Capital And Labor Both Suffer Under Minimum Wage Mandates

Graph 1: Minimum Wage in Different Countries (USD/Hour)

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Source: OECD.

Graph 2: Ratio of Minimum Wage to Median Wage in Different Countries

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Source: OECD.

Dozens of empirical studies have shown that hiking minimum wages undermines employment opportunities among low-skilled workers and increases unemployment, in particular when the increase is massive like the one proposed by the Democrats. A study by the Congressional Budget Office quoted by both Murphy and Jones estimates that employment would be reduced by 1.4 million by the minimum wage increase while the number of people in poverty would decline by a nine hundred thousand. Yet the negative economic impact would not end with the labor market effects. According to the same study, a higher minimum wage would also “slightly reduce real GDP, primarily because of reduced employment,” redistribute family income, and increase the budget deficit by a cumulative $54 billion over 2021–31. Significant income redistribution would take place from wealthier families that suffer a decline in business income estimated at $333 billion over 2021֪–31 or face higher prices for goods and services to the families of workers that either benefit from higher wages or have lost employment because of the minimum wage hike.Several US states have already imposed higher minimum wages than the national one of $7.25 an hour. Yet none of the state top-ups has reached $15 an hour as of 2021, which means that the negative impact on employment will be felt in the entire country. Nevertheless, states where average wages are lower and which have not gold-plated the national minimum wage yet will be affected most. A cursory look at wage statistics shows large differences between annual median wages among US states. An increase of the minimum wage to $15/hour would be equivalent to an annual minimum wage of about $31,200 (OECD data), representing about 90 percent or more of the 2019 annual median wage in about twelve US states: Florida, Oklahoma, Kentucky, New Mexico, Idaho, Alabama, South Dakota, South Carolina, Louisiana, West Virginia, Arkansas, and Mississippi. This ratio is very high compared to the OECD average of about 55 percent. Seven of the US states have not even gone beyond the mandated national $7.25 per hour minimum wage so far, illustrating how disastrous the effects of this one-size-fits-all measure could be.

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