In recent years, the movement to enact “living wages” or increases in the minimum wage has been active in states and cities across the country. Advocates of these wage hikes argue that the increases will help low-income families escape poverty. While emotionally compelling, this argument ignores the unintended consequences the proposed increase would create. Worse, the mandated increase confers its benefits overwhelmingly on employees who aren’t poor, while those who are bear a disproportionate share of the costs.
This paper by economist Dr. David Macpherson from Florida State University analyzes one such proposal—legislation to increase the minimum wage in Pennsylvania. Using Current Population Survey data and labor demand estimates (as reported by a consensus of economists), Dr. Macpherson’s research shows that the proposed increase will be an expensive mandate on the employers of Pennsylvania.
The study concludes that the mandate increase would result in a loss of just over 10,000 jobs and impose a $350 million hit on the Pennsylvania economy. Most of the economic cost—$262.7 million—stems from increased labor costs for employers. A significant portion, however—$86.7 million—is the result of the lost income for the 10,000 employees who will lose their jobs. That more than half of the job losses fall on those under 25 and almost 30 percent on those earning less than $25,000 adds cruel irony to the consequences.
As this study shows, minimum wage increases are a blunt and ineffective means to assist low-income employees. Many low-income persons are not affected because they do not work or they work few hours. This report found that minimum wage employees with incomes below $12,500 would experience only an $89 increase in annual income. It’s the amount they work, not the wage they work at, that is the critical determinate of their economic situation.
Wage increases also fail to meet their stated goals for the simple fact that most minimum wage earners aren’t poor. Only 10 percent of earners are the sole earner of a family with kids. Over half—56.2 percent—are under 24 and 45.9 percent still live with their parents. Almost two-thirds, 65 percent, are part-time employees. This study found that the average family income of minimum wage employees in Pennsylvania is just over $49,000 and that 80 percent of the benefits of the wage hike go to families that aren’t poor.
This paper’s calculation of the enormous economic cost of a mandated wage increase ought to caution policymakers. When this is added to the research that the proposed wage increase would confer most of its benefits on families that aren’t poor and impose a disproportionate share of its costs on those who are, policymakers would be wise to explore alternative measures to assist low-income families.