Would a Minimum Wage Increase Help or Hurt Workers?

By. Dr. David Mitchell and Aaron Newell

Would a higher minimum wage be a win for the little guy? Would it help families struggling to earn a living? Would companies let workers go? These are the questions in front of voters in November.

A minimum wage is a price floor for low-skilled workers. Businesses must pay at least the minimum wage. Companies can pay more, but they can’t pay less. The higher wages come out of the companies’ pockets. Minimum wages don’t affect highly skilled workers because they already earn above that amount. If you know of an experienced accountant, electrician, or software engineer working for less than $11 an hour, please let me know.

When hamburgers become more expensive you buy fewer of them. Companies do the same with workers.  Businesses will hire fewer workers or give workers fewer hours. In fact, individual data of low skilled workers in Seattle found that these workers suffered after their minimum wage hike.

When you talk to PhD economists about the minimum wage, you don’t get much disagreement on the fact that employment falls. Economists generally disagree about the size of the employment fall. The question is how many workers will lose their jobs and how many hours will workers lose. The number of hours per worker tends to fall faster than the number of workers. It is sometimes easier to cut peoples’ hours than to fire them directly.

While there is some disagreement on how many workers will lose their jobs and how many hours will be cut, previous studies involve a minimum wage between 37% and 59% of the median wage. The Arkansas median wage is $14.82. The proposed Arkansas minimum wage of $11 would be 74% of median wage. The higher the minimum wage compared to the median wage, the bigger the impact on unemployment and lost hours.

Compared to our median wage, Arkansas would have the highest minimum wage in the U.S. The median wage in Hot Springs is about $13 an hour. The proposed minimum wage would be 85% of the median wage.

When you combine the proposed minimum wage with the higher minimum already enacted in 2015-2017, we are increasing our minimum wage by 50% in six years. That’s a big jump.

Companies will be forced to make tough choices. They can cut other employee benefits including health benefits. They can stay open fewer hours to lower their labor costs. Companies can close some locations and let those workers go. A firm can require the same amount of work, but have fewer employees to share the workload. Companies can use more capital, such as self-checkout equipment, rather than hiring cashiers. Automated kiosks don’t get paid the minimum wage. Expect to hear “unexpected item in the bagging area” every time you go to Walmart. But not just Walmart, lots of stores will move quickly to automated tellers.

Of course, raising the statewide minimum wage encourages some businesses to move out of Arkansas completely, as the cost of doing business would be too high compared to neighboring states. On the other hand, it would encourage some low wage workers to move into Arkansas.

The impact on teens is especially strong. Studies show that a 10% increase in the minimum wage results in a 1 to 3 percent decrease in teenage employment.  Arkansas is proposing to increase their minimum wage by about 30%.  This large wage hike could decrease teenage employment by 9%. Employers will be less likely to hire inexperienced workers. But teens can’t become experienced without a chance at a job. This means that some teens won’t get the chance to learn the sorts of work skills they don’t teach in the classroom.

People start out as low skilled workers. Your first job flipping burgers was your entry to the economic ladder. Research suggests that higher minimum wages prevent some low-skilled workers from getting their start. This prevents them from acquiring the experience leading to higher wages in the future. These long-term effects are even more important than the short-term effects.

We have been very fortunate to go so long without a downturn in the economy. Voters should ask themselves if a minimum wage will help or hurt during the next recession. Will a recession exacerbate all of the other issues with a minimum wage?

Some workers will certainly benefit from the higher minimum wage. They will keep their job and their hours. Some workers will lose their jobs or have their hours cut dramatically. They will suffer. Some business may be forced to shut down. The question before Arkansans is whether the benefits outweigh the costs.