Higher minimum wage in Minnesota hurts those it's supposed to help

Nationwide the "fight for $15" movement to increase the minimum wage to $15 per hour has gained momentum, with several municipalities, including Minneapolis, adopting plans for such minimum-wage hikes, and St. Paul soon to follow suit. Those who advocate for such policies should learn from the experience of past minimum-wage hikes.

In particular, the state of Minnesota's experience shows that minimum-wage increases lead to employment losses for precisely those low-wage workers the policy is designed to benefit.

The contrast between policies and labor market outcomes in Minnesota and Wisconsin shows the effects of the minimum-wage increases. My research shows that, beginning in 2014, Minnesota began a series of minimum-wage increases that in less than four years increased the effective minimum wage by 33 percent. By contrast, Wisconsin increased its state minimum wage in 2010 to keep pace with the federal minimum wage, but has not increased it since.

The minimum-wage increases had a substantial effect on the labor market in Minnesota. Before the wage hikes, 4.7 percent of Minnesota's hourly workforce earned the minimum wage or less, but by the time of the increase in 2016 this share had more than tripled to 15.4 percent. The increase in affected workers was heavily concentrated among young workers and workers in the restaurant industry — and both of these groups experienced employment losses.

Young workers, those under age 24, make up 21 percent of Minnesota's hourly workforce but 54 percent of the total number of minimum-wage workers in the state. Before the minimum-wage increases began, youth employment was relatively constant in both Wisconsin and Minnesota, with a slight increase in Minnesota and a slight decline in Wisconsin in the 2012-2014 period.

However, after Minnesota began its minimum-wage increases in 2014, there was a big fall in youth employment, while there was an increase in Wisconsin over the same period.

Youth employment averaged 9 percent lower, a reduction of 35,000 young workers, in Minnesota in the three years following the minimum-wage increases, compared with the preceding three years. During the same span, youth employment increased by 10.6 percent, or 43,000 jobs, in Wisconsin.

While other factors played a role, the timing of the trend break and the concentration of youth employment in minimum-wage jobs suggests that much of this difference was driven by Minnesota's minimum-wage increases.

In addition, about 60 percent of Minnesota's hourly restaurant workers earn the minimum wage or less, by far the highest concentration of minimum-wage earners in a single industry. From the beginning of 2010 until July 2014, employment in fast-food restaurants in Minnesota and Wisconsin grew at the same rate. However, beginning with the first minimum-wage hike in Minnesota, a gap opened up as fast-food employment in Minnesota stagnated while it continued to increase in Wisconsin.

In total, from July 2014 to May 2018, employment at fast-food restaurants grew by 4.8 percent in Minnesota but by 8.8 percent in Wisconsin. While other factors may have played a role, the timing of the trend break again suggests that the minimum-wage increases in Minnesota accounted for much of this 4-percentage-point gap.

Beyond the lost employment, the minimum-wage increases had other economic effects. Part of the increased wage costs that employers faced have been passed on to consumers through higher prices. The relative price of restaurant food in the Minneapolis-St. Paul metro area had fallen by 2 percent in the four years preceding the minimum-wage hikes, but it has risen by 6 percent in the four years since.

On the benefit side, earnings for affected workers grew more rapidly in Minnesota than in Wisconsin following the minimum-wage hikes, with average annual pay at limited-service restaurants increasing by 5.5 percent more in Minnesota from 2014-2017.

Overall, these results are consistent with a competitive market for low-wage workers in Minnesota. The distortions from the minimum-wage increases led to higher incomes for some workers, but to lower employment, particularly among young and low-skilled workers — and to higher prices for the products of low-skilled labor.

These negative impacts should give policymakers pause before they consider further minimum-wage increases, such as the currently fashionable calls for a $15 minimum wage.

These minimum-wage hikes dramatically distort the labor market and hurt those they intend to help.

Noah Williams is Juli Plant Grainger Professor of Economics and director of the Center for Research on the Wisconsin Economy at the University of Wisconsin-Madison (nmwillams@wisc.edu).