Raising the minimum wage is one of the most popular ways to fight poverty. It’s also one of the worst.
Even in conservative states like Missouri, the concept of raising the minimum wage is very popular. Missourians have passed ballot initiatives raising the minimum wage in 2006 and 2018, each by substantial margins. They’ll have the chance to do it again this November, with a ballot measure that would raise the minimum wage from $12.30 to $13.75 next year and raise it to $15 in 2026.
In theory, these reforms sound great. Hard-working employees get more money — an urgent need as the cost of living has risen over the past few years.
The problem here isn’t with the intent, but with the practical consequences. Raising the minimum wage will cost companies more money, and that money has to come from somewhere. When the government forcibly increases the cost of labor, companies can’t simply absorb it, so they respond by reducing employees’ hours and benefits, converting full-time staff to part-time, or laying off workers altogether.
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Raising the minimum wage would thus increase poverty, not reduce it.
The disemployment effects of the minimum wage are well-documented. In their 2022 systematic review of minimum wage research, economists David Neumark and Peter Shirley concluded that evidence from minimum wage studies conducted over the previous three decades “points strongly toward negative effects of minimum wages on employment of less-skilled workers.”
Last year, in a written testimony to the Missouri secretary of state, Elias Tsapelas of the Show-Me Institute estimated that a minimum wage hike could cost as many as 12,000 jobs immediately.
Some companies that employ minimum wage workers would certainly cut jobs, though not all of them. Restaurants need a certain number of cooks to prepare food, and stores need folks to stock shelves, so laying off workers isn’t an option if these businesses want to continue operating efficiently.
Instead, as recent research has shown, businesses offset minimum wage increases by hiring more part-time workers, while reducing their total hours so that they won’t be eligible for costly benefits.
In 2021, a group of Business Management researchers looked at how companies responded to minimum wage hikes in California over the course of three years. They found that “for every $1 increase in minimum wage, the percentage of workers working more than 20 hours per week (making them eligible for retirement benefits) decreased by 23.0%, while the percentage of workers with more than 30 hours per week (making them eligible for health care benefits) decreased by 14.9%.”
The same study also revealed that, because companies reduced hours for individual employees, “total wage compensation of an average minimum wage worker in a California store actually fell by 13.6%.”
It’s no wonder that most economists warn voters against raising the minimum wage. A 2022 survey conducted by the Institute of Labor Economics found that, of the 160 economists who responded, 71% agreed that it would lead to job losses in the hospitality industry. 39% of the economists surveyed said that a $15 minimum wage would increase poverty.
Nonetheless, many self-proclaimed “pro-labor” activists seem to believe that the only way to get companies to pay their employees more is if the government forces them to.
Commenting on a fast food workers strike in St. Louis, the editor of the Labor Tribune writes that prices for everything have been going up for more than a decade, except for the price of workers’ labor. This is false on two counts: not only did the minimum wage increase in 2018, wages for fast food workers have actually gone up even further.
According to the Missouri Economic Research and Information Center, the average fast food cook made $9.05 an hour in 2014. By 2023, cooks earned an average of $13.86 an hour — a nearly 35% increase (19% after adjusting for inflation). Workers in other traditionally low-wage occupations also saw their incomes rise. Inflation-adjusted hourly wages for retail cashiers, for example, went up by 15% over the same period.
In a mostly free and dynamic economy, wages tend to go up over time. But when voters or politicians try to interfere and speed up this process by mandating even higher hourly wages, it is workers who end up paying the price.