Wednesday, May 17, 2017

It's Just a Bad Idea

Erielle Davidson is an economic research assistant at the Hoover Institution in Palo Alto, California. In a column at The Federalist cites yet more evidence that confirms what anyone with common sense would already know, which is that raising the minimum wage mostly hurts small businesses, especially marginally successful businesses, and the often poor people they employ.

She writes:
The [Harvard] paper focused specifically upon the restaurant industry in San Francisco, using data from the review platform Yelp to track the activity and performance of individual restaurants. Researchers Dara Lee Luca and Michael Luca discovered that a $1 increase in the minimum wage leads to approximately a 4 to 10 percent increase in the likelihood of any given restaurant exiting the industry entirely. In economic terms, minimum wage hikes quicken a restaurant’s “shutdown” point.

Luca and Luca found this effect to be more pronounced among the restaurants with lower ratings while essentially nonexistent among five-star restaurants. A $1 increase in the minimum wage increased the likelihood of a 3.5-star exiting by roughly 14 percent, while having zero effects on the restaurants with five-star ratings. In other words, minimum wage hikes disproportionately affect the restaurants that are already struggling in popularity.

Why is this paper stunningly relevant? In an era where liberal-minded folks see increasing the minimum wage as a key way to equalize economic outcomes, studies such as this undercut the ignorant economics those on the Left espouse. Basic economics tell us that increasing the minimum wage will hurt not only firms by increasing their operational costs but also the very workers they presumably fire in the process to keep those operational costs down.

....This particular paper shows that not all firms adjust to hikes by merely raising the prices of the goods and services they provide or firing a fraction of their workers. Some firms shut down altogether, taking their job opportunities with them.
The research indicates that contrary to the hopes and claims of the Fight For $15 crowd and the Black Lives Matter movement raising the minimum wage has a negative effect on minority earning power:
Economists have found minimum wage hikes to be unhelpful in reducing inequality and [are often] followed by more low-income workers being laid off, a great number of whom are people of color. The first of a series of scheduled minimum wage hikes in Seattle in 2015 resulted in a 1 percent drop in the employment rate of Seattle’s low-wage workers and preceded the worst job decline for the city since the 2008-09 recession.

According to a 2014 report, only 17 percent of Seattle workers previously making under $15 per hour before the hike were white. The rest were Asian (20 percent), Black (28 percent), and Hispanic (22 percent). Undoubtedly, these folks were disproportionately hurt by the reduction in employment that followed the hikes.

While “racial and economic justice” through forced minimum wage hikes sounds appealing, it just doesn’t work the way its supporters suppose. In fact, quite the opposite. Slapping a $15 minimum wage requirement on a large corporation might “feel good” to angry workers, but those very workers are ultimately the ones who will pay the price.
There's more in Davidson's article at the link. The minimum wage issue is an example of people wanting to implement an easy measure to help the poor without any thought to the consequences of their action on the people it's supposed to help. It's ironic that many of the people fighting the hardest to raise the minimum wage are the very people who'll find themselves out of work when it's imposed. San Francisco is raising their city-wide minimum wage this summer, so it'll be interesting to see what happens to the low-wage employment numbers in the city when they do.