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A $15 Minimum Wage Would Wreck US Economic Recovery

A $15 Minimum Wage Would Wreck US Economic Recovery

Saturday, 24 October, 2020 - 04:45

In Thursday night’s debate, both President Donald Trump and former Vice President Joe Biden expressed openness to a $15-per-hour national minimum wage. Biden seems all for it, and Trump indicated it may be a good idea for some states.

They both know that raising the wage level is a popular idea among Republicans as well as Democrats, if polls are to be believed. But a wage floor at $15 would set the recovery back by reducing employment.

Biden tried to rebut that point during the debate: “There is no evidence that when you raise the minimum wage, business has gone out of business,” he asserted.

He’s right that evidence is limited on what a $15-per-hour minimum wage would do to workers and businesses. That’s because it is such a high minimum that few states and localities have tried it.

In July 2019, the nonpartisan Congressional Budget Office estimated that a $15 minimum wage would eliminate 1.3 million jobs. The CBO also forecast that such an increase would reduce business income, raise consumer prices, and slow the economy.

The US economy will be very weak throughout 2021. The nation will need more business income, not less; more jobs, not fewer; and faster, not slower, economic growth. A $15 minimum wage would move the economy in the wrong direction across all these fronts.

For his part, Trump said he favors a more regional approach. In “some places, $15 is not so bad,” the president said, implying it could be justified. But in parts of the country, he thinks it wouldn’t make sense.

The president is half-right. It’s a slam-dunk case that a $15 minimum wage would be devastating to low-wage workers in much of the country, even after the economy has fully recovered from the Pandemic Recession.

According to data from the Bureau of Labor Statistics, half of all workers in 20 states earned less than $18 per hour in 2019. In 35 states, the median hourly wage was less than $20. Setting a minimum wage so close to the median wage would price many workers out of the labor market. Indeed, in 47 states, 25% of all workers earned less than $15 an hour.

Trump seems to think that $15 per hour would work in higher-wage states. That’s off base, too. A team of economists, including the University of Washington’s Jacob Vigdor, have been studying the employment effects of Seattle’s move to increase its minimum wage to $15. In 2016, Seattle — a high-wage city — had hit a $13 minimum, on its way to $15.

The economists found that this led to a 9% reduction in low-wage jobs. The pay increase it generated didn’t make up for the reduction in employment, and earnings fell for low-wage workers overall. The economists’ subsequent research found that the gains from the higher minimum wage accrued to more experienced workers.

When Biden was asked at the debate whether he supports the $15 wage, he answered that he does, but he immediately pivoted to mention the Paycheck Protection Program as a way to help workers and businesses. The PPP was enacted as part of the $1.8 trillion package passed in March to help support the economy during the pandemic. The program offers forgivable loans to businesses with fewer than 500 employees to keep their workers on the payroll and to keep businesses from going under.

The program expired in August, and Biden is absolutely right that it needs to be back up and running to support businesses and workers while the coronavirus is still raging. Rather than reducing employment as a $15 federal minimum wage would do, my own research with economist Glenn Hubbard suggests that the PPP boosted jobs among small businesses in the early months of the program.

Biden argued that the US should adopt a $15 wage floor because workers — the vice president specifically mentioned the “first responders we all clap for as they come down the street” — should not live in poverty. Set aside the specifics and focus on the general principle: Biden is right that no one who works full time and heads a household should be in poverty.

The best way to help ensure that workers aren’t in this situation isn’t through wage regulation. Instead, this goal should be pursued with resources from all of society. By mandating higher hourly pay, the minimum wage places the burden of fighting poverty on the employers of low-wage workers and the customers of low-wage businesses. But economists, columnists, professionals and hedge funds should pitch in, too.

The federal earned-income tax credit assures exactly this. It uses tax revenue to supplement the earnings of low-income households. It reduces poverty, lifting millions of people — including several million children — out of poverty each year. Because it increases the financial rewards for working, it increases employment.

Biden has gone to great lengths to distance himself from his party’s far-left flank. In the final presidential debate, Trump tried to paint Biden as a supporter of single-payer health care in the mold of Senator Bernie Sanders. Biden responded: Trump “thinks he's running against someone else. He's running against Joe Biden. I beat all those other people because I disagreed with them.”

A $15-an-hour hour federal minimum wage — more the double the current minimum — is one of the few far-left policies Biden supports. But mandating it would create a huge obstacle for the least-experienced, least-skilled, most vulnerable workers in the US.

When push comes to shove, would a President Biden actually support a $15 national wage floor? I’m skeptical. But all signs suggest that the nation might be about to find out.


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