March 3, 2014

Minimum-Wage Hike Would Hurt Pennsylvania

Keith Hall

Former Senior Research Fellow

Robert Greene

Luce Scholar, FinTech, Henry Luce Foundation
Summary

President Obama recently chose Pennsylvania to tout his executive order raising the minimum wage for federal contractors. This comes as no surprise, considering a recent Franklin and Marshall poll finds one-third of Pennsylvanians view unemployment and the economy as the state's most important problem.

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President Obama recently chose Pennsylvania to tout his executive order raising the minimum wage for federal contractors. This comes as no surprise, considering a recent Franklin and Marshall poll finds one-third of Pennsylvanians view unemployment and the economy as the state's most important problem.

Pennsylvania desperately needs new jobs. In fact, fewer exist in the state today than before the Great Recession began six years ago. The state is also experiencing extremely slow wage growth, contributing to rising income inequality.

Higher-paying jobs, and more of them, would undoubtedly help low-income Pennsylvanians. Unfortunately, raising the minimum wage - at the national or state level - will not achieve this goal.

A significant amount of economic research, including a brand-new report by the nonpartisan Congressional Budget Office (CBO), finds that raising the minimum wage benefits some workers at the expense of jobs for others, namely the least skilled and experienced. In fact, CBO's report reveals that raising the national minimum wage to $10.10 could lead to 500,000 jobs lost.

There is a genuine risk that a higher minimum wage will slow Pennsylvania's already-weak labor market recovery, disproportionately hurt its youth, and - ironically - increase income inequality. To understand why, take a deeper look at Pennsylvania's labor market picture and who would be affected by a minimum-wage increase.

Pennsylvania's labor market is still recovering from the Great Recession. In 2013, its unemployment rate was 7.5 percent, compared with 4.4 percent in 2007. Worse, the state's pace of recovery is anemic compared with the rest of the nation. Over the past four years, jobs grew just 3.3 percent - or just over half the national average.

In conditions like this, businesses struggle to stay afloat. Raising hiring costs for less-skilled workers forces businesses to find substitutes. They may shift employment to higher-skilled workers or replace employees with rapidly advancing technology like automated checkout registers. And, of course, they may move jobs to other states.

Young Pennsylvanians are hit the hardest by a higher minimum wage. An increase is most likely to affect those making the "near-minimum wage," between $7.25 and $8.25 per hour - and more than half are under 25 years old. In 2013, unemployment among that age group was already at 15.3 percent - more than double the state average. (A recent Mercatus Center study by Antony Davies found that raising New Jersey's minimum wage would increase unemployment for young workers without a high school education by two percentage points.) By denying them work experience, a higher minimum wage inhibits the ability of young people to pursue long-term careers and start independent lives.

There is an often-invoked image of thousands of families living in poverty and trying to survive on a single minimum-wage income. In reality, a majority of Pennsylvania's minimum- and near-minimum-wage earners reside in households with an annual income above $40,000 a year. One in five come from households making more than $100,000 annually. Further, most working-age people living in poverty didn't log a single hour of work over the prior year. They need jobs.

Granted, there are some people trying to support families on low-income jobs. But by raising the costs of employing them, a higher minimum wage could endanger the job of any low-skilled worker. Fortunately, it is possible to raise wages and increase hiring at the same time. Pennsylvania need only reform the policies stunting demand for labor and slowing wage growth.

For example, Pennsylvania should lower its corporate income tax rate, which is arguably the highest in the world. International Monetary Fund economists conclude that these taxes have a highly negative impact on economic growth. A one-percentage-point drop in the state's corporate tax rate would likely increase annual economic growth by 0.1 to 0.2 percent. This would make the state more competitive with neighboring Ohio - which has no such tax - and Maryland, New York, and New Jersey - which all have lower rates. Higher economic growth boosts wages and employment.

Pennsylvania should also consider freeing its workers from costly required unionization. Studies link right-to-work laws with higher levels of employment and economic output. Much like corporate tax reform, this would increase the state's competitiveness and bring in more jobs.

Pennsylvanians are right to be concerned about the health of their labor market. But adding a higher minimum wage to a cocktail of antigrowth policies would extend the Keystone state's labor market hangover. In doing so, it would further deprive some of the state's most vulnerable workers of gainful employment.