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Commentary By Diana Furchtgott-Roth

Why Minimum Wage Laws Hurt America

Economics Employment

States such as California and New York and cities such as Seattle, WA are raising the minimum wage to $15 an hour, and other states and localities are planning to follow. Unfortunately, these   higher minimum wages will not move people out of poverty. Rather, they will have the opposite effect of depriving young and low-skill workers of employment. To raise wages, people need to have the skills that will increase their value to employers. Our challenge is to raise levels of education, not raise the minimum wage.

“Governments can mandate a $15 hourly minimum wage, but they cannot force firms to hire workers. ”

Raising the Minimum Wage Hurts the Young and Unskilled

Governments can mandate a $15 hourly minimum wage, but they cannot force firms to hire workers. As minimum wages have risen, cashiers have vanished from drug stores and food trucks have replaced restaurants. Few would have thought 10 years ago (when the national minimum wage was $5.15) that food trucks would line the streets in D.C.’s downtown area and people would line up for their lunch. All of us have seen the iPads that are used for ordering in restaurants, substituting for servers. As minimum wages rise, automation becomes more profitable, and workers are displaced. Businesses modify their products and services to suit economic conditions.

If you were running a business, and the minimum wage rose from $7.25 to $15, your first step would be to lay off your least-skilled workers. Future workers would have to produce more. You might do less on-the-job training and hire workers who already have experience.

In a global economy, where competitive countries battle for business with well-trained, disciplined, experienced employees, America is putting itself at a disadvantage by keeping young and unskilled Americans off the first rung of the career ladder.

Make no mistake—few workers stay at the minimum wage level very long. Only three percent of American workers earn the federal minimum wage.  The other 97 percent make more, not because of government regulation, but because that is the only way that employers can persuade them to stay.  As one example, Walmart CEO Doug McMillon started out unloading trucks at a Walmart distribution center when he was a teenager.

University of California (Irvine) professor David Neumark, in a paper in the Industrial and Labor Relations Review, writes that the strongest evidence linking unemployment to increases in the minimum wage comes from teenagers and other low-skill groups, without regard to industry.

Even if total employment shows little change when minimum wages rise—because minimum wage workers are such a small share of America’s 144 million nonfarm payroll workers—the skill mix of employees can change. That is, employers can hire a similar number of workers, but substitute high-skill for low-skill employees. Employment levels may remain the same, but evidence shows that more high-skill workers and fewer low-skill workers are hired. This leaves low-skill workers and teens with no option except unemployment.

In 2014, I was among 500 economists, including Nobel laureates Vernon Smith, Eugene Fama, Robert Lucas, and Edward Prescott, who signed a letter opposing increases in the federal minimum wage. “Although increasing wages through legislative action may sound like a great idea, poverty is a serious, complex issue that demands a comprehensive and thoughtful solution that targets those Americans actually in need,” we wrote.

The economy created only 25,000 private sector jobs in May 2016, a precipitous decline from prior months. That makes the seventh month in a row that job creation has declined. These data are consistent with the decline in GDP growth, from 2 percent in the third quarter of 2015, to 1.4 percent in the fourth quarter of 2015, to 0.8 percent in the first quarter of 2016, spurred by the decline in nonresidential fixed investment.

Workers are taking note by withdrawing from the labor force.  The unemployment rate declined to 4.7 percent due to a dramatic exit from the labor force by mostly low-skill workers. The labor force participation rate decreased to 62.6 percent in May (1977 levels) from 62.8 percent in April. It was 63 percent in March. The civilian labor force shrank by 458,000 workers, a decline of 820,000 in two months.

Polls show that raising the minimum wage is popular. But it does not take a neurosurgeon, or even a McDonald’s cook, to know the right answer when an opinion pollster asks you whether you are in favor of raising the minimum wage. Practically everyone with a heart is in favor of raising wages as long as those higher wages are paid by someone else.

No pollster asks whether a person would be eagerly willing to pay 39 percent more for a service. The answer to such a question is generally no, and not politically acceptable.

Union Incentives to Raise the Minimum Wage

Unions have been at the forefront of drives to raise the minimum wage to $10, $12, or $15 an hour. Take Fight for $15, funded by the Service Employees International Union, demonstrations that occur regularly outside fast food outlets. Or, take Black Friday demonstrations outside Walmart, organized annually the day after Thanksgiving by OUR Walmart, funded by the United Food and Commercial Workers. But now that unions have achieved their goal in Los Angeles, their leaders want to exempt unionized workplaces from the minimum wage hike.

Reasonable people might think that unions’ battles to raise the minimum wage are motivated by concern for low-income Americans. The union-funded Los Angeles campaign, Raise the Wage, stated, “Raise the minimum wage—and not just a little, but enough to bring the hundreds of thousands of Angelinos who power our economy into the middle class. It’s good for business, it’s good for taxpayers, and, most of all, it’s the right thing to do for workers, who have earned it.” The Los Angeles City Council was persuaded, and voted to increase the minimum wage in Los Angeles to $15 an hour.

Although the union-funded Raise the Wage campaigned so vociferously in favor of a $15.25 minimum wage, unions are seeking exemptions from the higher wages for their members. The exemption, or escape clause, would allow them greater strength in organizing workplaces.  Unions can tell fast food chains, hotels, and hospitals that if they agree to union representation, their wage bill will be substantially lower.  That will persuade employers to allow the unions to move in.

One of the leaders of the Raise the Wage coalition, Rusty Hicks, Executive Secretary-Treasurer of the Los Angeles County Federation of Labor, AFL-CIO, stated, “With a collective bargaining agreement, a business owner and the employees negotiate an agreement that works for them both. The agreement allows each party to prioritize what is important to them. This provision gives the parties the option, the freedom, to negotiate that agreement. And that is a good thing.”

