HERITAGE FOUNDATION – Raising Minimum Starting Wages to $15 per Hour Would Eliminate Seven Million Jobs

Prominent Members of Congress have proposed raising the minimum wage to $15 per hour, more than doubling the federal minimum wage. States with lower costs of living would see an even greater real increase. At the state level, the minimum wage would cover one-third of wage and salary workers. The new minimum-wage legislation, including payroll taxes and the employer mandate, would increase the minimum cost of hiring a full-time worker to $18.61 per hour.


Businesses would respond to these higher labor costs by reducing employment of affected workers by over one-sixth, thus eliminating approximately seven million full-time-equivalent (FTE) jobs by 2021. Forcing employers to pay starting wages of $15 per hour would make many less skilled workers unemployable.


Growing Support for $15-an-Hour Starting Wages


A $15-per-hour minimum wage was once a fringe idea. Politicians of every ideological stripe agreed that raising starting wages that high would eliminate too many job opportunities. Nonetheless, recent, union-backed campaigns have pushed the idea into the mainstream.


The California and New York legislatures recently passed bills raising minimum starting wages in their states to this level.[1] Several cities, including Washington, DC, have also passed $15-per-hour minimum wages.


In Congress, Senator Bernie Sanders (I–VT) has introduced the Pay Workers a Living Wage Act, which would raise the federal minimum wage from $7.25 per hour to $15.00 per hour over four years.[2] Prominent Senators, including Assistant Minority Leader Dick Durbin (D–IL), have co-sponsored this bill. The Democratic Party has formally included a $15-per-hour minimum starting wage in its 2016 campaign platform.[3]


Since the $15-per-hour minimum wage was a fringe proposal, it received relatively little empirical examination. Economists widely agreed $15 was too high, and instead examined smaller increases that actually had political support. This Issue Brief fills that gap, examining how a $15-per-hour federal minimum wage would affect workers.


Unprecedented Increase


If Congress passed the Pay Workers a Living Wage Act in 2017, the federal minimum wage would rise to $15 by 2021 (equal to $13.80 in 2016 dollars).[4] In contrast, adjusted for inflation, the federal minimum wage has never stood higher than $8.55 per hour.[5] No state has increased starting wages above $10.00 per hour. (The California and New York increases have not yet taken full effect.)[6] Raising minimum starting wages this high has no historical precedent.


Table 1 shows how raising the federal minimum wage to $15 per hour in 2021 would directly affect one-third of wage and salary workers (44.9 million employees).[7] Lower-wage jobs are more likely to be part-time than higher-wage positions, so the increase would affect a somewhat smaller proportion (28.2 percent) of total hours worked in the economy. Those work hours still represent 37.5 million FTE jobs.[8] These numbers do not include “spillover effects” from near-minimum-wage employees getting raises to maintain pay differentials.


At the $15-per-hour level, minimum starting wages would affect a greater proportion of workers than ever before. Chart 1 shows the proportion of workers directly affected by the minimum wage by state and year, along with average coverage across the U.S.[9] Federal and state minimum wages typically cover between 4 percent and 10 percent of the workforce. At present, 5.5 percent of workers across the U.S. make the minimum starting wage. In the late 1970s and early 1980s, the federal minimum wage briefly covered as many as one in five workers in some Southern states with low costs of living (Mississippi, Arkansas, and Alabama).


Chart 1 also shows how raising the minimum wage to $15 per hour using the schedule proposed by Senator Sanders would bring it to cover one-third of the workforce.[10] The minimum wage has never before come close to covering such a large share of workers. Whether expressed in real dollars or as a proportion of workers directly affected, no state has experienced minimum starting wages this high.


Larger Impact in Areas with Lower Living Costs


A $15 federal mandate would have a greater effect in states with lower costs of living. Employers in lower-cost areas generally pay lower wages, although those wages purchase more goods and services than they would in high-cost areas.[11] The federal minimum wage ignores these regional living cost differences. Thus, employers in Mississippi or Ohio would have to pay the same starting wages as employers in California or New York—even though those wages purchase considerably more goods and services in low-cost areas.


A federal minimum-wage increase disproportionately affects states with lower living costs. Map 1 shows the value of $15 per hour, relative to living costs in the state with the highest living costs (Hawaii). As the map illustrates, living cost differences considerably affect effective wages. A minimum starting wage of $15 per hour has similar purchasing power in high-cost states like Hawaii, New York, and California. However, it would take approximately $20 per hour in Hawaii to purchase the same goods and services that $15 per hour buys in low-cost states like South Dakota, Arkansas, or Alabama.


Employer Costs Would Rise Above $15


Raising minimum starting wages to $15 per hour would actually raise hiring costs well above $15 per hour. The Affordable Care Act (Obamacare) requires most employers with 50 or more employees to offer full-time workers qualifying health coverage.[12] Failing that, they must pay a per employee penalty (after the first 30 workers) out of after-tax dollars.[13] The penalty currently stands at $2,160 per employee and is projected to rise to $2,886 by 2021.[14] This equates to a $4,731 increase in pre-tax payroll costs[15]—$2.27 per hour for a full-time worker.[16]


These costs come on top of other government mandates. Businesses must also pay the employer share of payroll taxes and unemployment insurance (UI) taxes. Businesses normally defray these costs by reducing workers’ wages by an offsetting amount. However, employers cannot reduce the pay of minimum-wage employees, so they must pay these payroll costs themselves or forgo hiring.


Chart 2 shows the minimum costs of hiring a full-time worker in 2021 under current federal and state laws. Under current law minimum hiring costs will stand at $12.84 per hour.[17] This includes the effect of states like California and New York raising their minimum wage, as well as payroll and UI taxes and the Obamacare mandate.


