You’d have to be living under a rock — with both fingers firmly planted in your ears and humming loudly — not to have heard that the House passed the “Raise the Wage Act” last month. It would increase the $7.25-per-hour federal minimum wage by $1.10 each year until it hits $15 in 2025. Adjusted for inflation, this would be almost 60 percent higher than it’s ever been.
The bill’s proponents are celebrating — which makes sense, since they’ve been working toward this day since 2013 when the idea of a $15 minimum wage was initially proposed as a union bargaining tactic. But they should take a moment to listen to the advice of reasonable economists. Although it’s fashionable to scoff at the idea that raising the minimum wage causes job losses, there are valid reasons to believe that it hurts the very workers who face the greatest employment challenges.
To understand why, it’s important to understand the proposal. $15 in 2025 — after adjusting for inflation — is 130 percent higher than the current federal minimum wage. This would be the largest increase in history, and the Congressional Budget Office recently estimated that it would affect the wages (and therefore the cost of employment) of 32 percent of America’s hourly workers.
The legislation would also phase out exemptions such as the short-term training wage for teenage workers ($4.25/hour), tip credits for service workers ($2.13/hour), and lower minimum wage allowances for people with productivity-inhibiting disabilities. This puts lesser-skilled workers into direct competition for jobs with more productive adults. Meanwhile, the inflation-adjusted cost to employ service workers would increase by almost 700 percent.
After hitting $15, the federal minimum wage would increase annually at the same rate as the national median wage — which over the last 10 years has grown 60 percent faster than the rate of inflation.
It’s easy to see why these changes, taken together, would motivate employers to adapt their business models, hiring fewer low-skilled workers in favor of more productive workers, increasing automation, or both. The Raise the Wage Act would accelerate the existing arms race between businesses to find the best labor-saving technologies, causing a permanent decrease in the demand for lesser-skilled workers.
The main argument used by minimum wage proponents is that inflation has eroded the value of $7.25 per hour and that the federal government has been negligent in keeping up. But competition between businesses for workers, not government mandates, is the primary way that wages rise.
Over the last decade, retailers like Wal-Mart, Costco, Target, and Amazon have fought a wage and benefits battle to attract and keep the best workers. After the last increase in, 1.8 million workers were paid exactly the federal minimum wage in 2010. Last year, that number had dropped to 430,000, or just 0.5 percent of hourly workers — and that happened even as unemployment declined to a 50-year low.
Certainly some of this drop-off is attributable to the 29 states (and Washington D.C.) which have passed higher minimum wages. But that’s also an argument against the need for a higher federal minimum wage, which applies the same, non-scientific standard to every state and U.S. territory.
History clearly shows that workers in low-wage labor markets bear the brunt of minimum wage job losses. The federal minimum wage has decimated the Puerto Rican labor market on multiple occasions since the original Fair Labor Standards Act. Similarly, the Government Accountability Office found that the 2007-2009 federal minimum wage increases destroyed entire low-wage industries in American Samoa and the Northern Mariana Islands.
Furthermore, it’s clear that the authors of the Raise the Wage Act anticipate creating the same problems again: The legislation delays the implementation in the Northern Marianas and requires the GAO to provide Congress with annual reports regarding how much of its economy will be affected by the yearly increases.
National politicians’ feigned ignorance of the local effect is the biggest problem with the federal minimum wage. Even proponents of the minimum wage are leery of raising it too high, because the definition of “too high” inherently depends on the characteristics of each local labor market.
Rep. Terri Sewell (D-Ala.) even proposed an alternate bill that included a regional adjustment to reduce the harm to rural labor markets. The idea is a sensible approach to a problematic policy, especially since the harmful effects of the original federal minimum wage fell mostly on low-wage Southern manufacturing and processing industries, rather than the more highly automated operations in the North.
But Sewell’s idea was swiftly shot down, illustrating that the fight over the minimum wage is really about optics and politics, not the most effective policies. As highly respected labor economist Daniel Hamermesh recently said regarding the two sides of the minimum wage debate, “This is closer to religion than anything else.”
Michael Farren is a research fellow with the Mercatus Center at George Mason University.