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Minimum Wage, Minimum Jobs

The Congressional Budget Office (CBO) has released a report detailing “The Effects on Employment and Family Income of Increasing the Federal Minimum Wage.”  The New York Analysis of Policy and Government presents key portions of the report.

The federal minimum wage is $7.25 per hour for most workers. In this report, CBO examines how increasing the federal minimum wage to $10, $12, or $15 per hour by 2025 would affect employment and family income.

The federal minimum wage of $7.25 per hour has not changed since 2009, though many states and localities have set their minimum wage above that level. Increasing the federal minimum wage would have two principal effects on low-wage workers. For most low-wage workers, earnings and family income would increase, which would lift some families out of poverty. But other low-wage workers would become jobless, and their family income would fall—in some cases, below the poverty threshold.

What Options for Increasing the Federal Minimum Wage Did CBO Examine?

CBO examined three options for increasing the federal minimum wage.

The first option would raise the federal minimum wage to $15 per hour as of January 1, 2025. That increase would be implemented in six annual increments starting on January 1, 2020. After reaching $15 in 2025, the minimum wage would be indexed, or tied, to median hourly wages. The $15 option would also gradually eliminate exceptions to the minimum wage for tipped workers, teenage workers, and disabled workers.

The second option would raise the federal minimum wage to $12 per hour as of January 1, 2025. The $12 option would be implemented on the same timeline as the $15 option but would not index the minimum wage to wage growth after 2025. It would leave in place current exceptions.

The third option would raise the federal minimum wage to $10 per hour as of January 1, 2025. The $10 option would be implemented on the same timeline as the $15 and $12 options. Like the $12 option, it would not index the minimum wage to wage growth and would leave in place current exceptions.

What Effects Would the Options Have?

Of the three options, the $15 option would have the largest effects on employment and family income. That is because it would increase wages for the most workers, because it would impose the largest increases in wages, and because, in CBO’s estimation, employment is more responsive to relatively large wage increases and increases that will be adjusted for future wage growth. The $12 option would have smaller effects, and the effects of the $10 option would be smaller still.

There is considerable uncertainty about the size of any option’s effect on employment. CBO’s estimates are based on the median values of likely ranges for wage growth and the responsiveness of employment to changes in wages. In particular, the likely ranges for the responsiveness parameter are not symmetric: That value has an equal chance of being smaller or larger than the median, but if it is larger, it could be substantially larger.

Effects of the $15 Option on Employment and Income. According to CBO’s median estimate, under the $15 option, 1.3 million workers who would otherwise be employed would be jobless in an average week in 2025. (That would equal a 0.8 percent reduction in the number of employed workers.) CBO estimates that there is about a two-thirds chance that the change in employment would lie between about zero and a reduction of 3.7 million workers. In addition, in an average week in 2025, the $15 option would increase the wages of 17 million workers whose wages would otherwise be below $15 per hour, CBO estimates. The wages of many of the 10 million workers whose wages would be slightly above the new federal minimum would also increase.

The $15 option would affect family income in a variety of ways. In CBO’s estimation, it would:

  • Boost workers’ earnings through higher wages, though some of those higher earnings would be offset by higher rates of joblessness;
  • Reduce business income and raise prices as higher labor costs were absorbed by business owners and then passed on to consumers; and
  • Reduce the nation’s output slightly through the reduction in employment and a corresponding decline in the nation’s stock of capital (such as buildings, machines, and technologies).
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On the basis of those effects and CBO’s estimate of the median effect on employment, the $15 option would reduce total real (inflation-adjusted) family income in 2025 by $9 billion, or 0.1 percent.

The effects of those income changes would vary across families. Changes in earnings would mainly affect low-income families, but many higher-income families would be affected, too. The loss in business income would be mostly borne by families well above the poverty line. All consumers would pay higher prices, but higher-income families, who spend more, would pay more of those costs. And the cost of effects on the overall economy would generally accrue to families in proportion to their income, which means they would largely be absorbed by families with income well above the poverty threshold.

