From Job Loss to Automation: There Is a Real Price of Minimum Wage Laws

I have found fewer economic topics that have been more divisive for economists than the minimum wage debate. For advocates, it is a moral and economic imperative to help provide a living wage so no one ends up in poverty. For critics, minimum wage has unintended consequences that make matters worse, especially for the low-skilled workers minimum wage was meant to help. As minimum wages increase higher and higher, a new wave of research gives us a sense of what is to come with higher minimum wages. Today, I will cover some of the most recent research conducted on the topic of minimum wage.

The first is a working paper from the National Bureau of Economic Research on the increased minimum wage for fast food workers in California that was released last month (Clemens et al., 2025). This research found that increasing minimum wage to $20 decreased employment by 2.7 percent, or a reduction of 18,000 people. This is even more jarring given that this minimum wage increase only applied to fast-food restaurants with over 60 locations. 

Why does this happen? This is not merely theoretical. It is Supply and Demand 101 in action. Two phenomena take place when the minimum wage becomes higher than what businesses are paying. One is an increase in people who want to work for the higher wage. The second phenomenon is that fewer businesses want to pay, since workers are now more expensive. As a result of these two phenomena, the result is a labor surplus in the market, which is another way of saying that minimum wage causes greater unemployment. 

This NBER research makes a new contribution to the debate. Minimum wage proponents often argue that the benefits of higher pay outweigh the job losses, as this 2024 research paper does. However, the new NBER paper estimates that 29 to 49 percent of the wage gains were offset by job losses. This does not even get into the social or psychological costs of unemployment, not to mention how unemployment has the potential to slow one's career development and worsen the trajectory for lifetime earnings. 

This segues us into an interrelated phenomenon: automation. Automation is the use of machines, technology, and software to perform tasks that were previously performed by humans. I call automation interrelated because not all job losses are due to automation and not all automation results in job losses. 

All the same, automation is a response to higher minimum wage laws. Last week, the think tank Cato Institute released a policy brief entitled The Minimum Wage and Automation (Nain and Wang, 2025). This brief explores how minimum wage hikes led to greater automation-related patent applications. The researchers found that when there is a 10 percent increase in these patent applications, there is a 1.6 percent decline in employment share for workers in routine jobs without an education, as well as a 1.2 percent drop in their wages. How does this happen? 

By definition, minimum wage is an increase in labor costs. Minimum wage laws disproportionately impact industries that rely on low-wage, routine-task workers. In response, firms eyeing automation either decide to adopt existing automation technology or invest in new automation technology. This demand drives innovation from manufacturing and tech industries, which increases the opportunities to supply automation services to other end-users. This means that as automation increases, jobs entailing repetitive routine tasks are more susceptible to being permanently replaced. 

Minimum wage increasing automation is a finding that is confirmed by a study from Nature released this past June finding that an increase in minimum wage in Europe resulted in an increase in robot installations (Sharfaei and Thavorn, 2025). This Nature study shows that the deleterious effects of minimum wage are not confined to a certain industry or a specific country. 

Laws of economics do not get suspended simply because proponents want their favored policy to work. There are real-life consequences and tradeoffs to minimum wage laws. Job loss and automation are two outcomes. There are also the effects of reduced work hours, increased consumer prices, prolonged recessions, and an increased federal budget deficit. It is no wonder that minimum wage does nothing to reduce poverty. In the end, policies driven by good intentions that ignore economic realities only serve to hurt the people they were meant to help. Workers deserve better than having to navigate a labor market distorted by wage mandates that make it more difficult to find and keep a job. 

More Evidence Against Minimum Wage: Why Minimum Wage Fails to Reduce Poverty

Bernie Sanders says the darnedest things. There have been a number of his proposals I have criticized over the years: single-payer healthcare, free college, breaking up big banks, the financial transaction tax, and capping consumer loan interest rates. I can add another one to the list: a $17/hour minimum wage. For Sanders, a $15/hour minimum wage is not enough due to the inflation caused by the federal government's fiscal policy and Federal Reserve's monetary policy. Sanders is looking to introduce legislation next month to increase the minimum wage to $17/hour over the next five years. Let's forget the opposition that there would be in the Senate to more than double the minimum wage. 

Let's get at Sanders' argument, which is "If you work 40-50 hours a week, you should not be living in poverty. It's time to raise the minimum wage to a living wage." There are two insights from Bureau of Labor Statistics data on minimum wage workers that Sanders wants to conveniently ignore and that I brought up last year. One is that fewer workers in this country are minimum wage workers, decreasing from 6.9 million hourly workers (or 13.9 percent) in 1979 to 1.5 million workers (or 1.4 percent) in 2021. The second is that 52.9 percent of minimum wage workers are part-time, which is in contrast to the 8.9 percent of minimum wage workers who work over 40 hours a week, or approximately 120,000 workers. 

Even if we ignore BLS data, we still have a research paper from the National Bureau of Economic Research (NBER) that was released about a week ago entitled Minimum Wages and Poverty: New Evidence from Dynamic Difference-in-Differences Estimates (Burkhauser et al., 2023). The main finding of this paper is that "a 10 percent increase in the minimum wage is associated with a (statistically significant) 0.17 percent increase in the probability of longer-run poverty in all persons." This study is intriguing because it is more longitudinal because it spans over four decades. Plus, it spans over multiple industries, which I cannot say for the Card and Krueger study from 1994. That being said, I would like to explore why minimum wage would actually increase poverty instead of reduce it. 

For a minimum wage proponent, it makes sense that minimum wage should help alleviate poverty. After all, if you give someone a higher wage, it means they can better afford to pay their bills and claw their way out of poverty, right? 

It’s not that simple. Mainstream microeconomic theory posits that minimum wage acts as a price floor above the equilibrium point. This in turn causes a surplus of labor in this particular labor market, which is a fancy way of saying that minimum wage causes net unemployment (e.g., Neumark et al., 2021). The most recent report from the Congressional Budget Office (CBO) in 2021 showed that while a $15/hour minimum wage would pull 900,000 people out of poverty, it would also make 1.4 million people unemployed. Minimum wage only helps if you are one of the lucky ones who keeps their job. If you are one of those who loses their jobs, then you are earning $0/hour and will have a harder time gaining the skills and experience necessary to eventually acquire a higher-earning job (e.g., Clemens and Wither, 2014). 

This unemployment effect of minimum wage has a disproportionate effect on the marginalized. To quote the Foundation of Economic Education, "When jobs are scarce, then immigrants, workers with few skills or little education, and those with limited English proficiency are going to have a harder time convincing employers that their labor is work $15 an hour [or $17 if Bernie Sanders gets his way] than their better-skilled, native, English-speaking competitors." 

There is more to this puzzle. This point was mentioned at the end of the aforementioned NBER paper: "We find that less than 10 percent of workers who would be affected by a newly proposed $15 federal minimum wage live in poor families." That is because minimum wage is not determined by household income, but individual income. This is one of the main reasons why minimum wage is not effective at reducing poverty: because it is not targeting the poor. 

