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DANIELS: Minimum-wage-hike proposals aren’t so simple

June 10, 2017

Daniels
I understand the sentiment—I really do.

But sometimes, those who want to better others’ lives end up actually hurting their cause.

A case in point is the push by many progressives to increase the minimum wage to $15 at the earliest possible time.

The current federal minimum wage is $7.25 per hour. Conservatives fear that raising it significantly will actually lead to job losses, as businesses could no longer afford the labor and either close or ship jobs overseas, where the labor is affordable.

Proponents suggest we can restrict the ability of companies to shift jobs elsewhere by using punitive measures; they scoff at the notion that raising the pay of minimum-wage workers will cause some businesses to go under, leading to a net entry-level job loss.

The Obama administration used an interesting mechanism to try to force all wages up. It promulgated rules relating to H2B visas for temporary foreign workers in such businesses as landscaping and entertainment, apparently as a vehicle to raise the wages of full-time workers employed in those fields. By forcing up wages for all the temporary foreign workers, generally working at the lowest pay levels, employers could also be forced to increase the pay of everyone in permanent positions in their companies to keep it above that of the lowest-paid. Employers, such as the company that runs the Indiana State Fair Midway, faced being forced to spend millions of dollars in increased wages to fair workers, leading to increased ticket prices for fairgoers.

We are now seeing some proof of what, to many, was the obvious outcome of a swift and dramatic minimum-wage increase. The Washington Examiner recently reported on a study by the Harvard Business School of the impact of recent minimum-wage hikes on the survival rate of restaurants in the San Francisco area (“Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit,” April 17).

The study found that “every $1 increase in the minimum wage leads to approximately a 4 to 10 percent increase in the likelihood” that restaurants will exit the market. Interestingly, this phenomenon does not generally affect high-end restaurants. Rather, it hurts those in the three-star range and below—the restaurants with lower margins, in which lower-income workers are more likely to find entry-level jobs. As it happens, these are also the restaurants the middle and lower economic classes are able to afford to patronize.

The study also found that higher minimum wages reduce the rate at which new restaurants open.

Here in Indiana, our minimum wage is the same as the federal minimum, at $7.25 per hour for entry-level jobs. Many entry-level jobs pay more, including city of Indianapolis jobs. Now, the Indianapolis City-County Council is proposing to increase the hourly wage to $13 for all city workers earning $9.13 to $12.98 per hour.

Mayor Hogsett, who is trying to erase a $50 million structural deficit he confronted when he took office, has requested a delay in implementation until he can get the budget under control. The council has delayed its vote on the proposal, but strong voices in that body militate for the increase, despite the obvious hole it would blow in the mayor’s efforts to balance the budget.

You can’t increase wages significantly while also erasing the deficit. What services will have to be cut, and how many workers laid off, in order to accommodate the increase?

Responsible management of scarce resources often requires hard choices. This is one of them.•

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Daniels, managing partner of Krieg DeVault LLP, is a former U.S. attorney, assistant U.S. attorney general, and president of the Sagamore Institute. Send comments to ibjedit@ibj.com.

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