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The winners and losers of a minimum wage hike

Opposing a federal hike isn’t just about political philosophy. It’s about practicality too

July 27, 2019

3:25 PM

27 July 2019

3:25 PM

Millions of Americans could get a pay hike if a Democrat wins the White House. Most of President Trump’s 20-plus challengers have vowed to raise the minimum wage to $15, up from $7.25 today. Front-runner Joe Biden said the move was long overdue. Elizabeth Warren opined that doing nothing threatens the survival of the American family. And Bernie Sanders – who has long championed raising national pay standards – said it’s time companies pay their workers, ‘a living wage.’

The idea isn’t new. Wage hikes have already been approved by lawmakers in several blue states including California, Illinois and Massachusetts (Massachusetts’s minimum wage is set to always be higher than the federal average). Yet while Democrats see raising the pay floor as a moral imperative (New York city mayor and presidential candidate Bill de Blasio said his campaign is boycotting McDonald’s until the fast food chain pays its workers a $15 minimum wage), Republicans worry about government overreach. White House economic adviser Larry Kudlow said he would oppose any such proposal. House Republican Steve Scalise quipped the $15 figure was, ‘picked out of thin air and is not supported by any reasonable economic analysis.’ His colleague Rep. Kevin McCarthy said the strength and prosperity of American economy should not be jeopardized through more regulation. Put another way, socialism – an effective political bogeyman for the right – isn’t the answer.

Opposition to the minimum wage isn’t just about political philosophy. It’s about practicality too. Conservatives say the minimum wage forces employers to pay workers more than their work is worth. This discourages the hiring of these workers altogether. Milton Friedman famously criticized the minimum wage because – he argued – the resulting unemployment hits African Americans particularly hard. Raising the minimum wage worsens things as employers – confronted by higher labor costs – pare back on working hours offered to their now pricier employees.

Yet evidence supporting such reasoning is mixed. Research does show the introduction of a minimum wage has had no adverse effect on employment prospects. But research also shows that raising the minimum wage can hurt employment. In Seattle, a state-ordered increase in wages resulted in employers cutting back on working hours for employees. The result? Some low-wage workers ended up ‘losing’ the equivalent of $74 per month (this particular finding wouldn’t surprise Friedman who famously quipped, ‘Does higher pay of domestic servants induce more housewives to hire help?’).

Free marketeers shouldn’t cheer just yet though because research also shows wage hikes can help the poor. In fact, according to the non-partisan Congressional Budget Office, doubling America’s minimum wage would boost the earnings of up to 27 million workers. Low-income households would disproportionally benefit with families currently earning less than the poverty threshold receiving an extra $8 billion by 2025. That extra income could lift up to 1.3 million Americans out of hardship. But a pay hike could also – according to the CBO – trigger up to 3.7 million job losses.

This scientific seesaw highlights a seldom discussed truism. While the political right equates the minimum wage with job cuts, and the left connects it to economic mobility, the reality is that both outcomes are simultaneously and equally plausible. What matters is the timeline. While wage hikes may have little short-term effect on employment, the same can’t be said in the long run. Indeed, wages hikes have been found to curb overall job growth after as little as three years.

This doesn’t mean a pay hike across America isn’t due. As author and activist Barbara Ehrenreich aptly observed, ‘something is wrong, very wrong, when a single person in good health, a person who in addition possesses a working car, can barely support herself by the sweat of her brow. You don’t need a degree in economics to see that wages are too low and rents too high.’ Nearly 40 million Americans live in poverty, 18.5 million in deep poverty  which means that their annual household income – assuming a family of four – is less than half the official poverty threshold of $25,000. These people deserve better; they deserve more. But raising the minimum wage creates winners and losers. Winners will be rewarded with a pay hike and losers (if they’re lucky), faced with a pay cut.

While this reality is overlooked in today’s political climate, its one that warrants attention. We can’t – despite what our politicians tell us – have our cake and eat it too.  ​

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