Taking those effects into account, CBO estimates that families whose income would be below the poverty threshold under current law would receive an additional $8 billion in real family income in 2025 under this option. That would amount to a 5.3 percent increase in income, on average, for such families. That extra income would move, on net, roughly 1.3 million people out of poverty. Real income would fall by about $16 billion for families above the poverty line; that would reduce their total income by about 0.1 percent.

Effects of the $12 Option on Employment and Income. Under the $12 option, according to CBO’s median estimate, about 0.3 million workers who would otherwise be employed would be jobless in an average week in 2025. (In percentage terms, the number of employed workers would fall by about 0.2 percent.) There is a two-thirds chance that the change in employment would lie between about zero and a reduction of 0.8 million workers, in CBO’s assessment. However, in an average week in 2025, the increase in the federal minimum wage would boost the wages of 5 million workers who would otherwise earn less than $12 per hour, CBO estimates. Wages would also increase for many of the 6 million workers who would otherwise earn just above $12 per hour.

Like the $15 option, this option would boost wages, but it would also increase joblessness, reduce business income, raise prices, and lower total output in the economy. On balance, real family income in 2025 would fall by $1 billion, or less than 0.05 percent. The effects of those changes would again vary across families. CBO estimated that families with income below the poverty threshold under current law would receive $2.3 billion in additional real income under the option. The option would move, on net, about 0.4 million people out of poverty. Families above the poverty line would receive about $3 billion less in real income, a very small share of their total income.

Effects of the $10 Option on Employment and Income. According to CBO’s median estimate, the $10 option would have virtually no effect on employment in an average week in 2025. There is a two-thirds chance that the effect on employment would lie between about zero and a decrease of 0.1 million workers. In an average week in 2025, wages for 1.5 million workers who would otherwise be paid less than $10 per hour would increase, CBO estimates. Wages would also increase for many of the 2 million additional workers who would otherwise earn slightly more than $10 per hour in 2025.

Real annual family income would again be affected by changes in earnings, business income, and prices. On balance, the $10 option would reduce real family income in 2025 by $0.1 billion, a very small percentage. CBO estimates that real income would increase, on net, by $0.4 billion for families whose income would otherwise be below the poverty threshold. Families with higher incomes would see very small changes to their real income. The option would also have a small effect on the number of people in poverty.

Other Effects. Numerous studies have examined the link between minimum wages and a range of outcomes other than employment and family income. Those include labor force outcomes such as labor force participation (whether a person is working or actively seeking a job); health outcomes such as depression, suicide, and obesity; education outcomes such as school completion and job training; and social outcomes such as crime. CBO did not examine those other possible outcomes in this analysis.

CBO also did not estimate how any of the three options would affect the federal budget. However, the agency previously estimated how proposed changes to the minimum wage under the Raise the Wage Act (H.R. 582) would affect the federal budget by boosting the pay of certain federal employees. The policy analyzed in that estimate is very similar to the $15 option in this report.

Why Are the Outcomes Uncertain?

There are two main reasons why CBO’s median estimates of the effects of increases in the minimum wage on employment are uncertain. First, future wage growth under current law is uncertain. If wages grow faster than CBO projects, then wages in 2025 will be higher under current law than CBO anticipates. In that case, increases in the federal minimum wage would have smaller effects on employment than CBO expects. If wages grow more slowly than CBO projects, the options would have larger effects on employment than CBO expects.

Second, there is considerable uncertainty about the responsiveness of employment to an increase in the minimum wage. If employment is more responsive than CBO expects, then increases in the minimum wage would lead to larger declines in employment. By contrast, if employment is less responsive than CBO expects, then such increases would lead to smaller declines in employment. Findings in the research literature about how changes in the federal minimum wage affect employment vary widely. Many studies have found little or no effect of minimum wages on employment, but many others have found substantial reductions in employment.

Illustration: Google images

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Increased Minimum Wage Increases Unemployment

The debate over raising the minimum wage has become a significant factor in the presidential contest. The evidence indicates that, contrary to the claims of Senator Sanders and former Secretary of State Clinton, increasing pay for the lowest paying jobs will increase unemployment and harm the very people the concept purports to assist.

The concept that hiking the minimum wage will not cause increased unemployment was satirized recently by Rep. Chris Collins (R-NY) when he asked his Democrat colleagues “If raising the minimum wage to $15 won’t hurt the economy or produce increased unemployment, why not raise it to $50 instead?”

