CONTRIBUTORS AARON YELOWITZ, University of Kentucky MARK PERRY, American Enterprise Institute and the University of Michigan-Flint DAVID NEUMARK, University of California-Irvine DAVID MACPHERSON, Trinity University JAMES SHERK, Former Research Fellow, Heritage Foundation WILLIAM EVEN, Miami University ANDY PUZDER, Former CEO, CKE RICHARD BERMAN, Center for Union Facts LLOYD CORDER, CorCom, Inc., Carnegie Mellon University and University of Pittsburgh JOSEPH SABIA, San Diego State University and University of New Hampshire With an Introduction by MICHAEL SALTSMAN Edited by LIAM SIGAUD and MICHAEL SALTSMAN EMPLOYMENT POLICIES INSTITUTE 5 INTRODUCTION: A CASE FOR CAUTION MICHAEL SALTSMAN EMPLOYMENT POLICIES INSTITUTE In his 2013 State of the Union, President Obama These consequences shouldn’t come as a surprise, called for a 25 percent increase in the federal minimum given the lack of precedent for a minimum wage as high wage, to $9 an hour. Five years later, the Democratic as $15 an hour. The first federal minimum in 1938 was Party promised a minimum wage increase of more than $0.25 an hour, or $4.20 in 2015 dollars. It began primarily 100 percent, to $15 an hour. as a skilled minimum wage, applied to industries such as This radical evolution in what constitutes an mining, manufacturing and transportation. As it expanded acceptable minimum wage can be credited to the to include jobs in the service industry, the minimum Service Employees International Union (SEIU), which wage in effect became a wage floor for unskilled labor. starting in 2012 invested more than $100 million to Adjusted for inflation, the federal minimum wage has normalize the concept of a $15 minimum wage. The been as high as $10.90 an hour, in 1968, and as low as SEIU has succeeded in its political goal; today, anything $3.93, in 1948. But the average federal minimum wage less than a demand for over its 80-year history in a $15 minimum wage is the U.S. has been $7.40 an considered unacceptable There’s a strong case hour--roughly half of the to organized labor, and for caution on a $15 proposed $15 standard. the Democratic Party has minimum wage. As this book describes, adopted the policy as part The question is, will moving to a $15 standard of its national platform. Congress heed the would expand coverage But political success of the minimum wage to a doesn’t translate to evidence? level previously unheard of. economic success, and Today, less than 3% of the the $15 experiment has a more-mixed record on this hourly workforce earns the minimum wage; by contrast, point. A 2017 analysis from researchers at Harvard and a $15 minimum wage would cover 44% of the hourly Mathematica Policy Research, covering more than a workforce in 2020. Considering that minimum wage dozen cities in the San Francisco Bay Area, found each coverage has historically ranged from 1.5 to 4 percent of $1 increase in the minimum wage was associated with this workforce, this figure should rightly shock members a 14% increase in closures for median-rated restaurants. of Congress considering whether to support $15. In Seattle, a team of researchers at the University of In an era of wage demands where $15 is the baseline Washington identified a significant loss of work hours standard, it’s easy to forget that even more-modest for affected employees, such that workers who were increases in the minimum wage have been shown to supposed to gain a boost in pay were instead no better negatively impact employment for less-skilled workers. off than before. The consensus from the empirical literature on this topic, EMPLOYMENT POLICIES INSTITUTE 7 as summarized in a 2015 paper from the Federal Reserve tipped employees that’s been embraced by organized Board of San Francisco, was clear: “...the overall body labor. Currently, tipped employees are guaranteed the of recent evidence suggests that the most credible same minimum wage as all other employees; with their conclusion is a higher minimum wage results in some tips, they report earning more than $14 an hour on job loss for the least-skilled workers—with possibly average. A New York-based labor group called ROC larger adverse effects than earlier research suggested.” has spent millions of dollars advocating to eliminate Even Bill Clinton (who signed an increase in the the tipping system in favor of a higher flat wage. Most federal minimum wage in 1996) understood that trade- tipped employees are strongly opposed to this change-- offs exist. After approving a 21-percent increase in one survey found that 97 percent prefer the status quo- the federal minimum wage, then-President Clinton -and have organized against ROC’s efforts to change it. was confronted in 1998 with a proposal for a further More than their income is at risk: One study looking 40-percent wage hike. In a January 1998 memo, the at past changes in the tipped minimum wage found an President’s economic advisers called the increase “too industry-wide decline in employment associated with aggressive” (even with a strong