The $15 Wage Win May Be Pyrrhic

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Recently, California and New York each passed state laws that will set their states on a path to a $15 minimum wage. In this they join several major cities such as Seattle and may encourage more states to yield to the pressure from unions backing the #FightFor15. Even if no place else moves to a $15 per hour minimum wage, by 2022 somewhere around one out of five American workers will be employed in states with that standard. Yet, from everything we know about economics and labor markets, this "victory" for labor will come at a steep cost for those workers who will lose their jobs for the benefit of those who don't and the unions pushing this campaign.

Figuring out exactly what will happen is complicated for two reasons: only a limited number of studies have examined a $15 minimum wage because more attention was given to more plausible changes such as $9 or $10 and because this will not be a national policy, but only local. That means employers can shift jobs to other states with lower minimum wages rather than having to take the larger step of leaving the country. That means both that the local job losses could be larger and that the national job losses may be smaller than if a national policy change were implemented.

There are some things we do know. The Congressional Budget Office has estimated that a national minimum wage of $10.10 per hour will cause 500,000 people to lose their jobs. Douglas Holtz-Eakin, former director of the CBO, co-authored a report with Ben Gitis for the Manhattan Institute that applied the CBO model and two other models to estimation of the effect of a $15 national minimum wage. They find estimates of 3.3, 6.6, or 16.8 million lost jobs depending on which model is used. Given this uncertainty, I decided to crunch some numbers for myself based on facts that are well-established in the economics literature.

Of particular help here is a paper by three economists-Andreas Lichter, Andreas Peichl, and Sebastian Siegloch-who surveyed 105 different economic studies of labor demand encompassing 942 separate estimates of the price elasticity of labor demand. This measure tells us what percent of jobs will be lost in response to a specific change in the wage rate. Based on the authors meta-analysis (a fancy statistical combination of all those studies), their best estimate of the elasticity of low-skill labor demand is -0.635. This number implies that a 10 percent increase in the wage rate for low-skill workers should cause 6.35 percent of such jobs to be lost.

Given this elasticity, we only need to know the number of workers affected and the size of the wage increase. The CNO report helpfully tells us that 16.5 million workers would be affected by an increase to $10.10 while the Holtz-Eakin study tells us an additional 21.8 million workers are impacted by an increase to $12 and another 16.8 million if the minimum wage goes all the way to $15 per hour. I then assume that the workers currently below $10 per hour make an average of $9 per hour, meaning an average 67 percent raise; that workers between $10 and $12 would see an average increase of 36 percent; and that the workers currently earning between $12 and $15 per hour would see an 11 percent raise.

Multiplying all this out (elasticity times number of workers times percent wage increase) gives us lost jobs. For the favored elasticity estimate of -0.635 we arrive at 13.2 million lost jobs (7 million of which are for workers currently earning less than $10 per hour).

It is comforting that these numbers, based on over one hundred economic studies, yield a job loss estimate very in line with those in the Holtz-Eakin study. This correspondence gives me some confidence that the job losses from a national $15 minimum wage could easily be 13 million or more.

It is also important to note that more than half of the job losses will fall on the lowest paid workers and that according to other studies only 6.7 percent of income gains by low wage workers accrue to households with incomes below the poverty line. These results make sense because the lowest-skill (and therefore lowest paid) workers are naturally the most likely to be fired and because so many low wage workers are young or second earners living in households with incomes well above the poverty line.

Just for California, this method estimates 400,000 job losses, although reality would likely be worse because with lower starting wages available in other, nearby states, employers have an additional option of simply moving operations to another location.

So why would labor unions fight this fight, given that they may cost millions of the people they are supposedly fighting for their jobs? There are three obvious answers to this question.

First, government employees are increasingly the bulk of union workers (with public union workers on pace to pass private sectors ones in the next year to two) and government union workers likely will make up few of those lost jobs. Government workers have stronger job protection and work for employers who can force their "customers" to cough up more revenue.

Second, there are many union contracts which include automatic pay increases tied to changes in the minimum wage. Thus, many workers who already earn more than $15 per hour will still get raises thanks to these laws. For example, California teachers have a contract that ties starting pay to twice the minimum wage, meaning that once the new California law is fully effective in 2022 all public school teachers in the state will earn over $30 per hour.

Third, although millions of workers will lose their jobs, those who keep them get substantial pay gains. For unions, the increase in union dues from higher wages will likely more than offset the loss in dues from fewer jobs. In other words, union revenue is expected to increase. While some union workers (and many more non-union workers) will lose their jobs, those who keep their jobs win big enough for total dues payments to rise. So, if you are a union not overly concerned about the fate of those job losers, a $15 minimum wage has some definite upside.

It is common in economics these days for more free market economists to push policies that produce gains on aggregate regardless of distributional impacts, while more liberal or interventionist economists generally resist policies that particularly harm those with lower or middle incomes even if the benefits to higher income individuals are sufficient to offset that harm. The idea of raising the minimum wage to $15 per hour constitutes a reversal of this usual positioning. Liberals are arguing for a policy that will do great harm to both the poorest workers (and some harm to the richest) because it will benefit some workers in the middle of the income distribution.

Increasing the minimum wage is pure redistribution. No new wealth is created, income is simply shifted from business owners and customers to low-skill workers. As discussed above, more than half of all job losses from raising the minimum wage will be workers earning less than $10 per hour. It seems odd for liberals to be supporting a policy that hurts the most vulnerable among us, particularly given that an expansion of the earned income tax credit could help all low wage workers without incurring significant job losses.

Unions may win a pyrrhic victory in their Fight For 15. Low-skill workers who keep their jobs, union workers with pay that automatically increases with the minimum wage, and union treasuries may all win, but millions of low-skilled workers will become unemployed. When the public realizes both the extent of these job losses and sees more clearly who wins and who loses from this policy, I suspect the union bosses who funded this fight will face a fierce backlash.

 

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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