Labor Management

Wage Hikes: Proceed with Caution

While boosting wages for workers is critical, helping workers retain their jobs and stay on the income ladder makes more sense for the economy.
Aparna MathurFebruary 16, 2017
Wage Hikes: Proceed with Caution

The idea that boosting the minimum wage can help low-wage workers is not a new idea. The Fight for $15 movement, for example, has steadily gained momentum over the last four years. Several cities and states are set to phase in an increase to a $15 minimum wage over the next few years.

Aparna Mathur

Aparna Mathur

But there are very good reasons to carefully consider how a jump in the minimum wage could negatively impact the very workers the measure aims to help.

Most policies of any kind involve trade-offs, and minimum wage hikes are no exception. When the government mandates that employers must pay minimum wage workers more — i.e., the hike is not because of any increases in productivity or skills — employers will strategize about how to recover the added costs. Can they pass them on to their customers? Should they invest more in automation? And of course: Should they decrease the size of the work force?

Among economists, there is little consensus on the employment outcomes. Some studies find that minimum wage hikes have no effect on overall employment, while others find that hiking the pay floor causes job losses.

A recent major study by New York University looked at 160,000 job openings listed in an online labor marketplace and randomly set minimum wages for some of the openings, which generally were for short-term contract work. The study found that imposing a minimum wage raised the wages of hired workers but also reduced hiring, albeit not by very much.

However, hours worked fell sharply, with reductions as large as 3% across all workers and 25% for the lowest-wage jobs. Presumably, the study’s authors wrote, some of the reduction was caused by employers economizing on labor. However, they also wrote, hours worked also likely fell because employers hired more productive workers.

In practice, a shift toward more productive employees likely also implies a shift toward automation. Many stores and fast-food restaurants are already planning this transformation. For example, McDonald’s plans to move away from cashiers to touch-screen kiosks nationwide and to allow mobile ordering rather than pay an employee $15 an hour to bag French fries. Wendy’s is considering a similar move. Walmart already is automating many positions that employ hourly workers.

The non-partisan Congressional Budget Office projected that a rise in the federal minimum wage to $10.10 would potentially lead to 500,000 jobs being lost, while certainly helping many families make higher incomes.

While the studies and anecdotal evidence presented above can’t determine with certainty what effects minimum wage hikes will have on employment levels, they suggest that caution should be applied when advancing any such policy.

The truth is that there are better ways to help low-wage workers. For one, the federal government can supplement incomes by expanding the Earned Income Tax Credit program. A targeted program with no risk of job loss, the EITC has been proven to lift people out of poverty, and it is the best way to boost incomes for poor households.

At the same time, encouraging upgraded skills for workers through greater investments in on-the-job training and paid apprenticeship programs for younger workers would allow for greater upward mobility even for workers starting off in minimum wage jobs.

While boosting wages for workers is critical, helping workers retain their jobs and enabling them to move up the income ladder is even better. The risk of job loss that comes with a minimum wage hike threatens the ability of these workers to get on that ladder. States that are on track to approve such an increase should proceed with tremendous caution.

 Aparna Mathur is a resident scholar in economic policy studies at the American Enterprise Institute.