economy) and were each tipped wage increase. unequivocal in their opposition: “[This] proposal could The best case against a higher minimum wage might prove damaging to the employment prospects of low- be its irrelevance. Since the last increase in the federal skilled workers, as well as to the general macroeconomic minimum wage was fully phased-in in 2010, both the performance of the economy.” number and percentage of people earning it has fallen The President took their advice, but the 40-percent every year, as employees earn raises through their own increase did eventually pass in 2006, and it phased initiative. Multiple studies confirm that a majority of in between 2007 and 2009. Subsequent research has minimum wage employees--who are disproportionately shown that the increase worsened the effects of the young and less-educated--earn a raise within one to 12 Great Recession; according to one study by economists months on the job. For employees who are older and/ at the University of California-San Diego, this federal or have children, better alternatives exist--including the wage hike was responsible for 14 percent of the decline Earned Income Tax Credit, which operates through the in employment during the recession. The Congressional tax code instead of a mandate on employers. Thanks for Budget Office warned that raising the federal minimum the EITC (also called the Working Americans Credit), wage by another 40 percent (to $10.10) would cost the effective federal minimum wage for many single the country an estimated half-million jobs. Should parents is already above $10 an hour. a $15 minimum wage be pursued, this book suggests There’s a strong case for caution on a $15 federal as many as 2 million jobs. Even that figure could be minimum wage. The question is, will Congress heed the conservative, as it doesn’t account for the impact of a evidence? sharp 604-percent increase in the minimum wage for 8 FIGHTING $15? AN EVALUATION OF THE EVIDENCE AND A CASE FOR CAUTION TABLE OF CONTENTS INTRODUCTION A CASE FOR CAUTION 7 Michael Saltsman, Employment Policies Institute CHAPTER 1 MINIMUM WAGES IN THEORY AND PRACTICE 13 Mark J. Perry, American Enterprise Institute and the University of Michigan-Flint CHAPTER 2 WHO’S AFFECTED BY A $15 MINIMUM WAGE? 19 David Macpherson, Trinity University William Even, Miami University CHAPTER 3 EMPLOYMENT IMPACTS OF A HIGHER MINIMUM WAGE 31 David Neumark, University of California-Irvine CHAPTER 4 WILL A $15 MINIMUM WAGE SAVE MONEY FOR TAXPAYERS? 39 Joseph Sabia, San Diego State University and University of New Hampshire CHAPTER 5 PRICE IMPACTS OF A $15 MINIMUM WAGE 49 James Sherk, Former Research Fellow, Heritage Foundation CHAPTER 6 EVALUATING CITIES’ EXPERIENCES WITH LOCAL MINIMUM WAGES 61 Aaron Yelowitz, University of Kentucky CHAPTER 7 LABOR UNIONS’ MOTIVATIONS IN SUPPORTING $15 71 Richard Berman, Center for Union Facts CHAPTER 8 FRANCHISEES AND MINIMUM WAGE IMPACTS 75 Lloyd Corder, CorCom, Inc., Carnegie Mellon University and University of Pittsburgh CHAPTER 9 BETTER ALTERNATIVES TO RAISING THE MINIMUM WAGE 81 Andy Puzder, Former CEO, CKE TECHNICAL APPENDIX 91-109 AUTHORS’ BIOGRAPHIES 111 CHAPTER 1: MINIMUM WAGES IN THEORY AND PRACTICE MARK J. PERRY AMERICAN ENTERPRISE INSTITUTE AND THE UNIVERSITY OF MICHIGAN-FLINT hen municipalities, counties or states consider FIGURE 1. THE STANDARD ECONOMIC Wimplementing minimum wage legislation, policy- MODEL OF THE MINIMUM WAGE makers need to accurately assess the economic impacts of those proposed minimum wage laws, both while such legislation is being considered and after a minimum wage law has gone into effect. A proper understanding of the economic effects of government price controls in general, and of minimum wage legislation specifically, requires an understanding of some basic principles of economics. The goal of this chapter is to present an overview of the standard economics textbook treatment of the minimum wage and to extend that standard textbook discussion in three ways that might help policymak- ers gain a greater understanding of the possible nega- tive employment effects of a higher minimum wage. I outline what I see as three possible shortcomings of the standard economic approach to the minimum wage and propose some common sense ways to enrich, enhance and supplement the analysis of minimum wage laws. To provide a quick overview of some key econom- ic issues before discussing the details, let’s start with the standard economic analysis of the minimum wage, which helps answer the question: If the minimum wage goes up by X% or by X dollars per hour, what effect Figure 1 above represents the standard economics will that have on low-skill employment levels in a given textbook presentation of the effects of minimum wage jurisdiction? That question, and its answer, should obvi- laws that artificially raise wages for low-skilled workers ously be of great interest to policymakers considering a (to $7.25 an hour in this case) above the market-clearing new minimum wage law.