The Mises Institute notes:

“The minimum wage is constantly sold as good for workers, or minorities or women. In truth, it hurts the most vulnerable and those its well-intentioned sponsors intend to help. A study by Jeffrey Clemens and Michael Wither evaluated the effect of minimum wage increases on low-skilled workers during the recession and found that minimum wage increases between December 2006 and December 2012 … reduced the national employment-population ratio by 0.7 percentage points.” That amounts to about 1.4 million jobs. And more noteworthy, that ‘… binding minimum wage increases significantly reduced the likelihood that low-skilled workers rose to what we characterize as lower middle class earnings.’

“Yes, it’s hard to make ends meet with a minimum wage job and such jobs certainly aren’t enviable. That being said, cutting out the bottom rung from people just makes it all the harder to get by. A bad job is better than no job and it is often the first step to something better.”

One reason raising minimum wage causes unemployment is that it increases the viability of automating positions. The Brookings Institute reports:

“The movement pushing for a $15 per hour minimum wage has succeeded in several large cities like New York, Los Angeles, San Francisco, and Seattle. These minimum wage increases coincide with falling prices for computers that can replace human labor in some low-skill jobs. A higher minimum wage changes cost considerations for businesses seeking to automate more of their operations. Increasingly, low-skill workers will not only have to compete with each other for jobs at higher wages, but also with computers. Staying competitive in a changing job market will require workers to specialize in tasks that computers cannot easily perform.”

In a study on the impact on increasing the minimum in New York State, the Empire Center  found:
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“Advocates of such a policy believe that low-income workers will be its primary beneficiaries…the poorest New Yorkers would have the most to lose from a sharp rise in the government-mandated wage floor. The authors, economists Douglas Holtz-Eakin and Ben Gitis of the American Action Forum, draw on three credible research models to estimate low, medium and high impacts from raising the statewide minimum wage to $12 or $15.

“The key finding: a $15 minimum wage ultimately would cost the state at least 200,000 jobs, with proportionately larger employment decreases in upstate regions. That’s the authors’ “low-impact” scenario, based on a model developed by the Congressional Budget Office, of which Holtz-Eakin is a former director.

“The other two models point to even bigger losses, indicating that a $15 an hour minimum wage would lead to 432,200 and 588,000 fewer jobs under the “medium impact” and “high impact” scenarios, respectively.

“Job losses would be smaller, but still more than New Yorkers should be willing to tolerate, if the state was to set the minimum at $12 an hour, according to Holtz-Eakin and Gitis.

“Based on national labor force data, the authors of this paper estimate less than 7 percent of the wages generated by a $15 wage, and less than 6 percent of the wages generated by a $12 wage, would actually go to households in poverty.”

The Employment Policies Institute verifies that study on a national level:

“An overwhelming majority of American labor economists agree that minimum wage hikes are an inefficient way to address the needs of poor families, according to a new national survey of the American Economic Association (AEA). The survey was conducted by the University of New Hampshire Survey Center and sponsored by the Employment Policies Institute. Over 73 percent of AEA labor economists believe that a significant increase will lead to employment losses and 68 percent think these employment losses fall disproportionately on the least-skilled. Only 6 percent feel that minimum wage hikes are an efficient way to alleviate poverty.”

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Minimum wage hikes shown to increase unemployment

Yet another study has found that increasing the minimum wage increases unemployment.

The Empire Center for Public Policy and the American Action Forum think tanks have studied New York State’s proposed $15 an hour minimum wage, and concluded it could cost at least 200,000 jobs.

The report notes that the federal minimum wage has been set at $7.25 an hour since July 2009. In recent years, some American policymakers and labor advocates have argued for further increases in the wage at the federal, state, and local levels. On the federal level, the Obama administration and top congressional Democrats have rallied behind a proposal to raise the federal minimum to $12 per hour by 2020. Under another proposal championed by, among others, Sen. Bernie Sanders, the federal minimum would rise to $15 per hour, a level now in the process of being implemented in Seattle and a handful of other localities.

