Minimum Wage Politics, Bad Economic Policy
It wasn’t a corporate executive who said, “Right now Pennsylvania businesses carry a very high tax burden compared to states we compete with. We’re [a] very heavily taxed business state…. To raise the minimum wage in just Pennsylvania, particularly for small businesses, would add another premium for doing business in the state.”
It was Ed Rendell in May 2002, campaigning to be governor of Pennsylvania.
Now the political winds have shifted, and Rendell has turned what he knows to be a job-killer into a top priority. Nevertheless, bad economic policy cannot be annulled by seemingly good reelection politics.
A new study by labor economist David Macpherson of Florida State University shows that Rendell’s proposed $2 minimum wage increase (from $5.15 to $7.15 per hour) would result in more than 10,000 job losses. Macpherson’s research, commissioned by the Commonwealth Foundation and the Employment Policies Institute in Washington, also found that the near 40 percent hike in starting wages would cost the state’s economy $350 million.
Why does raising the minimum wage cost jobs? It’s simple supply and demand. The higher the price, whether for jewelry, ice cream or entry-level labor, the less will be purchased.
Imagine that a small-restaurant owner earns $50,000 a year, after wages, taxes, licensing, etc. Her 12 employees work 40 hours a week, 50 weeks a year at the minimum wage. The $2-an-hour increase would cost her $4,000 per worker, or $48,000 total.
If she doesn’t raise prices, attract more customers, or lay off employees, her profit—$2,000—barely exceeds expenses.
Wage-hike supporters frequently cast their efforts as an anti-poverty policy, but the largest group of minimum wage earners are young people living with their families. Macpherson’s analysis of the U.S. Census Bureau’s Current Population Survey shows that most minimum-wage earners are not impoverished households.
Indeed, the CPS data demonstrate that the average family income of a Pennsylvania minimum-wage earner is nearly $50,000. Meanwhile, only 10 percent of minimum-wage earners in the state support kids on their own.
Once the demographics of the minimum wage workforce are understood, it’s not surprising that Pennsylvania’s poor families won’t benefit much from a government-mandated increase in starting wages.
Even economists David Card and Alan Krueger—whose study looking at low-wage earners in Pennsylvania and New Jersey is often cited by supporters of a rate increase—acknowledge “the minimum wage is evidently a ‘blunt instrument’ for redistributing income to the poorest families.”
A growing body of evidence from economists at Ohio University, Michigan State University and elsewhere suggests that minimum-wage hikes have no impact on poverty rates. That’s because minimum-wage increases destroy so many of the jobs people need to begin to get out of poverty.
It is true, however, that many minimum-wage earners won’t lose their jobs after a rate increase. These workers tend to have higher skill levels than their less fortunate peers. But for the most part, they would have quickly gotten a pay raise without the help of politicians.
According to research by Macpherson and William Even of Miami University of Ohio, nearly two-thirds of minimum-wage employees receive a pay raise within their first year on the job. These increases come at a rate more than five times higher than better-paid workers.
Critics who insist minimum-wage workers have not received a pay raise since Congress last hiked the rate are referring only to the small group of workers whohave been unable to earn a raise on their own. No one will envy their situation. But raising the minimum wage will frequently result in these less-skilled workers being shown the door, instead of the ladder leading to economic self-sufficiency.
The good news is that policymakers can put more money into the hands of poor families without sacrificing jobs or raising the cost of doing business in Pennsylvania. For starters, Rendell and the General Assembly could repeal their 2003 income tax increase of 10 percent on individuals earning as little as $10,000 per year.
Rendell’s change of heart on the minimum wage is the ultimate triumph of politics over policy. Unfortunately, however, the victims of his minimum-wage politics will be Pennsylvania’s most vulnerable workers.
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Matthew J. Brouillette is president and CEO of the Commonwealth Foundation (www.CommonwealthFoundation.org), a public policy research and educational institute located at the foot of the Capitol in Harrisburg.