As the Foundation of Economic Education points out, there is only partial overlap between low-wage workers and the poor. This is important because poverty is measured at the household level, not the individual level. There are large segments of the poor who do not receive minimum wage, including the unemployed, stay-at-home parents, and gig workers. Conversely, there are many minimum wage workers who are not poor, such as teenagers and young adults living at home with their parents. Going back to that BLS data, workers under 25 account for 44 percent of those paid minimum wage or less. Contrast that with workers under 25 representing one-fifth of hourly paid workers nationwide. 

Another reason why minimum wage fails to reduce poverty is, as I have brought up before (see here, here, and here), because employers have ways to pass on the cost of minimum wage. It is not going to be the same response for each employee, but here are a few possibilities of working around minimum wage increases: cutting workers' hours, cutting workers' benefits, letting workers go, increasing consumer prices, and automation. 

To recap, here are the three main reasons why minimum wage does not reduce overall poverty levels. One is that it causes more unemployment than it does poverty reduction. The second reason is that minimum wage is not effective at targeting the poor. The third reason is that an employer can find ways around the labor costs that are part of minimum wage increases. I am open to discussing ideas of alleviating poverty so that all families in this country get a shot at the American dream. I am equally in favor of tossing such ineffective ideas as the minimum wage to the side. 

Robert Reich Continues to Lie About the Negative Effects of the Minimum Wage

With abortion and gun control dominating the news cycle, I wanted to take some time to cover another controversial topic: minimum wage. This past July 1, we saw multiple jurisdictions increase their minimum wage, including the state of Minnesota and the City of Los Angeles, as well as the City of Chicago and the greater Cook County. It sounds like a great victory for the working class. The minimum wage argument goes something like this: "If you wage the minimum wage to a living wage, it helps out workers. The workers are more productive, which in turn helps out employers. It's a win-win." 

American author and political commentator Robert Reich made that argument about a week ago in his piece entitled "4 Myths About Raising The Minimum Wage." For Reich, we should raise the minimum wage to $15 because "it is insult to American workers and it's bad for the economy." Reich attempts to debunk four talking points in the minimum wage debate to make it seem as if you can raise the minimum wage without any consequences. The problem is that Reich is flat-out wrong. I have actually called him out before on his minimum wage information in 2015 and in 2014. I ended up spending my Fourth of July weekend writing this piece and calling him out once more. He addressed four points, and I will respond to his analysis in kind. 

1. If businesses have to raise wages, they'll have to cut employees' hours or jobs all together. Reich takes with this argument by saying that "treating workers is worth the price." He then argues that increases in the minimum wage do not reduce the overall number of jobs. Minimum wage increases are increase in labor costs. As we will see throughout this piece today, companies have to account for the increase in expenses. 

Even if we were to forget standard microeconomic theory about price floors for a moment, Reich's fantasy does not play out in reality. When Seattle raised its minimum wage to $15, there was both a decline in hours worked and overall number of jobs. A 2019 review from the Cato Institute on the minimum wage similarly found that cutting employee hours is one way that employers compensate for the minimum wage hikes (Clemens, 2019). 

Not only is there a reduction in hours, but also an overall reduction in jobs. A report from the National Bureau of Economic Research looked at the impact of federal and state minimum wage hikes since 1992. This report also found that there has decidedly been a negative impact on employment (Neumark et al., 2021). 

The Congressional Budget Office (CBO), which is the gold standard for legislative analysis, has analyzed the effects of a federal minimum wage hike on more than one occasion. What does the CBO find? Among other negative effects, there would be a significant loss in jobs if the minimum wage were raised to $15. The last time the CBO looked into the possibility raising the minimum wage to $15, the CBO found that it would reduce employment by 1.4 million workers. While some workers would have a higher wage and be lifted out of poverty (900,000 according to the CBO), another 1.4 million would be unemployed. While a wage less than $15 can be an issue depending on where in the United States one lives, the last time I checked, $0 per hour is an even less livable wage.  

2. Small businesses won't be able to afford the higher wages and will be put out of business. Reich argues that a higher minimum wage attracts better workers, leads to better worker productivity, and improve retention of workers. I criticized Reich's turnover argument in 2015 by pointing out that the reason that turnout is lower is because the minimum wage hike disincentivizes hiring more workers. 

But let's get back to the main point. Small businesses have less resources to pay for higher wages, especially now after everything that came as a result of the pandemic. Given the wage structures, they do not have the same economies of scale that larger businesses have. It would explain why the average wage for those working for an employer with less than 100 employees is half of what it is for those working for an employee with over 1,000 employees. 

A paper from the National Bureau for Economic Research found that minimum wage increases created greater financial stress for smaller businesses, including "lower bank credit, higher loan defaults, lower employment, a lower entry and a higher exit rate for small businesses" (Chava et al., 2019). As another example, a paper from Harvard economists shows that raising the minimum wage by $1 resulted in a 14 percent increased likelihood that a mid-level restaurant would exit the market (Luca and Luca, 2018). Is it any wonder that such large companies as Walmart and Amazon support $15/hour minimum wages? They have the capacity to better pay for such wages while driving their competitors out of the respective market. 

3. If the wage is raised, prices for everything will skyrocket and lead to widespread inflation. With the inflation being the highest it has been in over forty years, it is understandable that inflation has become a topic of interest in U.S. politics. I would surmise that there are various contributing factors to this current bout of inflation, although some are more so than others. Even looking at other inflationary periods, I would not put minimum wage at the top of the list as a contributor to inflation, especially if the minimum wage increase is small. After all, minimum wage increases are more likely to be indexed to inflation projections, thereby minimizing impact on overall consumer prices (MacDonald and Nillson, 2017). At the same time, there are inflationary pressures, even if they are modest, as a result of artificially increasing wages for minimum wage workers. 

As previously mentioned, employers are trying to find ways to compensate for the increase in the price of labor that minimum wage laws cause. One of those possible ways is by increasing consumer prices. A Hungarian case study showed that the consumers bore the majority of the minimum wage increase through higher consumer prices (Harasztosi and Lindner, 2019). A research paper led by an economist from the Federal Reserve Bank found a similar response to the minimum wage increases, this time in the U.S. fast food industry. Essentially, fast food prices increased about twice as fast as the minimum wage (Aaronson et al., 2007). Two economists at the University of California at Berkeley who are minimum wage proponents even admitted that passing on the minimum wage increase to the customers is a phenomenon (Allegretto and Reich, 2017). 

While increasing consumer prices is shown to be an implemented strategy, there is a limit to how much increasing consumer prices can be used as a business strategy.  If the price increases are too high, demand and eventually overall revenue would drop. That is the law of demand for you! That explains why employers find other ways in addition to increasing consumer prices to deal with the minimum wage increases. While Reich is technically correct to say that prices will not skyrocket, he is still engaging in exaggerated language to deflect that there are still upward pressures on consumer prices as a result of minimum wage laws. 