“Our report shows that a massive increase in the minimum wage would actually hurt the very low-wage, low-skill workers it is supposed to help,” said E.J. McMahon, president of the Empire Center. “The impact on job creation and employment opportunities would be substantial in every region of New York, especially upstate.”

“Pay increases for millions will come at the expense of lost employment opportunities for hundreds of thousands of people,” McMahon said. “That’s an unacceptably high price to pay for a policy that will significantly disrupt labor markets and business conditions throughout the state.”

The report notes the findings are consistent with the preponderance of economic research, which has long indicated that higher minimum wages are associated with a decline in employment.

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The American Legislative Exchange Council reached a similar conclusion.

“Increasing the minimum wage may seem like a tool to raise low-income workers out of poverty, but it inevitably hurts the very people policymakers intend to help. When the government imposes a higher minimum wage, employers face higher labor costs and are forced to respond by decreasing other production expenses. As these employers cope with the increased costs of a mandated wage raise, they often respond by cutting the jobs available to less-experienced and less-educated employees. The result is that these individuals, who already have few employment options, find it more difficult to get a job.

“Increasing the minimum wage benefits those who already have a job at the expense of the unemployed. However, even those workers who see an increase to their wages may not feel the full benefit of higher pay, as businesses raise prices to compensate for the increase in labor costs. In particular, food prices tend to increase when the minimum wage is increased, exacerbating the problem for those who cannot find work and offsetting gains for those who can. States considering raising their minimum wage risk alienating business and harming their citizens.”

While raising the minimum wage is not a viable tool to address the problem of workers receiving wages that don’t allow for fiscal stability, the problems facing those workers remains. A more viable solution would be for governments on the federal, state and local levels to remove the numerous impediments to an expansion of economic activity, including high taxes and excessive regulations. This would encourage business growth, increasing demand for workers, and the competition for those workers would result in markedly high wages.

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American franchises: An Endangered Species

It’s a business model that has become as American as an ice cream cone at a drive in stop, or a hamburger at your favorite fast food shop.

The franchise model of business has allowed large numbers of Americans to become business owners, and has provided jobs to extraordinary numbers of people who might otherwise face unemployment or may never have had a chance to enter the job market at all.  The Competitive Enterprise Institute  notes that “minority-owned franchise businesses succeed at a rate 46 percent higher than that for minority-owned non-franchise businesses.”

But it is a formula that is under attack on two fronts. Attempts to increase the minimum wage to $15, and a legal maneuver that would raise liability for franchisors to the extent that it would make the entire franchise model a non-viable business model, may bring an end to this successful part of the U.S. economy.

USNEWS reports: “The franchise business model that has flourished for over two generations is under attack. The Service Employees International Union, as part of a national campaign to bolster its membership and finances, is leading an assault on franchise businesses. If the unions prevail, nearly 800,000 small business owners who employ more than 8 million workers could face economic uncertainty, even bankruptcy, and thousands of other would-be entrepreneurs could be deterred from pursuing their dreams and creating additional jobs, according to a recent industry report; meanwhile, franchisees are expected to create nearly a quarter million new jobs in 2015 alone. In addition, the franchise model, which involves less risk than that typically associated with a small business startup, has been especially attractive to aspiring women and minority entrepreneurs. Around 20 percent of franchises were owned by minorities in 2007, compared to 14.2 percent of non-franchised businesses.”

The Daily Signal concurs: “Legal experts worry that the franchising model could become extinct. The stakes are huge because by the end of this year, the more than 770,000 of these independently owned franchise stores nationwide are expected to employ more than 8 million workers. More than 31,000 automotive businesses, more than 155,000 fast-food restaurants and nearly 90,000 real estate businesses are part of this model.”

The minimum wage dispute is fairly simple: those representing workers want to force owners to provide substantial wage hikes, while business owners worry that those hikes will wipe out their profit margin and force them out of business. But the liability issue is more akin to a law suit strategy that seeks to incorporate as many “deep pockets” as possible into an action in order to gain the largest recovery, even if many of the parties dragged into the law suit have no real connection to the issue at all.

It would work like this: if an individual who works for a franchisee gets injured, he would not only be able to sue the owner of the franchised business he works for, but also the entire parent franchise company.  That liability would shake the entire franchise industry to the core, as it would provide almost unlimited liability.

