No Free Lunch With Proposed $15 an Hour Minimum Wage


Last Fall, New Jersey Governor Chris Christie vetoed a proposal to raise the state minimum wage by 79 percent to $15 an hour. This is just one of many proposals being floated by the Working Families agenda as well as a number of left-leaning policy groups in their effort to secure a $15 per hour national statutory minimum wage.

The policy debate so far has been one of dueling economists, with some suggesting that the increase would have a minimal impact on employment, with others claiming that there would be dramatic job losses. A fact check done by Politifact last May (http://www.politifact.com/truth-o-meter/article/2016/may/09/fact-checking-minimum-wage-debate/) goes down this rabbit-hole with quotes from numerous economists at universities and think-tanks droning on about whether a statutory minimum wage of this or that amount would impact jobs.

While the effects of a high minimum wage on employment is an important question, it is not the most important one and the effects of a high minimum wage are obvious to anyone who has ever shopped for groceries. The simple truth is that every increase in the minimum wage, be it a nickel, a dollar or five dollars, is paid out of the pockets of consumers (particularly senior citizens on fixed incomes), and the paychecks of workers.

To study this issue for the food retailing industry in New Jersey, we constructed a detailed micro model of the shopping patterns and cost structure for each and every food retailer in the state. In the case of New Jersey, a $15.00 per hour minimum wage would increase the average wage of a worker in a supermarket from the current $12.25 an hour - $13.48 after taxes are included - to about $21.00. That's a 56 percent increase and the money is not coming from the Legislature, but rather from shoppers and workers themselves.

Simply put, were the entire increase to be passed through to consumers, they would ultimately purchase less groceries. As prices go up, people purchase less. This is as true of food as it is of cigarettes or beer or any of the other myriad products that states levy taxes on to reduce demand. In fact, the minimum wage acts no differently than a tax that is earmarked to support the workforce.

Like all taxes a statutory minimum wage has unintended consequences that result from the way it is passed through - what economists call tax incidence. In the case of a $15.00 minimum wage in New Jersey, we found that there would indeed by job losses (we found that food retailing employers would be forced to reduce employment be nearly 17 million work hours each year). One can legitimately argue whether or not this would come through an elimination of jobs, or whether full-time workers would be transferred to part-time status, but retailers would reduce employment because they would be selling less stuff.

More importantly, the money for the higher wages that supporters claim will help make 975,000 New Jerseyans better off, will come from the pockets of 8.9 million residents who will be forced to pay more for groceries, clothing, gasoline, restaurant meals, dry cleaning and a myriad of other goods and essential services. In particular, the price tag of a $15 minimum wage in increased costs to consumers, just for groceries, is nearly $294 million per year. A detailed analysis of who purchases what in grocery stores found that seniors age 55 and above, many of whom are on fixed incomes, would bear 40 percent of these increased costs to the tune of nearly $125 million. Basic necessities, such as toilet paper, would increase in cost by as much as 19 percent.

This is not some sort of magical analysis but rather simple economics. And it has been borne out over the years. Since 1990, New Jersey has increased its minimum wage six times, not including the two times when the Federal minimum wage was adjusted. This is one factor that has led to slow employment growth in the Garden State. Had New Jersey kept its minimum wage more in line with the Federal standard and many of its peer states, the State could have created 620,000 more jobs over that twenty-six-year period than it actually did. To put this into context, had employment in New Jersey just grown at the same rate as jobs grew nationally, nearly as many new jobs would have been created than the entire employment base of Philadelphia, or Austin or Minneapolis.

There is simply no free lunch when it comes to economic policy on forced wage increases. From a clear economic perspective, higher minimum wages lead to four things: Lower sales for retailers, higher grocery prices for consumers, fewer employment opportunities for workers and greater burdens on seniors and others on fixed incomes.

_______________________

John Dunham and Associates (JDA) is one of the newest FIAE affilliate members. They are a leading New York City-based economic consulting firm specializing in the economics of fast moving issues. JDA is an expert at translating complex economic concepts into clear, easily understandable messages that can be transmitted to any audience. Our company's clients include a wide variety of businesses and organizations, including some of the largest Fortune 500 companies in America, such as:

  • Altria

  • Diageo

  • Feld Entertainment

  • Forbes Media

  • MillerCoors

  • Verizon

  • Wegmans Stores

For more information please contact JDA at (212) 239-2105.

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