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Adverse effects of the minimum wage (“political wage setting”) even if some workers keep their jobs – Publications – AEI

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AEI Adverse effects of the minimum wage (“political wage setting”) even if some workers keep their jobs In an article titled “4 Ways Employers Respond to Minimum Wage Laws (Besides Laying Off Workers)” economist John Phelan of the Twin Cities-based Center of the American Experiment outlines four of the possible adverse effects of minimum wage hikes resulting from employers’ responses to higher government-mandated labor costs that don’t involve laying off workers and therefore won’t show up as negative employment effects: 1. Employers Cut Worker Hours Rather Than Workers 2. Employers Make Employees Work Harder 3. Employers Cut Other Elements of Worker Compensation 4. Employers Increase Investment in Automation and Hire Fewer Workers in the Future Much of the empirical research on the

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Adverse effects of the minimum wage (“political wage setting”) even if some workers keep their jobs

In an article titled “4 Ways Employers Respond to Minimum Wage Laws (Besides Laying Off Workers)” economist John Phelan of the Twin Cities-based Center of the American Experiment outlines four of the possible adverse effects of minimum wage hikes resulting from employers’ responses to higher government-mandated labor costs that don’t involve laying off workers and therefore won’t show up as negative employment effects:

1. Employers Cut Worker Hours Rather Than Workers

2. Employers Make Employees Work Harder

3. Employers Cut Other Elements of Worker Compensation

4. Employers Increase Investment in Automation and Hire Fewer Workers in the Future

Much of the empirical research on the effects of government-mandated minimum wage hikes focuses on trying to find negative employment effects (layoffs, job losses, etc.). But even when some workers are able to keep their jobs, or find jobs, following arbitrary government-mandated wage increases (“political wage setting“) on employers, employees may still be worse off as employers find ways to reduce their artificially higher, government-imposed labor costs as John points out. I made many of the same points several years ago in a three-part series on CD titled “Rethinking the Standard Economics Textbook Presentation of the Minimum Wage,” where I concluded that:

Research that fails to find negative employment effects following minimum wage hikes when focusing mainly on employment levels might not be uncovering other negative effects on low-skilled workers including: a) reductions in hours worked leading to lower weekly earnings, b) reductions in fringe benefits and non-wage job attributes leading to lower hourly compensation and less favorable working conditions, and c) reductions in the rate of change in jobs or the job growth rate leading to fewer employment opportunities for low-skilled workers in the future.

MP: Government mandated increases in the minimum wage (“political wage setting”) is bad public policy as John Phelan concludes. Further, the perverse cruelty of minimum wage laws is that they inflict the greatest harm on the very workers they are allegedly designed to help – the least productive workers with the fewest skills and the least experience.

Update: This morning the Competitive Enterprise Institute sent a letter to members of Congress in opposition to the “Raise the Wage Act of 2019,” which would mandate a 107% increase in the federal minimum wage to $15 an hour by 2024. Here’s part of the letter:

A one-size-fits-all approach to setting a uniform, federal minimum wage will have disastrous effects on many workers and local and state economies, especially as earnings vary greatly geographically and from urban areas to non-urban.

As American Enterprise Institute scholar Mark Perry aptly states, a national minimum wage is really a “one-size-fits-none approach” because a $15 minimum wage would be harmful in expensive urban areas and smaller communities alike. However, the negative impacts felt in urban, high income areas would be even more pronounced in lower income and non-metro areas that have drastically different costs of living. For instance, in Fairfax and Loudoun County, Virginia, the median household income is over $110,000, but in Lincoln County, Montana, the median household income is only slightly above $35,000. Given the differing economic conditions between these areas, a federally-mandated minimum wage could create additional economic problems for people living in and moving across this areas.

Adverse effects of the minimum wage (“political wage setting”) even if some workers keep their jobs
Mark Perry

Mark Perry
Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan’s Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

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