Everyone wants to “negotiate an agreement that works for them both,” in Hicks’s words. But unions are only in favor of exemptions for organized labor.

Once the higher minimum wage bill is signed into law, with the exemption for unions, then organizing becomes a win-win for employers and unions. Unions get initiation fees of about $50 per worker and a stream of dues totaling 2 percent to 4 percent of the workers’ paychecks.  Employers get a lower wage bill.

The losers in this scheme are employees, who have to pay union dues out of their paychecks.  Jobs become more scarce as wage levels rise and some less-skilled workers become unemployed.

Los Angeles unions have not yet won the exemption to the $15 minimum wage they desire.  But other unions have. In many cities unions support minimum wage hikes, and then negotiate an exemption, in order to force employers to unionize.

Consider the minimum wage increase for hotels close to Los Angeles Airport that was passed in 2006. Under the Hotel Worker Living Wage Ordinance, employers had to pay $9.39 an hour if health insurance was provided, and $10.64 an hour without health insurance. Unionized hotels were exempt.

In California, San Francisco, Oakland, Richmond, Long Beach, and San Jose all have minimum wage laws with exemptions for unionized workplaces. One example: The San Jose Minimum Wage Ordinance contains Section 4.100.050, entitled Waiver Through Collective Bargaining, that states, “…all or any portion of the applicable requirements of this Chapter may be waived in a bona fide collective bargaining agreement, provided that such waiver is explicitly set forth in such agreement in clear and unambiguous terms.”

Further north, Seattle-Tacoma Airport had the first $15 minimum wage in the United States, voted into law in 2013. Yet employers that have collective-bargaining agreements are not subject to the higher wage. Section 7.45.080 of the SeaTac Municipal Code reads, “All of the provisions of this chapter, or any part hereof, including the employee work environment reporting requirement set forth herein, may be waived in a bona fide collective bargaining agreement…”

Union exemptions to minimum wage laws are not limited to the West Coast. They can also be found in Milwaukee, WI, and Chicago, IL.

Unions are resorting to campaigning for higher minimum wage laws and then carving out exemptions for themselves because they are desperately short of members. Their membership has been steadily declining over the past three decades.  In 1983 (the earliest year with comparable data), 20 percent of American workers belonged to unions. By 2015 only 11 percent of American workers, and only 7 percent of private sector workers, were union members.

Instead of exempting union workers from the minimum wage, it would make sense to exempt teens and low-skill workers, because they are the ones most harmed.

A Practical Solution to Raising Wage Levels

What improves pay is productivity, and better education leads to higher productivity. The question is how to raise educational levels of low-income children so that they earn higher wages. Better education in elementary school leads to better achievement in high school. That might lead to a community college or four-year college degree, with earnings that can be many multiples of the minimum wage.

Imagine if all children who lived in low-income neighborhoods, including housing projects, had individual tutors, along with computers and access to the Internet, waiting for them after school. Tutors would help them with their homework and make sure that any computer assignments were completed. (Their parents might not have a computer.) In addition, a mobile medical bus from a local hospital would show up a couple of times a year to give people check-ups and information relating to nutrition and wellness.

These children would perform better in school; their reading and math abilities would be vastly superior than otherwise. They would be better prepared to qualify for higher-paying jobs because of their skills, not because of a government mandate.

This is happening in South Carolina’s Lowcountry, where a local group called the Neighborhood Outreach Connection (NOC) purchases or rents apartments in six low-income developments and equips them with banks of computers, learning materials and healthy snacks. NOC hires public school teachers and recruits volunteers so that when children come home from school, they can get help with their homework.

NOC’s program centers, located in Bluffton, Hilton Head and Beaufort, help families through the provision of health services, individualized after-school and summer tutoring, pre-kindergarten classes and adult English-language classes. NOC uses incentives to encourage learning and issues report cards to engage parents.

NOC is the brainchild of retired economist Narendra Sharma, who is using his decades of World Bank experience to improve the lives of low-income children in South Carolina’s Lowcountry. The program currently tutors 450 children, as well as some parents who take evening English-language classes. NOC’s annual budget for programs in education, health care and workforce development, as well as social events, is about $375,000.

In 2016 Sharma received the Peggy May Inspiration Award from the Foundation for Educational Excellence. In 2015 he won a Daily Point of Light Award from the Points of Light Foundation.

The most recent learning centers opened in 2015 in downtown Beaufort, serving 50 children from pre-kindergarten through eighth grade. The Parkview Learning Center has a pre-school program on Friday afternoons, in addition to after-school help Monday through Thursday, with an apartment donated by the Atlantic Housing Foundation. The apartment at Marsh Pointe was given by the Beaufort Public Housing Authority.

Sharma’s programs are successful partly because he works with the schools. The principal of Beaufort Elementary School said: “The NOC team in Beaufort interacts daily with the staff at Beaufort Elementary School. They focus heavily on tutoring, and helping with homework and improving literacy skills, so our students are better able to master state standards and experience success at school.”

The local schools test the children, ensuring unbiased results. Students who participated in the after-school and summer learning programs in 2013-2014 performed better on math and reading tests than all Beaufort County students and continue to show progress in math and language skills.

The proposed higher minimum wage levels in California and New York will not solve the problem of poverty. Rather, those with low skills will find that job opportunities vanish. If firms have to pay $15 an hour, they will hire workers who are worth $15 an hour. Those with $8.50-an-hour skills will be left unemployed.

The way to higher-paying jobs is by increasing skills, not by artificially raising wages. Education gives the skills to get the first job and then move up to a better one.

This piece originally appeared at the Jewish Policy Center


Diana Furchtgott-Roth is a senior fellow and director of Economics21 at the Manhattan Institute. Follow him on Twitter here.

This piece originally appeared in Jewish Policy Center