4. Most minimum wage workers are teenagers making some extra money on the side; they don't need a wage increase. Reich starts off by talking about teenagers and then goes into the red herring commonly used by minimum wage proponents that minimum wage is not livable. As I pointed out in my criticism of Reich's arguments in 2015, if we strictly look at teenagers and look at the 15-19 age bracket, then yes, there is a small percentage of minimum wage workers in that age demographic. At the same time, this is misleading in terms of what a typical minimum wage worker looks like. 

If we use Bureau of Labor Statistics (BLS) data, we see a very different picture than the one that minimum wage proponents paint of a single mother working three full-time minimum wage jobs to make ends meet. I have done this with 2014 data, but I am going to use 2021 BLS data since they are the most recent data from BLS to show that the typical minimum wage worker is far from what minimum wage proponents purport. 

• Age: In terms of age, 44.3 percent of minimum wage workers are 25 or less, although they represent one-fifth of hourly wage workers (BLS, Table 1). 
• Education: 85 percent of minimum wage workers have a high school degree or less. Let's look at those with college degrees in contrast. College degree holders account for 37.2 percent of the overall population (Pew Research), but 14.7 percent of minimum wage workers (BLS, Table 6). Another demographic statistic to remind us that completing a college degree generally helps people with their professional development and earning power. 
• Full- and part-time status. 52.0 percent of minimum wage workers work part-time (BLS, Table 1). 8.9 percent of minimum wage workers work over 40 hours, whereas 5.1 percent work greater than 50 hours (BLS, Table 9).  
• Percent Working at Federal Minimum Wage. There are fewer hourly workers working for minimum wage or less than there used to be. In 1979, 13.4 percent of hourly workers, or 6.9 million workers, worked for minimum wage or less. The percentage and raw number have decreased to the point that in 2021, 1.4 percent of hourly workers, or 1.5 million workers, are making minimum wage or less (BLS, Table 10). 

Conclusion

"Lies, damned lies, and statistics" is what I think of when I read arguments such as those coming from Reich. Every policy enacted has a tradeoff. Reich would prefer to think that we can simply raise wages without there being any consequences whatsoever as long as one feels as if they can claim moral superiority. The world does not work that way. If laws increase the cost of hiring a worker, employers will find a way to work around that cost increase. We explored reducing work hours, cutting jobs, or increasing consumer prices. There are other ways as well, including automation, scaling back workers' benefits, reducing the quality of the work environment, or playing around with work schedules (e.g., Clemens, 2021; Lordan and Neumark, 2017). 

There is a reason why economics is referred to as the "dismal science"; it points out the reality that we have a limited supply of goods and services, also known as scarcity. Economics is supposed to help us figure out how to best allocate that limited supply. Unfortunately for Reich, a $15 federal minimum wage would harm many of the people that he would like to help.

Biden's Federal Minimum Wage of $15 Per Hour Would Be an Economic Mishap

Nobel Prize-winning economist Milton Friedman once said that one of the great mistakes is to judge policies and programs based on intentions and results. When it comes to economic policy, there are way too many on the Left that think that simply by having good intentions makes a prescription of a welfare state or government largesse the correct one. The predominant thinking on the Left is so focused on intent and the process (i.e., government is always the answer) that it makes me facetiously wonder how much the result of actually helping out the poor matters. I have applied this to multiple anti-poverty policies on the Left, but I have found the "intentions matter more than results" argument to especially play out when it comes to minimum wage. 

President Joe Biden has not wasted any time since his inauguration. In addition to his flurry of executive orders, Biden has made a federal minimum wage of $15 per hour one of his major goals (Raise the Wage Act). This past weekend, Biden went as far as saying that "it's economics" that the economy booms if you raise the minimum wage to $15 per hour. 

What ceases to amaze me is how minimum wage proponents ignore the most basic laws of supply and demand. When you have a price floor above the equilibrium point in a given labor market, you create a surplus of labor (also known as unemployment). This is especially true in low-skill labor markets, in which there exists greater elasticity for demand. As we will see shortly, unemployment is one of the major costs of minimum wage laws. At the same time, it is hardly the only cost. Minimum wage laws prolong recessions, ineffectively targets poverty, make it more difficult for low-skilled laborers find work, and increase consumer prices. 

If that is not enough, the Congressional Budget Office [CBO] released its analysis on the proposal of a federal $15 per hour minimum wage yesterday. For those who do not know, the CBO is the gold standard of U.S. legislative research and analysis. This is not the first time the CBO has provided analysis on increasing the minimum wage. You can see my 2019 analysis and 2014 analysis of past CBO reports on the minimum wage. So what did the CBO have to say in its latest report? 

• Effects on poverty. Since the minimum wage is definitionally increasing wages for workers, it would make sense that there are some workers that are no longer in poverty. The CBO estimates that 0.9 million would be lifted out of poverty (p. 9).
• Effects on employment. Higher wages increase the costs for employers. Some of these costs would be passed on in the former of higher prices. This would lead to less consumption, which would affect production. Ultimately, it would mean less money to pay workers their wages. As such, one of the ways that employers compensate for minimum wage costs is to have fewer employers. The CBO estimates that between 2021 and 2025, the federal minimum wage will reduce employment by 1.4 million workers (p. 8). Another way of saying this is "the price of lifting 900,000 Americans out of poverty is to make 1.4 million Americans unemployed." The CBO's finding confirms what much of minimum wage research has to say about its effects on unemployment, especially a recent research paper from the National Bureau of Economic Research (Neumark and Shirley, 2021). 
• Effects on labor force. If it was not bad enough that minimum wage causes 1.4 million people be without a job, half of those who lose their jobs, or 700,000 people, will leave the labor force (p, 7). This effect has the potential to create a significant amount of potentially permanent unemployment individuals. This is all the more tragic considering that minimum wage earners are the ones who need the experience the most in order to ultimately gain better-paying work. 
• Effects on consumer prices and cost of labor. Labor is a major cost to employees. According to the CBO, estimated labor costs are to increase by $333 billion (p. 9). Since wages are a cost of doing business, it follows that consumer prices will increase because it is one of the ways that employers pass on the costs of minimum wage. This is even more true for industries using a disproportionate amount of low-wage labor (p. 10).
• Effects on the budgetary deficit. On the one hand, spending on food stamps [SNAP] would decrease (p. 4), as would the spending on the earned income tax credit and student loans (p. 5). On the other hand, unemployment compensation would increase because there will be more unemployed persons (p. 4). Spending would also rise for Social Security because the average benefits would increase (ibid.). On net, a federal $15 per hour wage would create a budget deficit of $54.1 billion from 2021 to 2031 (p. 17).
• Effects on real output. Raising the minimum wage means a slightly lower GDP. The effects of the unemployment would affect real output since the stock of capital goods would be smaller. Also, investment would be lower, which would lower productivity (p. 10). Any effects increase of consumer demand from lower-income households due to the wage increases would disappear in a few years (p, 10), thereby contributing to lower GDP. 