Forbes analyzes it this way: “The real objective for trial lawyers is to bring in another set of deep pockets for the phase of the case in which they attempt to prove the amount of punitive damages that should be awarded,” Oncidi [ a partner in a Los Angeles law office who focuses on labor and employment law] said. “They would much rather have a punitive damages award based on the income and profitability of the franchisor rather than just that of the franchisee.”

The legal theory being proposed by critics of the franchise industry, including the National Labor Relations Board and the Service Employees’ International Union, is called “joint employment,” which would define a franchisee worker as being employed not only by the franchisee but by the entire parent franchise company as well.

Alyosius Hogan  of the Competitive Enterprise Institute explains the issue:

“National Labor Relations Board (NLRB) cases involving three different companies could upend…business practices by radically redefining what constitutes a joint-employment situation—when an employee is considered jointly employed by two businesses. The joint-employer cases threatens to overturn decades of established precedent, upsetting the expectations of thousands of businesses that have relied on the current rules in developing their business models. These cases involve major American businesses—McDonald’s, CNN, and Browning-Ferris Industries (BFI), to list but a few—and regular American citizens across the nation would be harmed.
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“NLRB General Counsel Richard Griffin and U.S. Department of Labor Wage and Hour Administrator David Weil are pushing a radical redefinition of ‘employee.’ Their goal is to give unions greater leverage against the businesses they seek to organize, by turning many American workers’ employment by one company into simultaneous joint employment by two or more companies. The effect would be to add an additional, usually larger, employer to the collective bargaining table for negotiating wages, safety, and benefits…

“Currently, businesses jointly employ a worker when their actual practices involve sharing substantial, direct, and immediate control over hiring, firing, discipline, supervision, and direction. General Counsel Griffin seeks to expand the definition of joint employer to include direct or indirect or unexercised potential control, as well as broadly defined “economic and industrial realities”—a fudge factor that would cover most businesses simply by claiming one party is essential to the collective bargaining process.

“The NLRB’s proposed change would decimate the “bright-line” clarity of the past 30 years of law in this area. Under the Griffin-Weil plan, workers employed by franchisees, staffing agencies, contractors, and suppliers would typically become joint employees of the franchisor, lead company, or manufacturer, but the assessment would be highly speculative and specific to the situation. And the NLRB is sure to find whatever outcome benefits unionization appropriate.

“Furthermore, the NLRB is using sly means to impose this new definition of joint employment. Rather than issuing a rule, the Board will simply exploit its ability to decide the cases it prosecutes. Utilizing case law evades a number of congressional checks and balances to administrative rulemaking power.

“Substantively, joint employment has major consequences.

“First, joint employers can be sued more readily because they share liability for an employee’s actions. More parties and deeper pockets to sue translate into more business costs and hampered job growth.

“Second, joint employers are unionized more easily because both businesses must negotiate with a union. To unionize one business is effectively to unionize the other. Recent research shows that unionization means a 15 percent wage loss for workers and, for publicly traded companies, a reduction in overall valuation by as much as 14 percent.

“Third, Griffin and Weil intend to give unions “economic weapons”—pickets, protests, and boycotts—that have been prohibited for use against the third parties that would be redefined as joint employers. Unions then could pressure third parties into labor peace agreements—which grant union recognition via signed cards rather than secret ballots, give unions access to business premises, and prevent employers from opposing union organizing—in exchange for unions not deploying their weapons.

“Fourth, the NLRB’s proposed joint-employer standard would force major employers to bring more services in house, leaving small business with fewer opportunities. The NLRB’s efforts to expand the definition of joint employer seek to aid unions’ organizing efforts by exploiting large companies’ sensitivity to attacks upon their reputation. Weil’s top-focused strategy, which the NLRB is pursuing, seeks to bring others in line by attacking industry leaders like McDonald’s.

“Manufacturing in America would be made more difficult if contracting out were penalized. Contractor jobs could dwindle. These jobs are jeopardized by the NLRB’s unpredictable and outcome-biased “economic and industrial realities” test, which would make people reluctant to use these prevalent American business practices.”