Good Intentions, Bad Results

Tom Harkin’s proposal to hike minimum wage would slash 500k jobs, experts say

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March 30, 2012

A group of economists estimate that Sen. Tom Harkin's proposal to raise the minimum wage could add nearly 500,000 to the unemployment rolls.

Tucked into the Iowa Democrat’s Rebuild America Act is a provision to raise the minimum wage to $9.80 for all wage earners, a 35 percent increase from the current $7.25 level. It would also more than triple the minimum wage for tip earners, such as waiters and restaurant employees, to $6.86 from the $2.13 base pay they earn now.

Harkin said in a release that the "far reaching bill … will create jobs, restore fairness to the tax code, and rebuild America's middle class."

The Employment Policies Institute, a nonpartisan group dedicated to job growth, says that "rebuilding" would eliminate at least 467,000 jobs.

"When you raise the price of entry level labor, you create a barrier for people seeking jobs," said EPI research fellow Michael Saltsman. "When you make those employees harder to hire, businesses decide to do more with less, so people don’t get hired."

Saltsman pointed to several economic analyses that found that wage increases correspond to job losses, as businesses shed overhead in order to survive. These types of proposals, he said, often have unintended consequences.

"Grocery stores may decide to buy more self checkout counters; restaurants may do away with busboys and hire less waiters, so customer service goes down," said Saltsman, who first worked as a busboy in high school. "You end up hurting the people you are trying to help."

EPI studied the effects of the Obama’s 2010 proposal to raise the minimum wage to $9.50 per hour.

"The 467,000 job loss estimate is a conservative outlook; if businesses react strongly to the increased labor costs, we could lose as many as 1.1 million [jobs,]" Saltsman said.

There is dueling research on the subject. The Economic Policy Institute (EcPI), a nonprofit think tank that focuses on low wage earners, estimates that minimum wage increases would create as many as 100,000 jobs.

EcPI did not return calls for comment.

A Harkin spokeswoman said the bill would phase in the wage increases in order to allow employers to adjust and help lower earners catch up to today’s higher cost of living.

"The three phased increases to $9.80 are roughly consistent, percentage-wise with increases we’ve had in the past," she said. "This is still not quite enough to match historical highs—the federal minimum wage would be more than $10.00 per hour today if it had been adjusted each year since 1968 based on the Consumer Price Index."

Saltsman said such a metric is deceiving.

"You can pick your date to suit your goals … If you go by CPI from the 30s, you would find that the minimum wage would be just over $3 per hour," he said. "And if you look at the average waiter, he’s making more than $11 an hour after tips, but people still focus on the $2.13 wage."

Harkin said the bill is as much about fairness as it is about job creation.

"[The bill] will help grow the middle class in the long term by building economic opportunity for families," Harkin said in a release. "Perhaps most importantly, the bill addresses spiraling economic inequality by restoring fairness and balance to our tax code, which also fully pays for the cost of the bill."

The fight against inequality may end up hurting the young people and low-wage earners it is intended to help, according to EPI. Nearly one in four young people is unemployed, nearly three times the national average; the 2007 and 2009 minimum wage increases are partly to blame, according to Saltsman.

Economists at Miami University and Trinity University found that nearly 115,000 young workers have never been able to enter the workforce because of the $7.25 minimum wage. The workers are losing out on more than just an hourly wage.

"The vast majority of minimum wage earners get raises within 1 to 12 months of getting hired," Saltsman said. "The key to advancing beyond minimum wage is experience; by raising that standard, you are denying workers the experience they need."

Eighteen states and the District of Columbia have set minimum wages above the federal level. Washington State has the highest minimum wage at more than $9.00 per hour. All of those states would fall below the $9.80 minimum proposed by Harkin.

Several localities have a minimum wage higher than that proposed by Harkin and would be exempt. One such locality, San Francisco, recently enacted a minimum wage above $10, causing the sandwich chain Subway to cancel its "Five Dollar Footlong" special in the city.

Harkin introduced the bill on Thursday, outlining a roadmap of many favored Democratic jobs and tax policies. The bill, which is unlikely to survive either the Senate or the Republican House, would raise taxes on wealthy earners, as well as investors, pump billions into state coffers to hire teachers, budget $300 billion for infrastructure projects, and provide daycare subsidies.

The Senate will consider the bill through next week.