estimates total real family income would decrease by $9 billion.

The cost of a $15 minimum doesn’t stop there. The total impact becomes almost $19 per hour if you consider all costs of full-time employees.

Unfortunately, the same minimum would apply for the entire country. This would produce very different impacts, state by state. For example, imagine trying to make sense out of a comparison of the impact on New York or California to the impact on Mississippi or Alabama.

A large increase like this would be inflationary, with most of the costs passed on to consumers. Consumer price increases would eventually wipe out much of the purchasing power gains intended for low income workers.

There would be an added incentive to automate. The automated cashier machines being added at many McDonald’s are examples of this.

Several cities in the U.S. have jumped the gun on a $15 minimum. According to The Heritage Foundation, following are the reductions in overall employment after these cities implemented a $15 minimum wage: Los Angeles -3% lower employment; Seattle -2% lower; San Francisco -1% lower.

The goal of the $15 minimum wage is noble, but adverse consequences can be material. The biggest concerns are: most benefits end up with people who don’t need it, i.e. the benefits miss the intended target; and, acknowledging some will benefit significantly by that increase, there are a myriad of offsetting economic effects that would land on other categories of individuals. The combination of negatives leaves this proposed wage policy with a high risk of failure.

All those negatives are reasons most conservatives prefer other alternatives for helping the working poor. Consider the impact of the recent tax cuts on wages and total employment. The resulting economic growth produced record low unemployment along with significant wage gains for low-income workers. Or, why not look closer at what I’ve always concluded as a good solution? The earned income tax credit provides an incentive for the poor to seek employment, and ensures that benefits go to the lowest income workers – those whose need is the greatest. Unfortunately, these other suggestions, and conservative pro-growth policies in general, lack the political pizzazz of transformative proposals to raise the minimum wage. Hopefully the U.S. Senate won’t succumb to pressure to pass this legislation.

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Steve Bakke is a Courier subscriber living in Fort Myers, Fla. He is a retired CPA and commercial finance executive.


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