Like most state legislatures, Montana is kicking off 2021 focused on economic matters after a highly tumultuous 2020. The Treasure State is currently considering legislation that would increase the state’s minimum wage. More specifically, Senate Bill 187 proposes raising the state’s minimum wage to $12 per hour by 2024. The first round of increases would begin in 2022, raising the minimum wage to $10, followed by $11 in 2023, and eventually reaching $12 in 2024.
Every state in the union experienced a shortfall in previously projected tax revenues due to state and federally imposed lockdowns and shelter-in-place orders. Estimates of the economic impact on state government revenue in Montana forecast a drop from 15.4 percent to 18.7 percent compared to pre-COVID-19 revenue projections. Although lawmakers in Montana have done a better job than most in creating a substantial cushion in their state’s financial reserve, uncertainty over the Treasure State’s economic future has some doubting if the reserve is enough.
Therefore, it is not surprising that some Montana lawmakers are considering implementing minimum wage increases in an attempt to provide relief to their struggling constituents. However, this is a deeply flawed and ineffective way to improve the economy. Moreover, arbitrary minimum wage hikes produce unintended consequences that can inflict even more pain upon the very people they are supposed to benefit.
Minimum wage hikes rarely meet the expectations of the policymakers who advocate for them. For example, they do not raise the living standards in any appreciable way for individuals and families, yet illogical wage increases have the propensity to shutter small businesses for good. A recent study by the Congressional Budget Office, titled “The Effects on Employment and Family Income of Increasing the Federal Minimum Wage,” examines how increasing the federal minimum wage to $10, $12, or $15 per hour by 2025 would adversely affect employment and family outcomes, especially among teenagers and those at the bottom rungs of the income ladder.
According to the study, a $15 per hour minimum wage would boost the wages of 17 million workers. However, it would also push 1.3 million workers out of a job. In almost every scenario, minimum wage hikes result in some workers seeing their wages rise, while many more lose gainful employment.
Minimum wage hikes also impose a myriad of unintended consequences to all businesses, especially small businesses—the backbone of the American economy. Minimum wage increases in any state 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 less hiring, a reduction in work hours, and increasing prices for consumers. For many small businesses, a minimum wage hike will lead to bankruptcy, as they are no longer able to remain profitable due to substantially increased labor costs.
Given the struggles of small businesses over the past year, 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 temporarily closed since the start of the COVID-19 pandemic have shut down permanently.
Failed 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. Therefore, arbitrary minimum wage hikes could result in further restricting the revenue flow to the state, exacerbating the deficit caused by the coronavirus pandemic. While politically popular, the downstream effects of a minimum wage increase would certainly create long-term challenges for Montana’s budget.
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 unwise for Montana lawmakers to push minimum wage hikes, which as a function of themselves result in businesses closing and increased unemployment, especially when unemployment has skyrocketed due to the ongoing pandemic. According to a brief published by the Congressional Research Service, during the pandemic, the unemployment rate has reached catastrophic levels, unseen in decades. Even more worrisome, the U.S. labor participation rate has fallen precipitously since the onset of the pandemic. More specific to Montana, almost every major industry had less employed in 2020 due to COVID-19 contraction, with specific emphasis on food, retail, and small businesses, according to the Bureau of Business and Economic Research.
Although attempts to bolster a minimum standard of living and protecting low-skilled workers in a pandemic-world are laudable, the overall economic effects of proposed minimum wage hikes would do more harm than good in a time when every state cannot afford additional economic hardship. Arbitrary minimum wage hikes, out of sync with the laws of supply and demand, would do little to raise Montanans out of poverty while destroying jobs in the state. As such, legislators in Montana should consider all of the economic and social harm that the passing of Senate Bill 187 would inflict.
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