A new study shows that a $15 national minimum wage would ravage the American workforce, destroying millions of jobs, shrinking consumer benefits, and markedly reducing economic output.
The research, conducted by my colleagues and me at the American Consumer Institute, is part of a broader initiative to measure the state-level economic effects of major labor market regulations, including paid family leave requirements and predictive scheduling mandates. These misguided policies threaten to slow the U.S. economy, making it harder for small businesses to thrive, discouraging hiring, and stifling market forces that expand opportunity for all.
The unintended consequences of high minimum wages are already evident in cities like New York and San Francisco. At the end of 2018, after the minimum wage reached $15 an hour for most businesses, there were fewer restaurant workers in the Big Apple than in November 2016, even as total employment grew by more than 163,000 workers.
In San Francisco, where the minimum wage has risen sharply in recent years, restaurateurs are struggling to stay afloat. Restaurants Unlimited, a company that operates several locations in San Francisco, filed for bankruptcy protection in July, noting that despite raising menu prices and adding an extra surcharge to customers’ bills, its restaurants still weren’t profitable.
It’s not hard to see why. If the minimum wage for low-skill workers is set above market wages, businesses will cut labor costs by reducing worker hours or the number of workers, reduce production, rely more heavily on automation, or exit the market entirely. In effect, government-mandated increases in wages translate to depressed employment and have a rippling negative effect on economic output.
One way employers cope with higher minimum wages is to charge higher prices, decreasing consumer benefits, particularly for low-income families who disproportionately shop at businesses affected by minimum wage hikes.
To estimate these impacts, we looked at how each state’s economy would react to a $15 minimum wage, as proposed by some in Congress. Our analysis suggests heavy economic losses, including an estimated reduction of $138 billion in consumer welfare, a decrease in gross state product of $187 billion, and the loss of 2.1 million jobs – a figure somewhat higher than the Congressional Budget Office’s independent estimate of 1.3 million jobs but conservatively lower than its upper bounds estimate of 3.7 million jobs.
Although we examined three central indicators of economic performance, it is important to recognize that our findings do not reflect the full negative impact of high minimum wages, which include increasing job turnover, encouraging employers to cut back on fringe benefits, and reducing training opportunities for employees.
Moreover, the popular assumption that minimum wages alleviate poverty is increasingly being challenged. Research from the University of Washington, for example, has found that although the wages of many low-wage workers increased slightly when Seattle raised its minimum wage to $13 an hour in 2016, employers responded by cutting hours by 9 percent. As a result, low-wage employees’ earnings in the city declined by an average of $125 per month.
The implications of our study are important, especially as policymakers around the country move to raise the minimum wage to unprecedented levels. As Nobel Prize-winning economist Milton Friedman famously observed, good intentions are a poor substitute for well-designed policies. Our research adds to the chorus of empirical studies showing that the costs of a higher minimum wage far outweigh its benefits.