Good Intentions and Unintended Effects of the Minimum Wage

In November 2016, District of Columbia voters may get a chance to vote on a proposal to raise the hourly minimum wage to $15. If approved, the measure would lift D.C.’s minimum wage to be on a par with those in such liberal cities as Seattle, San Francisco and Los Angeles. But though the $4.50 jump from its current level might help a few workers, it would hurt many others, alongside consumers and businesses in some parts of the city.

Veronique De Rugy1

On the surface, this might seem like a way to increase the standard of living for lower-income workers in the district, but in reality, the policy would most likely backfire. For instance, research by economists David Neumark of the University of California, Irvine, William Wascher of the Federal Reserve Board and Mark Schweitzer of the Federal Reserve Bank of Cleveland shows that minimum wages increase poverty — and hence poverty reduction shouldn’t be expected as a benefit of raising the minimum wage. That’s because, contrary to common belief, the relationship between low wages and poverty is extremely weak.

As Neumark — who has done extensive research on the issue — explains, “the principal sources of an individual’s higher earnings are more schooling and the accumulation of experience and skills in the labor market,” both of which are discouraged by increases in the minimum wage. Though an increase raises the wages of some people, it also reduces employment of young and low-skilled people. The Congressional Budget Office calculated that an increase in the federal minimum wage from its current level, $7.25 an hour, to $10.10 per hour would cost about 500,000 jobs.

The negative consequences are also worse when unemployment is high; hence, not all D.C. neighborhoods would be similarly affected. Economist Salim Furth of The Heritage Foundation explained to me: “It’s easy for the lobbyists and economists of D.C. to forget that a quarter of the city is very poor and poorly served by its government. A $15 (minimum wage) would raise prices in Georgetown, but in Congress Heights, it would shutter shops altogether.” Georgetown is in Ward 2, where the unemployment rate is below 5 percent. Congress Heights is part of Ward 8, where unemployment is 13.4 percent.

Furth said: “The people most likely to lose their jobs are those in professions where there is no successful business model that includes high wages. In D.C., 18,000 people work in professions where most workers earn less than $10 an hour. That includes parking lot attendants, shampooers and a lot of food service workers.”

Consumers would be affected, too, as businesses push the extra cost onto them. Considering how sensitive they are to price changes, it might further hurt employment.

Fast-food workers might stand to lose the most from the hike. Using peer-reviewed research, James Sherk, Furth’s labor economist colleague, estimates that a $15 minimum wage would cause a 36 percent drop in hours worked in fast-food chains. His estimate is based on a national average and is not restricted to a high-cost city such as D.C. He told me, “I would expect a smaller effect in D.C., as $15 an hour will be less of a proportionate increase than it will be in, say, Louisville, Kentucky.”

To make matters worse, Sherk explained, “a $15-an-hour minimum wage in D.C. would force many less skilled D.C. residents to look for work outside the city or not work at all.” He added, “Businesses will not pay workers more than the value they produce.”

As the debate about the effects of minimum wage policies continues, the evidence seems to point to their long-term negative consequences. But often, politicians don’t care. After all, when you raise the minimum wage, you can point to someone whose earnings just got a boost, whereas it is difficult to see the negative effects on workers who couldn’t get jobs or saw their hours cut because of the policy. Unfortunately, many D.C. residents could find themselves among the unseen victims if the voters approve this raise.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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