A Year After Alabama Rejects Hike, Negative Effects of High Minimum Wage Shown

Fast food workers protest McDonald’s, push for higher minimum wage. (Flickr user Light Brigading)

A little over a year ago, Alabama passed a law that blocks cities from imposing minimum wage hikes shortly after Birmingham tried to raise its minimum wage to $10.10 per hour. But across the country in Washington, the city of Seattle raised its minimum wage to $15 per hour and is now seeing negative economic side-effects.

The Washington Post reports that Seattle employers have fought back against the gradual raising of the minimum wage by cutting their payrolls, putting off new hiring, reducing hours, and letting their workers go. The city-commissioned study from the University of Washington has been backed up by the researchers at FiveThirtyEight and reveals that government intervention into the economy often has unintended consequences.

“The goal of this policy was to deliver higher incomes to people who were struggling to make ends meet in the city,” said Jacob Vigdor, a University of Washington economist who helped craft the study. “You’ve got to watch out because at some point you run the risk of harming the people you set out to help.”

According to the study, the costs of low-skilled workers outweighed the benefit by a margin of three to one. While some employees at large companies are now getting paid the city-mandated wage of $13 per hour, there are many people now making $0 per hour instead. In total, the study estimates the average low-wage worker in Seattle lost $125 a month because of the hike in the minimum.

But Seattle’s experience is nothing new. Several states across the country have already forced employers to pay more, with California and New York demanding wages as high as $15 per hour. While well intentioned, economists have found evidence that minimum wage laws have little overall effect on poverty rates, and in some cases, the laws have adverse effects on the poor.

In a 2007 peer-reviewed study conducted by economics professors from Cornell University and San Diego State University, researchers examined U.S. Census data from 1979 to 2003 to estimate the effects of minimum wage increases on state poverty rates. According to one of the designers of the study, they “found no evidence that minimum wage increases were effective at reducing overall poverty rates or poverty rates among workers.”

Similar studies from The Cato Institute show that minimum wages create serious disincentives for employers to eliminate and replace low-skilled labor.

Many major chains such as McDonald’s, Wendy’s, and Panera Bread, have heavily invested in kiosks that will replace hourly low-skilled workers. Business Insider recently chronicled the shift from man to machine and noted that executives are explicit as to their motivation. “If you’re making labor more expensive, and automation less expensive — this is not rocket science,” said Andy Puzder, the CEO of Carl’s Jr. and Hardee’s.