You are here

New Study: Minimum Wages Have Tradeoffs

Congress nearly increased the federal minimum wage from $7.25 to $15 per hour this year. Though the Raise the Wage Act is unlikely to pass the Senate, 29 states and numerous local governments have passed their own increases. Moreover, the next session of Congress will almost certainly reintroduce the bill. This issue will be alive for a long time to come. Though some workers would benefit from a higher minimum wage, this would only be at other workers’ expense. As I argue in a new paper, minimum wages have tradeoffs. 

Moreover, tradeoffs go far beyond the usual complaints of job losses—of which the Congressional Budget Office estimates there would be 1.3 million if the Raise the Wage Act becomes law. The list includes, but is not limited to:

Differing regional impacts, layoffs, reduced non-wage compensation, a tax increase for low-income workers, fewer job openings, longer job searches, reduced hours, stricter policies for arriving late or leaving early, increased automation, higher insurance co-pays, less vacation and personal time, reduced or eliminated on-the-job perks, reduced employee discounts, less flexible hours, higher consumer prices, more outsourcing, higher youth unemployment, fewer minority workers hired, more abusive behavior by bosses, and higher crime rates.

Add them all up, and most economists believe minimum wages are likely a moderate net loss for low-income workers. For an ostensible poverty reduction policy, they are also poorly targeted. Minimum wage earners skew very young, often work part-time, especially if they’re over 25, and mostly live in households above the poverty level. Rather than causing all manner of tradeoffs and distortions by manipulating wages, a policy such as the Earned Income Tax Credit is far more likely to help the people it intends to, and with fewer tradeoffs.

Even assuming minimum wage increases meet the best-case scenario of being zero-sum, there are two ethical factors (beyond the money involved) that tip the scale against an increase. One is the rent-seeking minimum wages enable, and the other is reduced workplace flexibility for workers.

Rent-seeking: big companies including Walmart, Costco, and Amazon often have high internal minimum wages, and that’s great. What isn’t great is when those same companies lobby for legislators to impose higher minimum wages on their competitors. This can stack the deck against smaller businesses that can’t absorb the costs as easily. Worse, many people will actually believe and support the virtuous posturing hiding these rent-seeking grabs, making for a classic Baptists-and-bootleggers story.

Workplace Flexibility: Workers make more than wages. They also receive non-wage compensation ranging from tips to health insurance to employee discounts to free or discounted meals. These don’t always show up on a pay stub, but they still exist. One of the most common tradeoffs to a higher minimum wage is cuts to such non-wage pay. Total compensation doesn’t necessarily increase, it just gets shifted around—and taxed—in ways workers might not prefer.

When Washington, D.C. did away with the “tip credit” in its recent minimum wage increase, workers revolted and the City Council repealed the voter initiative just a few months after it passed. Most servers and bartenders would rather have high tips and a low wage than the package D.C. voters required them to take. Workers should be allowed to make those choices for themselves. Or think of someone who works at a music store or an electronics store in part for the employee discount. They might not like the job very much, but the discount helps to fund a hobby or a side business. For them, that non-wage perk makes the job worthwhile. A higher minimum wage might take that important benefit away.

For more, see my new paper “Minimum Wages Have Tradeoffs: Unintended Consequences of the Fight for 15.” For a shorter version, see the press release.