In the long run, low-wage workers lose out in ‘Fight for $15’

Earlier this week, 18 states and 20 cities hiked their minimum wage rates in a race to reach $15 an hour. States both red and blue are convinced that a higher minimum wage will help the lowest paid workers earn a “living wage.”

At first blush, an increase in hourly wages for low-paid workers seems to be great news for food and accommodation workers, cashiers, and secretaries — a higher minimum wage translates into a higher paycheck on a weekly and monthly basis.

The story so far

In a previous article, I explored the ways in which minimum wage hikes fail to reduce poverty and raise the income levels of poor families. What becomes increasingly clear from several studies on the targeted effects of minimum wage increases is that minimum wage is a very imprecise way to raise the relative incomes of the poorest families and may actually marginally benefit wealthier families.

But seldom do studies analyze the effects of minimum-wage hikes on the employment levels and income levels of individual workers in low-paid industries. Recently, a study conducted by two economics professors on California’s minimum wage experiment did just that.

The study found that for an industry with at least 50 percent low-wage workers, every 10-percent increase in the minimum wage rate led to a 4.5-percent reduction in employment. Using these estimates, the study concludes that a $15 minimum wage by 2022 will lead to around 400,000 job losses in the state of California.

Roughly half of those job losses would be in food services and accommodations and retail trade — some of the lowest-paid industries.

Another working paper published by the National Bureau of Economic Research in 2017 looked at the early impacts of Seattle’s minimum wage hikes on employment patterns since 2014. A significant increase in the minimum rate from $10.50 to $13 in 2016 led to a 3-percent boost in pay to low-wage workers.

However, the wage hike also led to a 9-percent reduction in the number of hours worked — that resulted in a 6-percent decline in collectivity pay for those low-wage workers. For a low-wage worker in Seattle, this effect translates into a monthly loss of around $125.

Author of the NBER working paper and University of Washington professor Mark Long noted:

“If you’re a low-skilled worker with one of those jobs, $125 a month is a sizable amount of money. It can be the difference between being able to pay your rent and not being able to pay your rent.”

The study also found that around 5,000 low-paid jobs have been lost in Seattle since 2014 due to the higher minimum wage.

A wage is not an entitlement, it is an assessment and reflection of value creation.

A significant problem with minimum wage hikes is that they disconnect performance and pay, transforming private businesses into welfare agencies. Yet, unlike welfare agencies, businesses must seek others avenues for cost saving in order to ensure they can still turn a profit.

This is exactly why more businesses are turning to automation and artificial intelligence. As low-skilled labor becomes increasingly expensive, it becomes more of a worthwhile investment to employ greater capital, over labor.

We have already begun to see greater machination in low-skill industries; for example, self-service machines in McDonalds replacing the traditional cashiers.

The early signs from significant increases in the minimum wage tend to demonstrate that in the short- to medium-term, certain low-wage workers will benefit from higher wage rates. However, these wage hikes will also come at the expense of lower hours of work available, as businesses begin to tighten their belts.

In the longer term, the effects of significant increases in the minimum wage will be greater business investment in capital and technology, resulting in an ever-growing number of low-skilled unemployed workers.

A wage is not an entitlement, it is an assessment and reflection of value creation. The start of 2018 may well mark a victory for the “Fight for 15” advocates, but in the preceding years, it is the low-wage workers who will lose the most in this push for $15 per hour.

Jack Salmon is a Washington, D.C.-based researcher focused on federal fiscal policy. Salmon holds an M.A. in political economy with specializations in macroeconomics and comparative economic analysis from King’s College London.