Setting the minimum wage at $15 an hour — unimaginable not that long ago — suddenly seems in vogue. The trend, however, isn’t cause for worker celebrations.
Yes, a $15 wage has become law in California, New York state and many cities. And the Democratic Party platform officially calls for it. But the evidence still shows super-sizing minimum starting wages would end up hurting workers.
One reason is that such a hike to the national minimum wage would affect far more workers than ever before. America’s inflation-adjusted federal minimum wage has never exceeded $8.55 an hour. Currently about one out of every 20 Americans make the minimum wage. If Congress took the minimum wage to $15 by 2021, as Sen. Bernie Sanders has proposed, it would cover over one in three workers.
Businesses’ payroll costs would jump, and the pain wouldn’t end there. Employers must pay unemployment insurance and payroll taxes on top of wages. The Affordable Care Act additionally penalizes employers that forgo health coverage. These expenses would increase the cost of hiring a full-time employee at $15 an hour to $18.61, or $38,700 annually for a full-year job.
Many less-skilled and less-experienced workers are not — at least not yet — this productive. But companies won’t hire individuals who create less value than they cost. Requiring $15 starting wages would make many Americans unemployable.
This has already begun in California.
Los Angeles raised starting wages to $15 an hour last year. Soon afterwards, American Apparel laid off 500 workers in the city. The Los Angeles Times reported the company planned to relocate those jobs within California.
Then the Legislature required $15 starting wages statewide. Executives are now exploring options to move outside the state. Industry analysts expect most Los Angeles garment manufacturers to follow. One apparel supplier told reporters, “[F]ive years from now, there won’t be manufacturing in the city anymore.” Most of the city’s garment manufacturing workers will lose their jobs.
A sad irony is some of these jobs pay more than $15. Starting apparel manufacturing wages begin much lower, but employees also get performance-based pay. This can raise productive workers’ earnings to $15 or higher. However, the manufacturers cannot afford starting wages of $15 for everyone. So everyone, including the more highly paid workers, will lose their jobs.
Fight for 15 supporters respond to such critiques with studies stating past minimum wage increases cost few jobs. It is true that some credible studies have found modest employment effects. But other high-quality studies have disputed those results and found much larger job losses.
Economists have not reached a consensus on the effect of small minimum wage hikes.
But this misses the point. Previous increases affected only a tiny minority of workers. That is why researchers studying the issue have primarily examined teenagers. They have been about the only group affected in large numbers.
This research says little about starting wages affecting a third of employees.
Fortunately, economists have extensively examined how employers respond to higher wages generally, not just minimum wage hikes. This research has studied businesses and workers throughout the economy and has found employment falls about 7 percent when wages rise 10 percent. This implies California’s $15 mandate will ultimately cost about 900,000 jobs.
A federal mandate would cost roughly 7 million additional jobs nationwide. Raising starting wages to $15 would price millions of Americans out of work.
Evidence of this comes from Puerto Rico and American Samoa. No state has yet experienced real minimum wages close to $15. These island territories have.
In the 1970s, Congress imposed the federal minimum wage on Puerto Rico, where wages have generally been much lower than on the mainland. Anne Krueger, the former World Bank chief economist, found this has significantly contributed to Puerto Rico’s persistent economic weakness.
Even greater job losses hit American Samoa. Congress passed legislation in 2007 gradually moving the territory to the federal minimum (the equivalent of roughly $20 on the mainland). Samoan unemployment jumped from 5 percent to 36 percent in two years.
The territory’s liberal governor begged Congress to stop. He pleaded, “We are watching our economy burn down. We know what to do to stop it. We need to bring the aggressive wage costs decreed by the federal government under control. …. [If not] American Samoa could be left substantially without a private sector economic base.”
Liberal economists recognize this. Alan Krueger, the former chairman of President Barack Obama’s Council of Economic Advisors, has publicly opposed a $15 mandate. But most left-wing economists have kept their reservations private. Dylan Matthews, a writer for the liberal news outlet Vox, recently noted, “[O]ne really fascinating phenomenon: left-wing economists saying off the record that $15/hr is super-dangerous, but not saying that publicly.”
In their silence, the left has united around a $15 minimum starting wage. Much of the self-proclaimed “reality based community” entertains misconceptions about what this would really do. That ignorance could hurt millions.
James Sherk is a research fellow of labor economics in the Center for Data Analysis at The Heritage Foundation