President Biden, Vice President Harris and Speaker of the House Pelosi (D., Calif.), hold a meeting on COVID-19 relief at the White House in Washington, D.C., February 5, 2021. (Kevin Lamarque/Reuters)The Democrats want to more than double the federal minimum wage to $15 an hour by 2025.
The Democrats want to raise the minimum wage to $15 an hour by 2025, with the phase-in starting just three months after their bill is enacted. The suggestion is bad policy at a bad time, and passing it through the “budget reconciliation” process to avoid a filibuster would violate Senate rules. They should drop this and focus their COVID-relief bill on actual COVID relief.
Simply put, the minimum wage stops labor markets from operating effectively. When it’s illegal to hire workers for less than $15 an hour, workers whose skills are not yet worth that much will find themselves working less or out of a job entirely. These workers include some living in or near poverty, and also teens, second earners, and young adults just gaining a foothold in the labor market.
Yes, there is a debate within the economics profession over how much of a mandatory wage increase corresponds to how many lost jobs and hours. But no, it has not been proven that basic economic principles magically don’t apply to low-wage labor.
The economists David Neumark and Peter Shirley recently reviewed decades’ worth of studies, finding that the bulk of them suggested at least some employment loss from minimum-wage hikes. This week the Congressional Budget Office, synthesizing current knowledge its own way, likewise projected that the Democrats’ plan would cost us 1.4 million jobs in 2025, nearly 1 percent of total employment, though of course those who remained employed would be paid more.
Not to mention the way that wages vary geographically across this enormous and diverse nation. A wealthy urban area where few workers make less than $15 already can probably manage. Mississippi, where $15 was the median wage as of 2019, meaning that about half of workers made less? Not so much.
Hiking the minimum wage also has a variety of knock-on effects that are poorly understood. For example, in some industries, wage hikes are mostly passed through to consumers — and poorer consumers spend a larger share of their incomes on things such as groceries and fast food, making this effect rather regressive. Employers can also cut perks and benefits, or simply work their employees harder, to make up for wage hikes, or replace workers with machines. The government will claw back some of the extra pay in the form of taxes and benefit cuts. And even when higher wages do come out of profits, this makes it harder for struggling businesses to stay afloat.
Speaking of which, this is a very poor time to start a series of minimum-wage hikes. The pandemic has hit small businesses, including restaurants, hard. At minimum, any increase should not start phasing in until the pandemic is under control and the economy is closer to a full recovery.
The minimum wage is a simple policy with very complicated effects, some of which are hotly disputed and some of which have hardly been studied. But if one thing is clear, it’s that a government-mandated wage hike isn’t just free money for workers. More than doubling the minimum wage when the economy is barely pulling out of a year-long slump amounts to gambling with the livelihoods of millions of American workers, consumers, and business owners.
Lastly, a note on process. There are not 60 votes in the Senate for such a dramatic policy change at such an awful time, so Democrats are considering passing their bill through the filibuster-proof “reconciliation” process, which requires a more plausible 50 votes.
This process is reserved for matters that directly, and not merely incidentally, affect the federal budget. Republicans stuck to this rule even when it made their Obamacare-repeal efforts incredibly difficult. The minimum wage instructs businesses to pay their workers more; that is the main goal and the main effect, and any impact on federal coffers is incidental to it. (For instance, the federal government itself will have to pay workers more, more workers will take unemployment, etc.) It doesn’t qualify, and the Democrats will probably have to either override the Senate parliamentarian or disguise the wage hike in budgeting gimmicks to pull it off.
If it comes to that, we trust the GOP will return the favor the next time it wins power. For the Democrats, it would be smarter politics and better policy to drop this idea.
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