Postscript: In short, it's not "simple economics" that increasing the minimum wage helps the economy, as President Biden asserts. If it were that simple, why not raise the minimum wage even higher? Why do minimum wage laws not work after one increase? Because we live in a world of scarce resources. The laws of supply and demand exist for a reason. The more the minimum wage deviates from the market value of labor (read: equilibrium point), the more negative the effects, especially on the people it was meant to help. I really wish minimum wage proponents could see the price tag of their good intentions.

For more information, read the Cato Institute's analysis on the Raise the Wage Act here.

2020 State Ballot Hodgepodge: Florida Minimum Wage, Illinois Income Tax Reform, California Gig Economy, and Marijuana Legalization

One of the things I enjoy most about election season is not the presidential election hullabaloo or even when you have Supreme Court justice vacancies. I personally get a kick out of the state ballot measures voted on in November. They are voluminous, they cover a wide range of topics, and they have greater impact on our lives than we can anticipate. Some of the fun ones I have covered in past years have included  single-payer healthcare, condom use in the porn industry, the right to hunt, and labels for genetically modified food. Today, I will cover minimum wage, tax reform, labor market reform, and marijuana. 

Florida Minimum Wage: Florida is looking to increase its minimum wage to $15 per hour by September 2026 (Amendment 2). The legislative branch's research arm, the Florida Office of Economic and Demographic Research (EDR) conducted a fiscal analysis of the ballot initiative. The EDR found that by 2027, it would cost the state of Florida $540 million per annum. Proponents argue that Florida needs to increase the minimum wage to account for rising costs in housing and transportation. Aside from contributing to the broader economy, the additional spending would offset the unemployment losses. 

The Congressional Budget Office (CBO) released a study on what a $15 federal minimum wage would look like. CBO found that while 1.3 million would be pulled out of poverty, the same amount of people would become unemployed. That on top of the fact that it would have a net cost of $8.1 billion. Not exactly an economic booster! Data from the last recession also found that minimum wage increases prolong recessions. Not exactly a winning policy if one of the main goals is to pull Florida out of the recession. Generally speaking, minimum wage increases such as these make it more difficult for low-skill labor to find or retain work, it is a poorly targeted policy when it comes to poverty reduction, and adversely impacts business operations. If you live in Florida, vote "No" on Amendment 2. For further analysis on Amendment 2, see the Reason Foundation's analysis here. 

Illinois "Fair" Tax: The main ballot initiative in Illinois this November is for what has been colloquially referred to as a "fair" tax. Essentially, Illinois is looking to switch its income tax from a flat tax (everyone pays the same percentage) to a graduated tax system (the richer you are, the higher percentage you pay). I covered the Illinois "fair" tax last year, but the proposed brackets are the same, so the analysis still applies. Aside from asking what constitutes as "fair when it comes to taxation, I took issue with the following:

• The tax will not close the budgeting gap.
• The tax reform does nothing to change Illinois' atrocious spending habits.
• The "fair" tax does not adequately address the issues of fairness that proponents purport.
• Illinois already has lousy tax competitiveness. Switching to a graduated tax system will simply incentivize more people to move outside of Illinois. 

Illinoisans should vote "no" on the "Illinois Allow for Graduated Income Tax Amendment." If you want more recent analysis on the ballot initiative, here is one from the Tax Foundation.

California Gig Economy: Last year, the California legislature passed Assembly Bill (AB) 5, which applied a three-factor test to determine whether a worker could be classified as an independent contractor under California law. AB 5 had considerable implications for gig workers, but especially app-based drivers (e.g., Uber, Lyft). If it passes this November, Proposition 22 would essentially reverse AB 5. I covered AB 5 last year shortly before it became law this past January. I thought AB 5 was inferior policy because a) it would cause greater unemployment, b) cost the California economy millions, c) increase costs for consumers, and d) eliminate the flexibility in hours that most app-based drivers prefer to the 9-5 work hour. 

Looking at the analysis by the California Legislative Analyst, it would create a minor boost in income tax revenue because drivers would be earning more in income. More to the point, passing Proposition 22 would "would allow the companies to charge lower fares and delivery fees. With lower prices, customers would take more rides and place more orders. This could increase the companies' profits. High profit would increase the companies' stock prices." This analysis points out that AB 5 has been hurting app-based drivers, customers, and companies that hire gig workers alike. In case you need more convincing, here are analyses from Reason Foundation and the American Action Forum. I urge Californians to vote "Yes" on Proposition 22 this November. 

Marijuana Legalization: This November, we have four states looking to legalize recreational marijuana - Arizona, Montana, New Jersey, and South Dakota. Reason Foundation provides analysis on each of these ballot initiatives. There is a reason states have been trending towards legalizing marijuana in recent years. It is because the fears and stigma surrounding marijuana have been overblown, to say the least. Colorado legalized in 2014, and it has not been anywhere near the disaster that naysayers thought it would be. Economically speaking, marijuana legalization makes sense. We're not spending millions to enforce laws (that includes policing, prosecuting, and imprisonment costs), which means we can focus on more serious crimes. There is more government revenue, which means that if government dollars can be spent, it could spent where it could do more good, instead of punishing a victimless crime. Also, we can reduce the size of the underground market. This is great not simply because it expands the legal economy, but because less commerce in the underground market gives criminals and drug lords less power. Let's continue the trend towards marijuana legalization by voting these ballots and making them the law of the land for these states. 

CBO Puts In Its Two Cents in Debate on Federal $15 Minimum Wage

Upon examining the views of the Democratic candidates for the 2020 presidential election, we could find a number of differences. There is one issue where there is near unanimity: raising the federal minimum wage to $15. The Congressional Budget Office (CBO) brought this issue to the forefront of the news cycle by releasing its analysis on Monday regarding a $15 federal minimum wage and its effects. This is not the first time the CBO has conducted such research. In 2014, it came out with an analysis on what raising the minimum wage to $10.10 an hour would look like (see my analysis of that CBO report here). The federal government has not raised the minimum wage since the last CBO report; it still remains at $7.25 an hour. If passed, this new minimum wage increase would gradually increase to $15 by 2025. What did the new CBO report find with regards to what it would be like to raise the minimum wage?

The condensed version is above, but let's get into some of the details of the report...

