US Minimum Wage

By: Submissions

John Dunham writes: What a difference a day makes.  Just this month, a group of researchers at the University of Washington (UW) released a working paper outlining how a $13 per hour minimum wage for restaurant workers in Seattle has led to exactly the opposite effects that proponents predicted.

According to the team at UW, which was funded by the City of Seattle, a 37 percent increase in Seattle’s mandatory minimum wage for restaurant employees resulted in a decrease of working hours for these employees of about 9 percent, and an overall loss in income of $125 per month.  This is significant because the minimum wage increase, which was promoted as a way to help lower-wage workers, actually cost those same workers about $1,500 per year on average.

This is nothing new to economists like me who have studied the economic impact behind minimum wage hikes.  These increases lead to a reduction in jobs and an increase in prices.  In fact, when we examined a potential minimum wage increase on the food retail industry in New Jersey, we found very similar results to the researchers in Seattle.  Our analysis suggested that a 79 percent increase in New Jersey’s minimum wage (to $15 per hour) would reduce employment in the grocery industry by 7.8 percent, or roughly 17 million fewer work hours.  This now seems to be a very modest forecast when one looks at the Seattle numbers.

What the Seattle study does not examine however, is how statutory minimum wages increases really harm everyone in a community.  This omission really shows how far policy debates have veered away from the economic principles that are used by proponents to justify them.  In the case of mandatory minimum wages, the entire debate has revolved around how they impact overall employment or more specifically employment of low-wage workers.  While this is an important question to understand, what the debate has ignored is the effect on those who actually pay for the higher wage floor.

Many industries are impacted by high statutory minimum wages.  This includes in particular the restaurant industry, the retail grocery industry, the personal care industry and the building maintenance industry.  All of these are extremely competitive sectors of the economy, and all provide what economists call “normal goods.”  In other words, when the price of a restaurant meal, or a box of cookies, or a landscaping job increases, the demand falls.  It is through this mechanism that high minimum wages reduce overall employment.  If a restaurant sells less meals, it needs fewer employees.  If a grocer sells fewer carrots or cans of coffee, it needs fewer checkers and stockers.

The key element that is ignored in studies of employment is the very fact that high wage floors will increase the price of goods and services.  Prices paid by consumers go up with no corresponding increase in quality or service so this is simply a dead-weight loss to all consumers, including minimum wage earners.  When we examined the effect in New Jersey, we found that the price tag of a $15 mandatory minimum wage would be nearly $294 million per year – and that is just for groceries. Even more troubling is that senior citizens, many of whom are on fixed incomes, would bear 40 percent of these increased costs to the tune of nearly $125 million.

In the case of grocery retailers in New Jersey, the potential $15 mandatory minimum wage would have an overall cost of about $644.3 million dollars.  This will be paid for by both workers (who lose their jobs) and consumers, with about 54.3 percent of the costs being borne by workers, and the remaining 45.7 percent by consumers. 

The bottom line from both the UW analysis and our own, is that regulations like mandatory wage floors cost a lot more money than they can ever generate in benefits. 

By John Dunham,

John Dunham & Associates

John Dunham & Associates is an economic consulting firm based in New York City that specializes in examining the economics of taxes and regulatory policy.

John Dunham is the President of John Dunham & Associates. John specializes in the economics of how public policy issues affect products and services. He has conducted hundreds of studies on taxes and reg­ulation. Dunham is regularly consulted by Reuters and other media covering business and economics, and his work has been reported in national broad­cast and print news outlets. His research has been published in a number of refereed journals including Economic Inquiry.

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