Advocates for increasing the minimum wage often believe that it will help the poor, but perhaps one of the clearest examples of good intentions leading to unintended consequences is the minimum wage standard. While it may sound appealing to instantly lift the poor out of poverty with a wave of the hand, the reality in a world of limited resources makes this highly improbable. In fact, raising the minimum wage often puts many low-income workers in a tougher spot and can lead to an increase in unemployment rates. A recent study on the minimum wage increase in California once again confirms this point.
Recently, three professors, Jeffrey Clemens, Jonathan Meer, and Olivia Edwards, wrote a working paper for the National Bureau of Economic Research (NBER), revealing some of the negative impacts of minimum wage laws.
Their study analyzed a law in California in 2023 that raised the minimum wage for restaurants with at least 60 locations in the U.S. to $20 per hour, significantly higher than the previous $16 minimum wage in the fast-food industry in California. They found that employment in California’s fast-food industry decreased by 2.64%, while employment in non-minimum wage-intensive industries increased by 0.58%. This contrasted with other areas in the U.S., where the fast-food industry saw a slight increase in employment, and non-minimum wage-intensive industries saw a 1% increase in employment.
The authors estimate that the negative employment impact of the minimum wage law ranges between -2.3% and -3.9% compared to all states, or only compared to states that did not adjust their minimum wage. Without the minimum wage increase in California, 18,000 job losses would have been avoided.
Despite the significant figure, what is even more astonishing is that the policy change affected a limited scope. The law only applied to restaurants with over 60 locations, excluding many other low-wage positions. Even within the restaurant industry, the implementation was limited.
In other words, these over 18,000 unemployed individuals were actually impacted by a relatively narrow policy adjustment. This significant loss of employment calls into question discussions about a nationwide “living wage,” often proposed at $15 per hour or higher. Given the higher cost of living in California, a $20 minimum wage in areas with lower average hourly wages would result in even larger-scale unemployment with other conditions remaining the same.
Such outcomes serve as strong evidence against minimum wage policies. As early as 2022, a summary of research on the impact of minimum wage showed that negative estimates significantly outweigh positive outcomes in literature.
So, why does the minimum wage law still exist despite clear economic research and real-world results indicating harm? Unfortunately, policies like minimum wage, despite sounding compassionate, often receive public support even if they prove ineffective.
Like voters, populist politicians from both the Democratic and Republican parties may want to improve the lives of low-income groups, but economic principles and related research repeatedly demonstrate that raising the minimum wage is detrimental to the poor. At least for some individuals, like the 18,000 workers in California, this renders them unable to earn any money at all.
Unfortunately, politicians have the incentive to ignore economic principles and favor appealing slogans that aim to improve the lives of vulnerable groups. Austrian economist Ludwig von Mises once pointed out the role of economists as balancers of experience.
Economics itself challenges the self-glorification of those in power and without acknowledging this, understanding the history of economic thought is impossible. Economists will never be the darlings of dictators and seductive politicians; in their eyes, economists are always troublemakers.
Economic evidence should serve as a valuable preventive measure against the utopian fantasies of politicians.
Author’s Biography:
Peter Jacobsen is a writer for the Foundation for Economic Education (FEE). He teaches economics at the University of Ottawa as an assistant professor of economics. He is also a professor of economic education and research at the Gwartney Institute. He completed his graduate studies at George Mason University.