• Effects on Income and Wages. By design, a major part of the premise of minimum wage is giving people an increase in their wages. The CBO found that 17 million workers would experience an increase in their wages (p. 1). 
• Per its supplementary data (Figure 4), the average wage increase is 21.2 percent (or $2.68). For those below the poverty threshold, it would mean an annual household income increase of 5.3 percent (p. 15). The discrepancy between the individual wage increase versus the household increase is due to the fact that many low-wage workers are in high-income households. 42 percent of low-wage workers live in households three times or more above the poverty threshold. Only 12 percent live in low-income households (p. 10).
• In net terms (including real income for employees, employers, and consumers), a $15 minimum wage would decrease net income by $8.1 billion annually (p. 3, 15). 
• Effects on Poverty Level. For those who have their wages increased, real income for the household increases, as well. The CBO puts the 2025 poverty level at $20,480 for a family of three, and $26,330 for a family of four.  If the proposed minimum wage increase passes, it would bring 1.3 million people out of poverty (p. 3). 
• Effects on Employment. With every policy comes a tradeoff. For raising the minimum wage, the tradeoff is 1.3 million unemployed, which would translate into a 0.8 percent reduction in overall employment (p. 2), as well as a 7 percent drop in employment for directly affected workers (p. 12).What this means is that for every person who escapes poverty under the minimum wage hike, a low-income individual loses their job and has even greater difficulty finding a job. 
• Effects on Consumer Prices. In response to the increase in labor costs, one of the ways that respond to the costs is by passing the cost of minimum wage to the consumer through higher prices of the good or service (p. 9). 

Yes, minimum wage does help some escape poverty. The CBO estimates that it would be 1.3 million that would escape poverty with a $15 minimum wage. But the CBO also estimates that approximately the same amount of people would lose their jobs, thereby being further trapped in poverty. On top of that, it costs $8.1 billion a year, thereby implying that minimum wage is not a stimulus of economic growth. Additionally, the minimum wage doesn't even properly target low-income households. Ultimately, the CBO report confirms that the minimum wage is far from alleviating poverty in this country, and if anything, causes harm to those who are not lucky to keep their job. We, as a country, can do better in helping the poor.


7-24-2019 Addendum: The Foundation for Freedom Education (FEE) had an interesting article on minimum wage and some empirical evidence on it. It highlights four additional was employers respond to minimum wage laws aside from laying off workers. Another way of saying this is that even if a low-wage worker still keeps their job, they could still either have their hours cut, work their employees harder, cut benefits, or hire less workers and turn to automation.

Why Seeing If You Can Live on the Minimum Wage Is a Red Herring

Before criticizing someone, you should walk a mile in their shoes....or so goes the proverb. Since our life experiences are so different, it is impossible to have the same exact conditions as another, even if you went through similar situations. The idea behind this proverb is to develop a sense of understanding of what another person is going through before you even begin to judge them. I don't disagree with the concept: we should try understanding where others are coming from. At the very least, you develop a fuller understanding of an argument or situation. This idea of a more empathetic understanding comes into play when people advocate for a higher minimum wage. It usually comes in the form of "You should try living on $7.25/hour to understand what it's like. Maybe that way, you'll change your mind."

To further illustrate this point, minimum wage advocates show how expensive it is for a minimum wage worker to afford a one-bedroom apartment. According to the National Low Income Housing Coalition, the average national housing wage for a modest one-bedroom apartment is $17.90, whereas the minimum wage worker makes $7.25. This means that a minimum wage worker would either have to work more than 40 hours a week or pay more than the recommended 30 percent of their income to afford housing.

Not being able to afford housing can be a problem because the financial strain of abject poverty can and does adversely affect physical and emotional health. Having workers provide enough for their families is a socially desirable outcome. Advocates make a fair point....at least to a point. At the same time, I think it is better to contextualize the problem before letting emotions take over by calling for a higher and higher minimum wage. Most of the data for today's analysis will be coming from the Bureau of Labor Statistics' (BLS) March 2018 report on the characteristics of minimum wage workers in 2017. I would like to take a look at this report and some other facets to get at the prevalence of the problem, demographics of minimum wage workers, and see what can be done.

1. How many minimum wage workers are there? Workers that make minimum wage or less than minimum wage account for 2.3 percent of hourly wage workers, which is a total of 1.85 million workers (BLS, Table 1). When looking at the number of workers as a percent of the civilian labor force (2017 average of 160,310,000), minimum wage workers only account for 1.2 percent of the overall workforce.  
2. Has the number of minimum wage workers increased or decreased? You'll be happy to know that the number of minimum wage workers has decreased from 7.9 percent of the hourly wage worker labor market in 1979 to 2.3 percent in 2017 (BLS, Table 10). This positive historical trend shows that "living on minimum wage" is becoming less prevalent of a problem. 
3. How many minimum wage workers are under 25? I ask this question because there is a high probability that those who are under 25 are living with their parents while working part-time jobs to supplement income. This age demographic accounts for 48.8 percent of minimum wage workers, which is a disproportionately high amount (BLS, Table 1). When filtering out this age demographic, the total of minimum wage workers decreases to 947,000 workers. Without factoring in anything else, an absolute maximum of 0.59 percent of workers are affected.
4. What percent of minimum wage workers are working part-time? I ask this question because it acts as a proxy of how many minimum wage workers are straining to make ends meet. 68.4 percent of minimum wage workers work less than 40 hours a week, whereas only 2.9 percent of minimum wage workers (or 53,650 minimum wage workers) work more than 40 hours a week (BLS, Table 9). This statistic also works in the backdrop of the fact that the percent of overall workers holding more than one job dropped from 6.1 percent in 1997 to 4.9 percent in 2017.

These facts illustrate that the vast majority of minimum wage workers, much less overall workers, have to wonder what it is like to live on minimum wage. Anyone who uses the exercise of "what is it like to live on minimum wage" to invoke your sympathy is cherry-picking to advance an agenda, plain and simple. To further my point of this exercise being a red herring, let us consider that the earned income tax credit (EITC) is a better policy alternative to fight poverty because minimum wage targets low-wage workers instead of low-wage households. Aside from poorly targeting low-income households, there is also increased unemployment of low-skilled labor, less job opportunities for low-skilled labor, higher cost of doing business, and higher consumer prices as a result of higher minimum wage.

I also think this is a red herring because it asks the wrong question. I brought this point up when looking at heating subsidies (LIHEAP), which is that if we throw money at the problem, we are masking the root issues. If we continue to increase wages, costs of productivity increase, which just means we'll keep having this conversation about minimum wage until the end of time. Instead of talking about a living wage, we should ask ourselves how to make living more affordable. The three major items that have increased in price considerably in the past twenty years are housing, health, and education. How can we make these three items less expensive? A major driver of high housing costs is limited housing supply caused by government regulation. Remove the land use regulations and there will be cheaper housing. The single largest culprit towards the increasing cost of education is federal loan subsidies. Health care is more complicated, but we should also focus on ways to bring health care costs down. Although asking "What Is It Like to Live on Minimum Wage" makes for an interesting policy analysis, it is asking the wrong question that adds nothing to a conversation that could actually help people escape low-wage jobs.

