Hiking the minimum wage has unintended consequences

The idea of raising the minimum wage is gaining steam in the United States. Twenty states increased their minimum wage at the start of this year—at least by $0.08 and at most by $1.50. President Joe Biden’s proposed COVID-19 legislation increases the federal minimum wage to $15 per hour. But some economists warn that the move will backfire, leaving fewer jobs and smothering the small businesses that have survived the pandemic thus far.

The federal government last increased the minimum wage in 2009, to $7.25 per hour. Many states set their own wage floor, while several use the federal number. Over the last decade, cities including Seattle and San Francisco enacted plans to gradually increase the minimum wage to $15 per hour. New York and California were the first to adopt similar plans statewide. Last fall, Florida adopted the $15 minimum wage through a ballot measure, and in January seven states raised their minimum wage as part of phased plans. Other states tied minimum wage to the cost of living or inflation. In 2019, the House of Representatives passed a bill to raise the nationwide wage, but it stalled in the Republican-controlled Senate.

Proponents of the increase argue it would give workers a livable income as many American cities become unaffordable. They point out the federal number would be $12 an hour if it had kept up with inflation. And the pandemic showed how vulnerable many Americans were as low-wage workers disproportionately lost jobs.

But opponents argue that a healthy economy has jobs available at various income levels. If businesses must pay workers a higher amount, they will reduce the number of employees and keep the more skilled. This means fewer jobs for the least skilled low-income workers. A 2019 Congressional Budget Office survey estimated increasing the minimum wage to $15 an hour by 2025 would mean 1.3 million fewer jobs in the United States.

Meanwhile, the pandemic didn’t just hurt workers: Small businesses are struggling to survive. Tina Miller and her husband started Walkabout Outfitter, an outdoor equipment store in rural Virginia. Starting pay is $10 an hour, and most employees are students who work part time. The pandemic reduced their business significantly—at one point, it was down 90 percent. The Millers took out loans, laid off most of their staff, and used their savings to cover their expenses. The state is set to increase the minimum wage to $12 an hour in 2023, then $15 an hour in 2026. “We’ve run the numbers, and you know, it would potentially put us out of business,” Miller told NPR.

“The timing [of Biden’s plan] is terrible and the tradeoffs are not worth it,” Competitive Enterprise Institute economist Ryan Young said. “Small businesses often have a hard time making payroll as it is, with bills and rent still piling up amid COVID-related slowdowns. A higher minimum wage would do no good for the workers who would be let go because of it.”