A terrible time for a minimum wage increase

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President Biden has proposed doubling the federal minimum wage from $ 7.25 an hour to $ 15 an hour. Democrats are pushing to include their $ 1.9 trillion relief bill increase debated in Congress. But with millions of unemployed and struggling small businesses, now would be a terrible time to impose such an expensive mandate.

Biden’s wage directive would eliminate jobs for younger, less-skilled workers whose economic contribution is worth less than $ 15 an hour. There is debate over the extent of possible job losses, but the Congressional Budget Office estimated that a federal minimum of $ 15 would cost 1.3 million jobs.

Biden campaign website promised it would create jobs for young adults to “achieve full employment as quickly as possible”, but his minimum wage plan would do the opposite. Workers aged 24 or under are 58 percent minimum wage workers. They need entry-level jobs to start moving up the career ladder, but raising the minimum wage would break the lower steps.

During the pandemic, more low-paying jobs disappeared that well paying jobs. A labor statistics office Analysis found that “occupations with lower wages are more common in closed sectors than elsewhere in the economy.” Thus, Biden’s salary mandate would particularly hurt those parts of the economy damaged by the crisis.

Biden too promised, “Building back better means helping small businesses and entrepreneurs emerge strong from this crisis. But again, Biden’s minimum wage plan would do the opposite. Many small businesses are suffering from declining revenues and higher security costs due to the pandemic, and they cannot afford a sharp increase in labor costs.

Small businesses tend to have lower wage structures than large businesses. Average salary in private sector establishments with less than 100 employees are twice as low as in establishments with more than 1,000 employees. Almost half minimum wage workers are employed in companies with fewer than 100 employees. This means that an increase in the minimum wage would particularly hit small businesses.

A statistic Analysis by Sudheer Chava, Alexander Oettl and Manpreet Singh examined minimum wage increases and small business finances. They found that “increases in the minimum wage … lead to lower bank credit, higher defaults, lower employment, lower entry and higher exit rate for small businesses.” The exit rate refers to the closure of businesses.

Over time, small businesses would adjust to a higher minimum wage by cutting low-skilled jobs, replacing workers with machines, cutting benefits, raising prices, and other changes. But in the short term, a salary mandate would be a blow to the finances of many small businesses, and that would be after small businesses took the lead. the biggest of recession.

Looking ahead, we need a wave of business start-ups to fill the void of jobs and production lost as a result of the recession. We need, for example, more than 110,000 restaurant startups to replace restaurants that have closed in the past year. But an increase in the minimum wage would undermine corporate efforts by making restaurants and other startups more expensive.

A statistic study by Xiaohui Gao found that minimum wage increases reduce the survival rate of start-ups. The problem noted by Gao is that “new and start-up companies tend to have a labor force with [a] higher proportion of workers at minimum wage. They often tend to operate with slim or even negative profit margins, leaving them exposed to mandatory increases in labor costs during their early years. “

The damage to small businesses and job opportunities caused by Biden’s proposal would vary from state to state due to very different economic structures. In 2019, average hourly wage in Massachusetts at $ 31.58, for example, were 64 percent higher than average wages in Mississippi at $ 19.27. A uniform minimum wage imposed in all states with such different wage levels makes no sense.

States are free to impose higher minimum wages themselves, and 29 states currently have rates higher than the federal minimum. All states could impose a $ 15 wage rate if they wanted to, but most chose not to. There is no reason to think that federal rulers have better judgment than state rulers about their own economies, so there is no basis for overriding state choices.

In summary, Biden’s national salary mandate makes no sense in such a diverse country, and it makes even less sense right now as the country desperately needs small businesses to create new jobs for millions of workers. displaced. We all wanna get back to the broad base Income the growth and historic decline in poverty that we enjoyed before the pandemic, but which was based on market-led growth, not federal interventions.

Chris Edwards is the Director of Tax Policy Studies and Editor-in-Chief of DownsizingGovernment.org at the Cato Institute

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