Seattle and Denmark: More Proof of Minimum Wage's Harm to Low-Wage Workers

The minimum wage battle continues. In June, three newsworthy studies on the minimum wage were released, which is quite a bit in such a short time. One of the reports was on minimum wage in Denmark, and the other two were on the effects of minimum wage in Seattle. We'll get back to the Denmark report, but the Seattle reports merit background information. In 2014, the City of Seattle was the first city to pass a bill to raise the minimum wage to $15/hour. Beforehand, the minimum wage was $9.47/hr. It was raised to $11/hr in 2015, to $13/hr in 2016, and reached $15/hour as of January 1, 2017.

To show the effects of Seattle's minimum wage hike, its City Council hired economists from the University of Washington (UW) to conduct the study (Jardim et al., 2017). It's not as if University of Washington is some second-rate school. US News ranks its graduate-level economics program 35th in the country, which is not terrible by any means. It's a reputable institution, but yet is was still a problem, a problem which had nothing to do with the institution's reputation.

City Council member Kshama Sawant, who is a Socialist politician, did not like the results of the initial draft of the study. Sawant claimed the research methodology was flawed, although renowned economist David Autor found the UW study to be "very credible." The last thing a politician needs is a failed newsworthy policy months before municipal elections. Ideology and election season help explain why Sawant decided to contact Michael Reich, an anti-capitalist professor at the University of Berkeley. Fox News obtained emails between Reich and the City Council to schedule the release of the Berkeley paper (Reich et al., 2017) before the UW paper in attempts to discredit the UW paper.   (Side Note: The Albany-Union Times also found that the Berkeley research team has coordinated with minimum wage advocates to create supportive reports, so it's not just a Fox News conspiracy).

Yes, it is true that UW had some conflicts with the City Council beforehand, but this is still an example of selection bias. The City Council did not like the results they wanted to hear, so they sought out a Left-leaning, anti-capitalist economist at the University of Berkeley to get the desired results. What was so upsetting about the UW minimum wage findings? And how does the Denmark minimum wage report relate to the Seattle incident?

Before delving into the studies and their findings, I want to add this caveat: Given the nature of minimum wage, there are going to be more methodological issues than other public policy studies. Why? Because economists are trying to figure out how the minimum wage interacts with the greater economy. Much like I explained with Kansas' tax cuts last month, there are multiple factors in play, including taxes, regulations, economic performance of surrounding areas, industrial composition of a given city, the list goes on. As we'll see shortly, we'll find shortcomings for these studies. That does not, however, mean we cannot draw meaningful conclusions from the findings.

University of Washington Findings
The UW study was not flattering because it had a number of findings that were flattering for minimum wage proponents, including:

• The second wage increase to $13 reduced hours worked in low-wage jobs by 9 percent.
• Although the hourly wage increased by 3 percent, overall wages decreased by $125 per month for low-wage workers, which would mean a $1,500 per annum pay cut per person, or a $120 million loss for the City of Seattle (not huge, but also still worth noting with a city that has a $231 billion economy).
• A loss of 3.5 million hours worked per calendar quarter, which is an annual total of 14 million hours lost. 
• Low-wage jobs declined by 6.8 percent, which means a loss of 5,000 jobs. 
• Low-wage labor demand has an elasticity of -3.0 (p. 35), which is the economic way of saying "low-wage labor is easily replaceable."

If I were for an advocate for minimum wage, I would want to discredit this study to no avail, much like the Left-leaning Center for American Progress (CAP) and Economic Policy Institute (EPI) attempted (see criticism of EPI's criticism here), which is even more hilarious considering that one of the economists on the UW research team is a former EPI employee. The most valid and prominent complaint the Left-leaning think tanks had was that it excluded many multi-site firms, which removes 48 percent of low-wage earners. At first glance, this comes off as a huge misstep on UW's part. Fortunately for UW, they covered the reason for this omission (p. 14). Not only that, the omission does not negate the findings, or at least the magnitude of the findings, since multi-site firms were more likely to plan and implement staff reduction as a result of the minimum wage (p. 15). The only way that way the exclusion of multi-site firms would negate the results is if they massively expanded operations, which again, is implausible given the reported staff reductions. CAP also brings up that Seattle's tech boom is causing the increase of its higher-wage jobs, which means the adverse results of the minimum wage hike are overstated. This would be backwards because if Seattle's economy is growing faster than expected, imagine what we we would see if the economy were not booming, much like during the Great Recession.

I do, however, find merit with CAP's critique that the UW study is just one study that covers one city. It does not automatically denounce minimum wage increases. It could simply apply to Seattle in general or Seattle in this specific time period. I would say there is enough academic literature to support the idea that the UW study findings can be broadly applicable, but I think there is an even more important point that gives the UW study more weight than past minimum wage studies. This study was unique in that it was able to do something past studies were not able to do: permit the direct observation of hourly wages (Jardim et al., p. 34). Previous studies used proxies to get at that data on hours and wages. Thus, the study allows for more direct and precise measurement of the effects of minimum wage that past studies did not have.

While it is just one study on one city that does come with methodological flaws (because honestly, what study doesn't have methodological flaws?), it still carries with it a good amount of credence in terms of showing the effects that minimum wage hikes can have on an economy because it is conducted by an apolitical group and is done so with superior data.

UC-Berkeley Study on Seattle
The UC-Berkeley study shows the opposite results of the UW study, which is that minimum wage hikes have no real effect on employment or hours worked for low-wage workers. I am already skeptical of the UC-Berkeley study based on the politicizing that went into making the study a possibility. The study suffers from more flaws than the political, the major one being that it only looks at the restaurant industry. It is hypocritical for Reich to criticize the UW study for omitting 48 percent of low-wage workers while Reich himself omits 70 percent of low-wage workers in his own study by analyzing restaurants only.

But the Left could argue that looking at the restaurant industry has been standard in conducting minimum wage research. That standard came from the Card-Kruger study in 1994, which has been since scrutinized (see here and here). Interestingly enough, when the UW economists looked at the restaurant industry by itself, it came to similar conclusions that Card-Kruger came to in 1994 and that Reich came to in his Seattle study, which is that there are little net effects in the restaurant industry (Jardim et al., 2017, p. 35).

The UC-Berkeley study is inferior for two reasons besides the political contentiousness surrounding its creation. One is that Berkeley uses data from the food industry only, which represents a fraction of low-wage workers in Seattle. Much of past minimum wage literature suffers from only looking at one industry or looking at one demographic (e.g., teenagers), which makes it tenuous. The second, as previously mentioned, is that the UW-research team had detailed work hours data that the UC-Berkeley team did not have. The Berkeley study is nothing more than a political ploy to allow Seattle politicians give themselves a pat on the back before their re-elections.

