Monthly Archives: November 2015

The choice: higher minimum wage or more jobs?

The Congressional Budget Office was asked to estimate the effects of $10.10 national minimum wage, and it reported the impact of a $2.85 increase over the current $7.15 would be (1) higher incomes for millions of lower-income workers and (2) the total loss of income for 500,000 Americans. Policymakers and voters should understand that mandating higher wages is not costless, and one cost in forcing employers to give raises to the lowest-paid workers will destroy some jobs. That’s just reality.

To make the math simpler, the CBO estimates means this: Every penny increase to the federal minimum wage costs 1754 jobs.

Of course, the effect is not so simple, but the CBO number is a fair starting point. A more realistic model would note that each penny increase will be more harmful than the last. Why? Because a higher minimum effects (1) more people (2) more deeply.  At the margin, almost every job involves a labor-capital tradeoff. Capital investments to replace suddenly more expensive labor (that prices it above its marginal value) will not occur immediately. But the timing of capital addition to displace labor will correspond to the size of the cost differential. In short, a $1 increase will cause a shallower and slower job loss than a $2 increase.

So what to make of the notion of a $15 minimum? Set aside the completely destructive approach of encroaching on local sovereignty and local conditions — seriously, why can’t Ohio set its own minimum wage? Or not. Let Ohio be Ohio, and trust the people of Ohio to manage their own wage setting.  But, I mean it, set aside the illogic of a national wage. Can we model the job losses of a $15 versus $12 versus $10.10?

Based on the simple CBO penny cost above, I calculate the $15 minimum wage will destroy 1.36 million jobs nationally.  But, importantly, I know it will be far worse.  The impact is exponentially higher for every penny.  If one assumes that each dollar increase has a 50% larger impact – an exponent of 1.5 – then the $15 minimum will cost 2.2 million jobs.  If the impact is 100% larger for each dollar increase, then the loss is 3.7 million jobs.

This is not a choice I would recommend. In fact, I would recommend allowing any adult the freedom to work at any wage they want. How is it moral to deny a person their choice of a job? If a person prefers a lower paying job that is a short walk from home, in a location they love, doing work they enjoy — there are just too many factors to be fairly managed by a one-size-fits all wage floor.