Over the past several months, we’ve highlighted a number of economic studies analyzing the potential negative impact, in terms of job losses, that may be expected to result from the state-mandated minimum wage hikes that are currently being implemented around the country.
One such study came from the American Action Forum (AAF) and estimated that 2.6 million jobs will be lost around the country over the next several years as states phase-in minimum wage hikes that have already been passed (see “State Minimum Wage Hikes Already Passed Into Law Expected To Cost 2.6 Million Jobs, New Study Finds“). Here were a few of the key takeaways:
- In isolation, the minimum wage increases in 2017 will cost 383,000 jobs;
- The entire minimum wage increases currently phasing-in will cost over 2.6 million jobs; and
- Each job lost only leads to an extra $6,900 in total wage earnings across all workers.
After running a lot of really complicated math using complex equations that most of us stupid people just wouldn’t understand, these studies ultimately come down to a simple economic premise: elasticity of demand (a.k.a. ‘the higher shit is priced the less people will buy of it’ rule). In fact, the AAF analysis even summarized their study by saying that each 10% increase in wages results in an proximate 0.3% – 0.5% decline in net job growth…a rule which they used to conclude the following:
While proposals to raise the minimum wage are well intended, it is important to consider the negative labor market consequences. Meer & West (2015) find that raising the minimum wage reduces job creation. Specifically, they find that a 10 percent increase in the real minimum wage is associated with a 0.3 to 0.5 percentage-point decline in the net job growth rate. As a result, three years later employment becomes 0.7 percent lower than it would have been absent the minimum wage increase.
While the Meer & West (2015) findings may not seem very problematic, when taking into account the magnitude of the minimum wage increases and the number of states implementing new laws, the negative labor market consequences add up. Let’s first examine the minimum wage hikes of 2017 in isolation, without considering previous or future minimum wage increases under the new state laws.
The problem is that these studies consistently underestimate the number of jobs that will be impacted by minimum wage hikes. For the most part, the economists simply tally up the number of jobs in a given market that currently fall beneath the new minimum wage threshold and then assume that a certain percentage of them will disappear.
In reality, minimum wage hikes trigger pay increases across the pay scale, not just for the employees earning minimum wage, because most people make employment decisions based on relative wages and not absolute wages.
Consider, for example, the folks working at a California McDonalds where the minimum wage was $10 per hour in 2016 but is set to increase to $15 over the coming years. Lets also assume that most of the customer service staff earns the minimum pay rate while managers earn $15. Under the methodology above, the manager would never be counted as an ‘at-risk’ position because his job would never technically fall below the new minimum wage. But, in reality, there’s no conceivable world where the manager will simply agree to keep his $15 per hour pay rate once all of his workers have received a 50% pay increase and now make the same as him…instead, he’ll run some basic math and conclude he needs to be making $22.50 per hour to have the same ‘relative’ compensation he had before or he’ll just go work as an order taker with less responsibility.
And while these are simple concepts to most of us, even if we don’t understand the complicated econometrics equations, as the Associated Press points out today they’re completely foreign concepts to our elected officials who ignorantly passed minimum wage bills across the country without understanding the real economic consequences. As a perfect example, apparently New York Governor Andrew Cuomo was shocked to learn that home healthcare experts would rather take his new $15 per hour minimum wage job flipping burgers with no stress than to earn the same amount of money for a job that requires a ton of expensive education and stressful, long hours….who knew?
It’s a national problem advocates say could get worse in New York because of a phased-in, $15-an-hour minimum wage that will be statewide by 2021, pushing notoriously poorly paid health aides into other jobs, in retail or fast food, that don’t involve hours of training and the pressure of keeping someone else alive.
“These should not be low-wage jobs,” said Bruce Darling, executive director at the Center for Disability Rights. “We’re paying someone who gives you a burger the same as the person who operates your relative’s ventilator or feeding tubes.”
There are 2.2 million home health aides and personal care aides in the U.S., with another 630,000 needed by 2024 as the Baby Boomer generation ages, according to the nonprofit research and consulting group PHI. New York state employs about 326,000 home health workers but is predicted to need another 125,000 by 2024.
For now, home health aides in New York state earn an average of about $11 an hour, though wages are lower in upstate regions. Advocates say the system needs an overhaul that focuses on higher pay, worker retention and finding methods of compensation beyond what is provided through Medicaid.
Here’s an idea…how about we just let markets set wage rates?