If Congress raises the federal minimum wage to $15 per hour, minimum hiring costs will rise to $18.61 per hour. That figure includes:

  • $15.00 for the minimum wage,
  • $0.19 in unemployment insurance taxes,
  • $1.15 in payroll taxes, and
  • $2.27 per hour in Obamacare penalties.
  • Government mandates add at least $3.61 to employers’ full-time hiring costs, although employees do not see those costs in their paychecks.


    Hurting Less Skilled Workers


    Raising minimum starting wages to $15.00 would badly hurt many workers. Companies hire workers when the additional earnings their labor creates exceeds the cost of employing them. Starting wages of $15.00 per hour mean full-time employees must create at least $38,700 a year in value for their employers. Such a high hurdle would make it much harder for less experienced and less skilled workers to find full-time jobs. Many of these workers are not yet productive enough to create that much value for their employers, and businesses will not hire them at a loss.


    Moreover, Senator Sander’s legislation does not establish lower starting wages for youth; it covers everyone irrespective of age. This lack of distinction would make it particularly difficult for younger workers to find entry-level jobs. Most teenagers lack the skills necessary to produce over $15 per hour in additional earnings for their employer.[18]


    Even Liberal Economists Agree $15-an-Hour Mandate Hurts Workers
    Raising starting wages to $15 per hour has gained political support. However, even liberal economists widely agree it would hurt workers. Princeton economist Alan Krueger, the former Chair of President Obama’s Council of Economic Advisers, explained that “a $15-per-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences…. [T]he push for a nationwide $15 minimum wage strikes me as a risk not worth taking.”[19]


    Harry Holzer, a senior researcher affiliated with both the Brookings Institution and the Urban Institute, who previously served as the chief economist in the Labor Department under President Clinton, also opposes a $15 minimum wage:

    [S]uch increases are extremely risky. In job markets where young or less-educated workers already have difficulty finding jobs and gaining important work experience, such mandates will likely make it much harder…. Many employers will be very reluctant to pay high wages to workers whose skills—including the ability to speak English, in the case of many immigrants—are so modest.[20]
    These views appear widespread among liberal economists, although many have kept quiet about their reservations. Dylan Matthews, a writer for the liberal news site Vox.com, recently wrote he had observed “[o]ne really fascinating phenomenon: left-wing economists saying off the record that $15/hr is super-dangerous, but not saying that publicly.”[21]

    Wage Mandates Eliminate Jobs


    Economists have good reason for these reservations. If Congress passed a $15 federal minimum wage, employers would have to increase affected workers’ wages by an average of 27.4 percent.[22] Additional raises are likely for workers currently making near $15 per hour.[23] Quantifying the magnitude of these “spillover” effects, however, is highly subjective.[24] Wages will almost certainly increase more than the minimum necessary to comply with the law, but predicting how much more is difficult.


    Increasing starting wages to $15 per hour would eliminate jobs and reduce hiring. When a good or service becomes more expensive, consumers buy less of it. Employers react the same way when wages rise. If Congress raised minimum starting wages to $15—and total hiring costs to $18.61 per hour—businesses would respond by eliminating positions, cutting hours, and looking for new ways to implement labor-saving technology. Some companies might have to face shutting down or leaving America entirely to cope with the additional expenses.


    In fact, that process has already begun in California. Shortly after Los Angeles raised its minimum wage to $15 per hour, American Apparel eliminated 500 clothing manufacturing jobs in the city. The Los Angeles Times reports the company planned to relocate those jobs within California. After California raised minimum starting wages statewide, however, American Apparel began examining options to move production outside California.[25]


    Seven Million Jobs Lost


    Existing minimum-wage studies shed little light on the total number of jobs a $15 mandate would cost. Those studies examined much smaller minimum-wage increases that affected relatively few workers. Most of these studies look at just teenage employment or the restaurant sector—the only sectors significantly impacted by the increase. They provide little guidance on the effects of a minimum wage covering one-third of the workforce.


    However, economists have extensively studied how businesses respond to higher wages overall, not just minimum-wage increases.[26] On average these studies find a 10 percent increase in labor costs causes firms to reduce employment of less-skilled workers by 6.8 percent in the long run.[27] This is not a precise estimate—some studies find greater job losses, others find lower. This average does indicate, however, the approximate magnitude of job losses that occur when labor costs rise.


    These studies imply that if Congress raised starting wages to $15 employers would reduce employment of affected workers by approximately 19 percent.[28] That represents about 6.9 million fewer FTE jobs in the U.S. by 2021.[29] These job losses come on top of jobs lost by state-level minimum-wage increases. The Pay Americans a Living Wage Act would prevent seven million workers from getting paid anything.


    Conclusion


    Raising minimum wages to $15 per hour has quickly gone from a fringe idea to a serious policy proposal. Such an increase would bring the federal minimum wage into uncharted territory. At that level, the minimum wage would cover one-third of the U.S. workforce—37.5 million FTE jobs. The increase would have particularly large effects on states with lower costs of living. Including the cost of mandatory employer taxes, minimum hiring costs for a full-time worker would rise to $18.61 per hour.


    Such a large increase in starting wages would make it difficult for less skilled workers to find jobs. Employers will not pay workers more than the value they produce. Employers would respond by reducing employment of affected workers by approximately one-fifth, eliminating roughly seven million FTE jobs.


    Source: James Sherk (@JamesBSherk)of the Heritage Foundation. Image via PBS.


    James Sherk is Research Fellow in Labor Economics in the Center for Data Analysis, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.


    You can find a detailed list of references and appendix here.