The folly of a $15 minimum wage

President Joe Biden is already working hard to sell his ambitious plan to get people back to work and help the economy heal from the pandemic recession. It's too bad the plan includes a key element that would get in the way: a $15 federal minimum wage that would slow the recovery and devastate many low-wage workers.

Few policy issues are as charged as the minimum wage, with supporters and opponents alike making extreme arguments.

A $15 hourly wage floor would not immediately lead to massive inflation or the abolition of entry-level jobs. Likewise, it is not a free lunch, helping some workers and harming none. Like all significant policy changes, it would create winners and losers.

It's a slam-dunk case that doubling the federal minimum wage — it's been $7.25 since 2009 — would lead to significant declines in employment opportunities for workers with few skills or little experience. According to data from the Bureau of Labor Statistics for 2019 (before the pandemic), in 47 states, at least one-quarter of all workers earn less than $15 per hour. In 20 states, half of all workers earn less than $18 per hour, and in 30 states, the median hourly wage is less than $19.

These statistics show that $15 is a very high wage floor. For employers to keep all their workers would require raising the wages of a huge share of the national workforce. But the number of workers affected would be so large that this wouldn't happen. Instead, the number of jobs in the low-wage workforce would shrink.

The nonpartisan Congressional Budget Office confirms this basic intuition, estimating that joblessness would increase by 1.3 million if the national hourly wage floor were hiked to $15. The CBO also concluded that this policy would reduce business income, raise consumer prices and reduce gross domestic product.

Even in high-wage localities, a $15 hourly minimum would reduce employment. Seattle was a pioneer in the Fight for $15, committing in June 2014 to gradually raise its wage floor to that level. Its minimum wage increased from $9.47 to as high as $11 in 2015, and up to $13 in 2016 for large employers.

In a subsequent paper, these economists found that the gains from the wage hike accrued to more experienced workers.

Opponents of hiking the wage floor often warn of dire consequences for even modest wage hikes. But following such increases, many observers conclude that the doomsday scenarios never materialized. This is not, however, necessarily an indication that minimum wages don't reduce employment.

To see why, imagine that you are drinking a cup of coffee. In between each sip, I add a tiny amount of sugar to your cup. You may not be able to tell whether your current sip is sweeter than the one immediately prior, because I am only adding a small amount of sugar each time. But your coffee will be a whole lot sweeter when you finish than it was when you started.

Something similar may be happening in the job market for workers with few skills. Don't focus on the effects of a single modest increase. Instead, look at the big picture.

At the end of 2019 (again, before the virus wrecked the economy), only 4 in every 10 high-school dropouts over the age of 24 had a job. Compare this with 6 out of 10 high-school graduates and 7 out of 10 college grads.

But because it happens gradually, it is hard for economists to measure the longer-term effect of any single increase.

Biden hasn't announced any details, but surely he would want to take the federal minimum wage up to $15 over a period of years. That would be better than an abrupt increase, but would still cause damage. In addition, and as my research with economist Peter Brummund suggests, businesses may cut employment more aggressively when they know future wage-floor hikes are coming.

Eight states and the District of Columbia have already put their minimum wage on a path to $15, including large and prosperous states like California, Illinois and New York. This trend would soften the blow from a $15 national wage floor. But more importantly, it should reduce the urgency of minimum wage proponents.

It would be better to see how these state experiments play out before the federal government increases the wage floor in, say, Mississippi, Arkansas and West Virginia — each of which had a median wage below $16.50 in 2019.

All that said, raising the federal minimum wage to $15 would have some upside. The same CBO report that found this policy would eliminate over one million jobs also concluded that at least 17 million workers would see their weekly earnings increase. Most of those gains would go to families with incomes above the poverty line.

Biden has the right goal in mind. When announcing this policy, he said: "No one working 40 hours a week should live below the poverty line." This is fundamentally a moral argument, not an economic one. And I agree.

Those who want to achieve this goal through the minimum wage are implicitly arguing that the burden of lifting up the working poor should fall to the businesses that employ them, along with their customers. This lets many high-income Americans who infrequently cross paths with the low-wage labor market off the hook.

Earnings subsidies, like the earned-income tax credit, are a better way to lift low-income workers out of poverty in part because they are financed with tax revenue. They use resources from all of society — not just low-wage employers and their customers — to achieve a social goal.

By increasing the financial rewards from working, they also increase employment among low-income households.

Biden wants to fight poverty. In the wake of the pandemic, he also wants to get more people back to work. Earnings subsidies would do both. A $15 minimum wage would reduce employment.