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Checking the Facts of Minimum Wage Hikes

June 29, 2016 Posted by Joe Horvath and Ben Wilterdink - No Comments

Maine’s third-largest industry is tourism. At a size of approximately $2.2 billion and more than 85,000 jobs tied to the hotel and restaurant-heavy sector, Maine’s economy would be heavily impacted by an increase to the minimum wage.

The case for minimum wage has been made ad nauseum: people are not earning enough money, so the legislature should give them a pay increase. The unintended consequences of drastic increases to the minimum wage, however, are hardly ever examined. Most often businesses are forced to reduce hours or lay off employees, many of whom were already working minimum wage jobs to begin with.

There are better ways to help those with the lowest incomes. The best way is by expanding economic opportunity.

Raising the minimum wage disincentivizes businesses from investing in the kind of low-skilled labor typically compensated at the federal minimum. While employers still need certain tasks done, human labor may become too expensive to use. Rather, increased automation, altering job responsibilities and attrition are the logical response.

In May, Wendy’s announced the addition of automated, self-service kiosks to place orders in more than 6,000 stores nationwide. Wendy’s joined McDonald’s, Chili’s and Applebee’s to continue the trend of increased automation in the service industry. Given certain economies of scale, it is more cost effective for businesses to automate than employ people.

The projected risk of increased unemployment stems from both non-partisan research estimates and empirical results from places that have already increased their minimum wages. In 2014, the Congressional Budget Office issued a report estimating a loss of between 500,000 and 1,000,000 jobs if the federal minimum wage was raised from $7.25 to $10.10. That says nothing of the $15 rate many municipalities and states are trying to approach.

Seattle, which is phasing in a $15 minimum wage, saw job losses of 1,300 in the months immediately preceding and following the first increase ($9.47 to $11 per hour). Of those jobs, 1,000 were in the restaurant industry. At the same time, the restaurant industry in the rest of Washington added jobs.

Even more importantly, in times of economic distress, minimum wage increases do more harm for workers than good. According to a recent National Bureau of Economic Research (NBER) study, during the Great Recession, individuals who would be impacted by a minimum wage increase suffered diminished employment opportunity and income potential. Rather than getting a helping hand, they became worse off than ever.

Even after the recession, areas with burdensome minimum wage requirements show the unintended impacts of the policy. As written by Andy Pudzer in a recent Wall Street Journal op-ed, San Francisco’s median income has grown substantially since the end of the recession. According to Pudzer, “Part of the problem is that those with technical skills make good livings, while those who don’t have those skills are being priced out of entry-level jobs.”

In a letter addressed to the Maine State Legislature, Governor Paul LePage wrote “Rather than debating a minimum wage, I want to give a pay raise to all working Mainers: eliminating the income tax will put $900 million back in the paychecks of Mainers.”

Everyone agrees that people should be making more money, but the unintended consequences of a legislative mandate cannot be ignored. Tax reform would do more to help the people of Maine than a minimum wage increase, and would not have the unintended consequence of harming job growth.

The best way to ensure widespread economic opportunity isn’t to mandate price controls; it is to allow individuals to keep more of what they earn.

Joe Horvath is a Maine Wire contributor and research analyst for the American Legislative Exchange Council (ALEC) Center for State Fiscal Reform. Ben Wilterdink serves as the director of Commerce, Insurance and Economic Development for ALEC. Learn more about ALEC at alec.org.