Denmark Minimum Wage Study
In early June, The Centre for Economic Policy Research released a study (Kreiner et al., 2017) on Denmark's minimum wage, specifically with regards to youth minimum wage. Denmark has a peculiar minimum wage law in which the minimum wage increases for a Dane by 40 percent when they reach their eighteenth birthday. What happens in this case? Unemployment for this age demographic drops, and it takes two years before the age-specific employment rate is recovered (see below). What is even eerier about these findings is that it takes college and apprenticeships into account (p. 18), which is to say the drop in employment is pretty much due to the minimum wage hike (p. 3). Much like with the UW study, CEPR had similarly granular data to come to its conclusions. This study is also significant because it shows a) the negative effects of a sudden increase in minimum wage, and b) the minimum wage disproportionately affects youth [because they have less skills and experience] (p. 1).

Postscript
The Denmark study might focus on youth employment, but the connection between the Seattle and Denmark cases studies is the following. When you raise the minimum wage modestly, you'll have modest impact on the economy. When you raise the minimum wage more drastically, the effects will be more drastic. For those who are fiscally conservative, this comes as no shock. As conventional economics teaches, when the cost of a good, input, or service is increased (e.g., carbon tax), the consumer (or employer) wants to consume less. The same goes with the minimum wage: when you increase the cost of labor, the employer hires less workers (or alternatively, increases product price on consumers, reduces workers' benefits, or reduces hours worked).

What is worrisome about the Seattle study is that the UW researchers did not even measure the impact of the full hike yet because the hike to $15 only took place this past January, so we do not even know the extent of the economic damage the hike will cause. By raising the minimum wage from $9.47 to $13 (or 37 percent) in a matter of a couple of years, we already see the economic impact. It is no surprise that a significant increase in minimum wage significantly hurts the very people minimum wage laws were meant to help. While neither Seattle study has been peer-reviewed, it is clear that the results will have implications for the minimum wage debate across the country. If I had to take an educated guess, things just got a lot more difficult for minimum wage advocates, especially in light of the more detailed wage and hour data that was available in the UW study that has not been available in past minimum wage research. At the very least, this should put the kibosh on the "Fight for $15" advocates, and at the most, this should be the beginning of minimum wage advocates to re-examine the magnitude of the negative impacts that minimum wage laws generate.

Puerto Rican Debt Crisis: Brought to You By Lousy U.S. Federal Government Policy

Puerto Rico. It has not so much been a tourist destination lately as it has been at topic of political discourse. For quite some time, Puerto Rico has had enough fiscal woes by acquiring $72 billion in debt, which is more than 100 percent of its GDP. Its fiscal condition is worse than any of the 50 states in the United States mainland. While the topic of Puerto Rican debt is not necessarily new, the fact that it owed about $400 million in debt by May 1st is news. While Puerto Rico defaulted on the majority of its $400 million debt payment, that will be shadowed by the upcoming $2 billion debt payment due on July 1.

John Oliver actually covered this complicated topic last week (see above), but I would like to delve into this topic a bit further. One of the largest factors that caused the debt crisis was U.S. tax code and its peculiar set of tax preferences for Puerto Rico. The Puerto Rican debt crisis has its origins in the early twentieth century. The Jones-Shafroth Act of 1917 exempted Puerto Rican government bonds from being taxed at the federal, state, and local levels. This Act made Puerto Rican bonds very attractive to American purchasers of bonds. For decades, this Act did not cause a financial ruckus, although a mistranslation in a 1961 amendment to the Puerto Rican Constitution opened the door. It was during the 1970s when the Puerto Rican government decided to use bond investment money to balance its budget. Since the borrowed funds were not actual revenue, this snowballed into a debt crisis because unsurprisingly, when you borrow money with an interest rate that is artificially lower than market value, it only facilitates more capricious borrowing.

As Puerto Rico's situation worsened in the 2000s, investors took advantage of the financial situation and bought up more of these tax-exempt bonds. What exacerbated the whole situation was the repeal of Section 936 of the U.S. tax code. Section 936 allowed for a corporate tax exemption for U.S. corporations doing business in U.S. territories, such as Puerto Rico. While Section 936 helped Puerto Rico evolve from an agrarian society to a manufacturing hub, this provision became increasingly unpopular during the Clinton Administration because it came off as "evil corporations" tax-dodging. A bill was signed in 1996 to phase out the exemption over the next decade. By the time it was completely phased out, Puerto Rico fell into a recession in 2006. Foreign investment fled the country, and the inability to fill the void that the corporate presence once occupied caused the Puerto Rican economy to contract. One of the lessons here is that if you're going to provide a tax break, make it permanent because otherwise, you undermine the economy and creditworthiness, much like with Puerto Rico. Another lesson is to illustrate the many issues with the corporate tax and why in an ideal world, we wouldn't have corporate taxes.

The Jones-Shafroth Act also has a provision that forbids foreign ships from carrying goods between ports in U.S. territories, which, as you can imagine, hampers trade flows. This goes well beyond an Act dating back about a century. Looking at the World Bank's Ease of Doing Business Index, Puerto Rico presently ranks 57th, which is considerably lower than the United States' ranking of 7th. According to the World Bank's ranking, Puerto Rico has horrid rankings in such vital areas as registering property (164th), enforcing contracts (100th), and paying taxes (134th). These are rankings that are on par with developing countries, not a territory that is part of the developed world.

Up to the 1970s, the Puerto Rican minimum wage was below that of the mainland. The federal government, however, stepped in and told Puerto Rico that their minimum wage had to be that of the federal minimum wage, which was a law that was phased in by 1983. A paper published in the National Bureau of Economic Research found that when implementing the minimum wage back in 1977, Puerto Rican employment decreased a number at 8-10 percent lower compared to what would have prevailed without minimum wage by 1992 (Castillo-Freeman and Freeman, 1992). The Federal Reserve Bank of New York found that a third of Puerto Ricans make the minimum wage (p. 8), which is higher than in the United States. The current minimum wage in Puerto Rico is 77 percent of the median wage, which this comprehensive 2015 report on Puerto Rican debt from the International Monetary Fund (IMF) economists admits (p. 6). Minimum wages that are such a high percent of the median wage cause massive unemployment, which is what we see in Puerto Rico: current U-3 unemployment is at 11.8 percent, which is significantly higher than the current 5.0 percent for the mainland.

On top of the high minimum wage, the welfare benefits are also lavish. As the IMF points out, they often exceeds what minimum wage employment yields (e.g., a household of three could receive $1,743, while a minimum-wage worker only earns $1,159 [IMF, p. 7]). Puerto Rico also does not allow for at-will employment without paying huge severance packages, which makes sense given that 23 percent of employees in Puerto Rico work for the government.  Other costs of employment induced by the government are mandatory Christmas bonuses and lavish mandatory paid leave, which includes 15 vacation days, 12 sick days, eight weeks of maternity leave, and one hour per day for breastfeeding. All of these rigidities discourage job creation, which is why Puerto Rico has a declining real GNP, shrinking population [from 3.82 to 3.55 million within the last decade], and a labor force participation rate that decreased from 56.5 to 50.2 percent since 2005.

