Minnesota's Minimum Wage Hike May Be Particularly Harmful

Minnesota’s minimum wage just went up to $9 per hour, the second hike in a series of increases passed by lawmakers in 2014. Next August the state’s minimum will increase again to $9.50 per hour, and after that annual increases will be tied to inflation.

That last bit may be what makes Minnesota’s  minimum wage hikes more pernicious in terms of economic impact than others.

Opponents of minimum wage hikes argue that it inflates the cost of labor and results in fewer jobs, particularly for low-wage workers. Proponents dispute this claim, pointing to empirical studies which show little impact from minimum wage hikes on jobs.

But the problem with measuring the impact of minimum wage policy in the United States is that, historically, the hikes have been effectively temporary because of inflation. As an example, if you raise the minimum wage $0.50 per hour the economic impact of that increase would be obviated by the declining purchasing power of the wage. Put simply, raising someone’s wage from, say, $6.50 per hour to $7.00 per hour is only going to be a temporary increase because eventually the higher wage will be worth the same as the lower wage in terms of purchasing power.

What’s different about more recent minimum wage policy, like Minnesota’s, is that the wage increase is effectively permanent because it gets tied to inflation. Proponents of the policy no doubt see that as a feature. Those who fear the economic impact of permanently inflating labor costs see it as a problem.

The latter seem to have the right of it. And those pointing to a failure of minimum wage policies to spur job losses have it wrong too. The impact of minimum wage policy is long-term, not short term. From The Economist:

Studies typically hunt for a fall in employment in response to a minimum-wage increase. But if the increase affects the rate of growth in employment, rather than the level, differences would appear slowly over time. Standard measures would struggle to pick up this more subtle effect.

Their results suggest that a 10% increase in the minimum wage, made permanent by linking it to inflation, could cut job growth by 0.3 percentage points a year. Over a long period, this could amount to a very large difference indeed, though the authors stress that such long-run extrapolations are difficult given the limited experience of such permanent changes.

One could perhaps argue that the sluggish economic recovery after the 2008-2009 recession had a lot to do with the 23 percent increase in the federal minimum wage passed by Congress from $5.85 per hour in 2007 to $7.25 per hour in 2009. Particularly when you consider that unemployment rates among teens – typically entry-level workers of the sort of command the minimum wage or near to it – have suffered particularly high levels of unemployment.

Really, what good ever comes from price controls?