Like most state legislatures, Missouri is kicking off 2021 focused on economic matters after a highly tumultuous 2020. The Show-Me State is considering legislation that would increase the state’s minimum wage. More specifically, House Bill 1051 proposes raising the state’s minimum wage to $15 per hour by 2026. The newly proposed legislation would raise the minimum wage from $10.30 per hour by $1 per year, until it reaches $15 by January 1, 2026.
Every state has experienced a shortfall in previously projected tax revenues due to state and federally imposed lockdowns and shelter-in-place orders. In addition, the number of Americans and Missourians that have been financially strapped by the shutdown is staggering.
Therefore, it is not surprising that some Missouri lawmakers are considering implementing a minimum wage hike in a feeble attempt to provide relief to their besieged constituents. However, this is a deeply ineffective way to improve the economy. Moreover, arbitrary minimum wage hikes produce unintended consequences that often inflict even more pain upon the very people they are supposed to benefit. In almost every scenario, minimum wage hikes result in some workers seeing their wages rise, while many more lose gainful employment.
Economists Grace Lordan and David Neumark showcase the effects of minimum wage hikes in relation to the increase of automation as a replacement for people in low wage jobs in their working paper, People Versus Machines: The Impact of Minimum Wages on Automatable Jobs. Lordan and Neumark find that raising the minimum wage increases the likelihood that low-skilled workers may become unemployed or employed in inferior jobs, based on data collected from 1980 to 2015.
At the national level, a recent report from the Employment Policies Institute (EPI) found that a minimum wage of $15 per hour would cost the U.S. economy two million jobs when analyzing the economic effects of a federal $15 per hour minimum wage. The EPI study notes that of those two million, the jobs most likely to vanish are those in the restaurant and hospitality industries. Considering that these two sectors were decimated by the pandemic, this would be a foolish decision. Forcing businesses in these industries, particularly small businesses, to drastically raise their labor costs would devastate the few that have hung-on during this harrowing period.
While minimum wage hikes inflict a myriad of unintended consequences upon all businesses, their effects are exacerbated when it comes to small businesses—the fulcrum of the American economy. In Missouri, a minimum wage hike would force businesses to reallocate their costs to cover the increase in employees’ wages, ultimately forcing them to alter spending elsewhere to offset their newly increased labor costs. More times than not, this results in reduced hiring, a reduction in work hours, and increased prices for consumers. This is often the small margin between staying open and bankruptcy for small businesses, which typically operate on slim margins to begin with.
As aforementioned, every state experienced some degree of state and federally imposed lockdowns and shelter-in-place orders due to the coronavirus pandemic, which sent shockwaves throughout the small business ecosystem that are still being reconciled. Therefore, a minimum wage hike in 2021 could not be more ill-timed. In an analysis based on self-recorded closures in their database, Yelp estimates that 60 percent of U.S. businesses that have closed since the start of the COVID-19 pandemic have shut down permanently.
Furthermore, closed businesses don’t pay property taxes, income taxes, sales and use taxes, and the dozens of other licensing and regulatory fees that governments rely on for revenue. Thus, minimum wage hikes, like the one being considered in Missouri, could result in further reducing the revenue flow to the state coffers, exacerbating the budget shortfall caused by the pandemic. While seemingly politically popular, the downstream effects of a minimum wage increase would certainly create more challenges for Missouri’s budget over the long term.
Minimum wage hikes are never a viable economic solution. A 2007 study from economists at the University of California-Irvine and the Federal Reserve Board comprehensively examined the body of work on the subject and found 85 percent of the studies they considered credible demonstrate minimum wage hikes cause job losses for less-skilled employees. Furthermore, a 2010 study by economists at Cornell University and American University found no reduction in poverty in the 28 states that raised their minimum wage laws from 2003 to 2007.
It is disingenuous for Missouri lawmakers to push minimum wage hikes, which routinely result in business closings and increased unemployment, especially when unemployment has skyrocketed due to the ongoing pandemic. According to Wallethub, Missouri experienced a 68.9 percent increase in unemployment from December 2019 to December 2020.
Although attempts to boost a minimum standard of living and protecting low-skilled workers in a pandemic-world are praiseworthy, the evidence is clear: minimum wage hikes accomplish neither of these objectives. Raising the state’s minimum wage to $15 per hour would do little to elevate residents of Missouri from poverty while annihilating entry-level jobs and small businesses throughout the state. As such, legislators in Missouri should consider all of the economic harms and social disenchantment that House Bill 1051 would inflict upon the Show-Me State.
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