And let's not forget the lack of fiscal transparency, that the federal government pays a significantly smaller percent of Medicaid costs than it does for the mainland, glaring budgetary inefficiencies in Puerto Rico's Department of Health and Department of Corrections, or that the Puerto Rico Electric Power Authority (PREPA) owes an eighth of the island's debt (CRS, p. 13), the latter of which has caused energy prices to be higher in Puerto Rico than in the rest of the United States (IMF, p. 8). With all this, here's the "shocker": government expenditures in real dollars have increased by 100 percent between 1980 and 2013!

Puerto Rico is a bloated, inefficient government currently without any bankruptcy or restructuring provisions to help. On the other hand, allowing for Chapter 9 bankruptcy would only encourage what has been years of poor governance, which is why a default would be preferable to a bailout. Puerto Rico should be able to restructure its debt without having it fully repudiated. Even if Puerto Rico can get enough money or can restructure its debt to handle the current debt, this will not take care of some the more systemic issues that allowed this debt crisis to manifest in the first place. Its current trajectory is one of large financial gaps (IMF, p. 14), and longer-term solutions will need to be a part of the overall reform to make sure this does not happen again, whether that comes in the form of greater budgetary transparency, exemptions on the minimum wage and Jones Act, increasing the privatization of public companies that have failed, opening the energy market to competitive forces, or less restrictions in the labor market. Whatever the outcome is, what I can tell you is this: government policy is largely to blame for the fiasco. Let's hope that the federal government can work in conjunction with the Puerto Rican government and the private sector to resolve the crisis.

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.

Robert Reich Is Wrong on Minimum Wage...Again!

Sometimes, it astounds me how smart men can act so stupidly. Robert Reich is one of those men. Here is a man who was a Rhodes scholar, earned his J.D. from Yale, taught at Harvard, and served in three presidential administrations. The man clearly has good credentials, yet I have to wonder when he pontificates on something like minimum wage. This isn't the first time he's gotten it so wrong. He made a video last year about why we need the minimum wage, and I called him out on it. The video he released a couple weeks ago (see below) shows that he's at it again. What did Reich say that was so off-base that I have to call it cringeworthy?

Let's go through his video claim-by-claim:

1. We see a growth in the working poor, some working 60 or more hours a week. "Some." What a vague qualifier. Let's get a more precise figure by looking at Bureau of Labor Statistics (BLS) data from 2014. 13 thousand minimum wage workers work 60 hours or more, which means that only 0.4 percent of minimum wage workers are working this grueling amount.

2. If the minimum wage from 1968 kept up with inflation, it would be worth $10 today. This might seem like a fair argument. However, let's take a look at the minimum wage over a longer period of time. The Pew Research Center actually published a 2014 study that looks at the inflation-adjusted minimum wage going back to its inception during the Fair Labor Standard Act of 1938.

Notice anything interesting? In terms of inflation-adjusted dollars, 1968 was the year during which minimum wage was at its peak. Historically speaking, the minimum wage was seldom as high as Reich would like for us to believe.

3. If it kept up with the added productivity of the American worker, it would be $21.72. This figure comes from a study conducted by the Left-leaning Center for Economic and Policy Research. However, this study suffers from the same aforementioned selection bias of making 1968 the base year to determine minimum wage policies. Even if we use the 1968 starting point, there is an issue with the way inflation is measured. As Manhattan Institute scholar Scott Winship points out, using the CPI-U to measure inflation overstates prices. Not only is there a substitution effect of goods, but the quality of goods changes over time, which increases purchasing power. As an example, a 1982 Apple computer versus one now is not only slower, but took more work-hours to earn enough money to pay the computer off. The two goods are qualitatively different. As such, a chained CPI or the personal consumption expenditure (PCE) method is preferred by the CBO and other governmental entities. And let's not forget that workers' wages are determined by marginal productivity, not average productivity.

4. When we put money in the pockets of the majority of minimum wage workers who are adult breadwinners, they turn around and spend it, which creates demand and jobs for all of us. It's a virtuous cycle. If the minimum wage is purely a "virtuous cycle," then it's reasonable to ask why we shouldn't raise the minimum wage to $50 or $100 per hour since it will be circulated back into the economy right away. What Reich seems to forget is that by raising the minimum wage, employers will respond accordingly since increased wages mean a smaller profit margin. Employers can adjust either by cutting hours and/or benefits, passing the cost on to the customer, or automating services.

5. Minimum wage workers aren't teenagers earning pocket money. About half are 35 or older. Most are women, and many are key breadwinners for their families. Let's take another look at that BLS data from 2014 to see if Reich is correct. While it's true that most minimum wage workers are not 19 and younger (only about a fifth are), it's equally untrue that about half are 35 or older (Table 7). If you do the math with the figures, about 29 percent of minimum wage workers are 35 or older (ibid). Minimum wage workers tends to be under 25, have a high school degree or less, have never been married, and work part-time. Also, 2.5 percent of workers age 25 and older earn the minimum wage, so it's not like we have a society full of minimum wage workers, which is the picture that minimum wage proponents like to paint.

6. And don't believe scaremongers who tell you that a $15 minimum wage will cause employers to cut employment. Reich is either forgetting or ignoring that there is an elasticity for the demand of labor, which is the responsiveness of employers in wage changes, most notably in terms of the amount of workers the employers keep employed as a result of said wage increase. Since labor has a cost, it's inconceivable that labor, especially low-skilled, is so inelastic. If you don't want to believe me or the "scaremongers" (his word, not mine), then believe the Congressional Budget Office (CBO) 2014 study that shows that an increase from $7.25 to $10.10 would cause an estimated 500,000 unemployed individuals as a result (CBO, 2014, p. 1).

7. When the minimum is raised, more are brought into the potential pool of employees. This cuts back on turnover, which saves more money. Reich very well might have confused correlation with causation. As for turnover, the lower turnover rate might have something to do with the fact that employers are disincentivized to hire more workers precisely because of the minimum wage hike (Neumark and Wascher, 2008; Meer and West, 2013).

8. Employers who don't pay enough to lift their employees out of poverty are indirectly subsidized by the rest of us......through food stamps, Medicaid, etc. Arindrajit Dube, an economist who is a proponent of the minimum wage, disagrees with Reich by saying that such assistance does not have that effect, but actually increases a worker's reservation wage and contracts the labor supply. So as appealing as it might sound to say that means-tested assistance (e.g., food stamps) are subsidies to the poor since they supposedly cannot earn a decent wage, that is not the case.

Reich says that the decent thing to is raise the minimum wage to $15 an hour. A decent thing to do is have a discussion that takes both the costs and benefits of minimum wage into consideration. The real decent thing to do, though, is to not cause higher unemployment for those who you claim that you're helping.

"One of the great mistakes is to judge policies and programs by their intentions rather than their results." -Milton Friedman