Tuesday, April 5, 2016

A $15 Minimum Wage for New York and California Will Most Probably Fail

The states of New York and California made history yesterday by raising their statewide minimum wages to $15 per hour. These new minimum wages are considerably higher than the current federal minimum wage of $7.25 per hour. Given the unprecedentedly high nature of these new minimum wages, it makes wonder just how it will turn out. When the Congressional Budget Office (CBO) did its 2014 analysis of a $10 per hour federal minimum wage, it found that a $10 hourly minimum wage would increase unemployment by 500,000 individuals, poorly target poverty, and pass the cost onto consumers. While we're not dealing with a federal minimum wage increase, New York and California are among the largest states in the Union with cumulative populations of 58.94 million citizens, or 18.3 percent of the the overall population. These states have overall higher costs of living than the national average, but it doesn't automatically mean that there won't be consequences to this policy change, even though we're dealing with more gradual minimum wage hikes. 

Aside from the aforementioned CBO study, I have blogged on other ill-effects of the minimum wage, such as causing the Great Recession to last longer, making it more difficult for unskilled labor to find work, ineffectively targeting poverty, and having businesses adversely affect its operations, whether in the form of cutting employee hours and/or benefits, raising consumer prices, letting people go, or increasing automation. Consider that it would have been this bad with more modest increases in the minimum wage. What happens when it is more pronounced like a $15 minimum wage?

Left-leaning economists who are proponents of the minimum wage, such as Alan Krueger and Arindrajit Dube, think that such a minimum wage hike is risky because we'd be charting into unknown territory and is "far outside of our evidence base." Any past $15 minimum wages (e.g., Seattle, Los Angeles) that have been enacted have done so as larger cities, and even then, we're still waiting on results. As Dube put it, "if you're risk-averse, this would not be the scale at which to try things." Given how more modest minimum wage hikes adversely affect people and the economy, I can hardly blame such a sentiment.

Former CBO Director Douglas Holtz-Eakin ran a model in 2015, which was the same model used in the CBO's 2014 analysis, simulating the $15 hourly federal minimum wage, and found that it would reduce employment by 6.6 million (although it could be as high as 16.8 million). Given that New York and California make up approximately a sixth of the nation's population, this would mean an estimated 1.1 million jobs lost under this model. Even though this model predicts increased wages, only 6.8 percent of the wage earners who would benefit would be in poverty, which is to say that this ineffectively targets poverty. The centrist Brookings Institution also has expressed its doubts, and postulates that such a huge increase would harm America's poorest workers. Also, this minimum wage is going to put it at 75 percent of the national median, which is higher than any of the other OECD countries. Going off that fact, the New York Times wonders just how badly this will affect non-urban areas in California. None of this even considers how much this will increase the cost of running government, particularly with unfunded pension liabilities.

California and New York already have some of the worst fiscal conditions, according to the Mercatus Center's ranking. Chief Executive Magazine ranks New York and California as the worst states to do business in, and that was before the minimum wage hikes. The Tax Foundation has similar rankings for New York and California's business climate. With California's weaker U6-unemployment (more debatable for New York), we cannot afford to weaken large labor markets such as these. For California, we're talking about increasing the minimum wage by 50 percent, which is going to be the equivalent of a $10,000 tax on each minimum wage employer.

The only minimum wage hike that has been such a high percentage of the median income was Puerto Rico, and that didn't seem to go so well. There have been many reasons to object the minimum wage, and that was only when the minimum wage hikes were low relative to the median income. This sort of minimum wage hike is quite unprecedented, and like with other regulations that affect marketplaces, there are going to be unintended consequences. I would say "unforeseeable," except there are even liberal economists who are cautious about this implementation. If I had to make an educated guess based on previous minimum wage hikes, these hikes will be an unmitigated disaster for the states of California and New York. Whatever sort of recovery that they might have made during the Great Recession is probably going to be greatly neutralized. Another educated guess is that we'll see net migration out of these states to states who have friendlier business regulations and business environment. It will be nice to have more conclusive proof of the adverse effects of the minimum wage, but I wish it wouldn't have to be at the cost of so many people.

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