Will Minimum Wage Hikes Help Red States or Hurt Them?

Last night voters in four “red” states approved minimum wage increases over the next few years.  The highest wage on the ballot was in Alaska, which will increase to $9.75 an hour by 2016 (indexed to inflation).  One on hand, it should be up to states to decide what their wages will be.  They have a better idea of how much their communities can absorb an increase in the cost of labor than does the federal government.  But will these wage hikes hurt employment opportunities?

Two of the four states in question – South Dakota and Nebraska – have low unemployment rates (3.4 percent and 3.6 percent respectively), compared to other states.  But Arkansas and Alaska have unemployment rates that are 6.2 percent and 6.8 percent, higher than the U.S. rate.  Even worse, Alaska has a teen unemployment rate of over 20 percent, which has remained stubbornly high since 2011.  South Dakota, Nebraska and Arkansas also have teen unemployment rates that are lower than Alaska, but still the highest of all age groups.

Empirical evidence shows that minimum wage increases have the greatest negative impact on young and low-skilled workers.  In fact, decades ago, the federal government’s own study found that a 10 percent increase in the minimum wage reduces teen employment by one to three percent.  Many may not really care whether a teenager has a job, but consider that non-youth workers who benefit from an increase in the minimum wage may have their hours cut or be replaced by technology.  It is a simple fact that increasing the price of a good, even if it is labor, reduces the demand for it.  It is not a coincidence that Lowe’s stores will be using robots to help customers in their stores over the holidays.  They are expensive now, but will become cheaper, more widespread, and possibly permanent at chain stores everywhere.


Comments (4)

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  1. Jake Sanders says:

    “One on hand, it should be up to states to decide what their wages will be. They have a better idea of how much their communities can absorb an increase in the cost of labor than does the federal government.”

    That is where the crux of the issue lies and I could not agree more.

  2. Santiago says:

    On a side note, also have to consider the likelihood of harmful externalities taking place if teens and young people are unemployed. Forget the economic argument for a moment, studies in Washington State University have attributed higher crime rates with a fall in local teenage employment from 45.8% to 25%.

    There are higher wages and lower employment on one side of the argument, and lower wages and higher employment on the other… but what we don’t seem to be discussing – again – is actual consumer purchasing power.

    • Fred says:

      I wonder if the teenage unemployment rate isn’t increasing due to the high pressures of high school. Sure more teenagers used to work, but did they have to worry about AP tests and extracurricular activities that are a necessity for college admissions nowadays?

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