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Arizona Finds Downside to Higher Minimum Wage

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Arizona Finds Downside to Higher Minimum Wage

February 21, 2018

Despite the continued “Fight for 15,” Arizona is reconsidering further increases to its minimum wage. Recent research from David Neumark and Cortnie Shupe suggests that more states should be doing the same.

During the 2016 election, Arizona voters approved a measure mandating incremental increases in the minimum wage, motivated by a desire for fairness and to reduce poverty. In 2017, the minimum wage rose from $8.05 to $10 per hour. On January 1, 2018, the minimum wage was raised to $10.50 per hour. The minimum wage is supposed to rise to $12 per hour by 2020. However, the increase in the minimum wage has had negative effects in the state’s communities, leading lawmakers to reconsider.

Senate Concurrent Resolution 1016 would keep the minimum wage at its current level. The measure has passed the Senate committee on Commerce and Public Safety. Because the original measure was a ballot initiative, if the new measure passes the Senate and the House, the measure would appear on Arizona’s ballot in November to be once again voted on by the public.

In Arizona, small rural businesses are being hit hard by the rise in the minimum wage. Many businesses must either cut employees’ hours or raise product prices to accommodate the increase in cost from a higher minimum wage. Cutting hours for employees is a well-studied phenomenon, but effects on rural businesses are less so. Rural business owners, such as local family-owned coffee shops, have commented that they must raise prices in order to pay employees the higher minimum wage. As a result, customers are leaving their shops for larger companies, such as Starbucks, that are less affected by an increase in the minimum wage.

Another problem associated with raising the minimum wage is the substitution from low-skill workers to higher-skill workers. After Seattle raised its minimum wage up from $11 to $13 per hour, a study by University of Washington researchers found that earnings and hours for low-skill workers decreased by 9 percent, equal to 3.5 million fewer hours worked each calendar quarter. Earnings and hours of higher-skilled workers increased or remained the same. The Seattle situation reflects the consequences when the minimum wage is increased to high levels.

Arizona’s minimum wage increases are still in the earlier stages as compared to Seattle. However, if its current trajectory remains unaltered, the consequences for the state’s labor force could become something akin to Seattle. A higher minimum wage does not seem to benefit the low-skill workers it is aimed to help.

If reduced hours and higher prices are not enough to encourage states to roll back minimum wage increases, they should look to recent evidence from David Neumark and Cortnie Shupe that suggests the increase in minimum wage has hurt teen employees significantly in the past decades. Since 1994, the teen labor force participation rate (LFP) has decreased by 17 percentage points—from 53 percent in 1994, to 44 percent in 2004, and to 36 percent in January 2018. After analyzing three potential causes of this decrease—minimum wage, immigration, and increases in returns to schooling—Neumark and Shupe find that the minimum wage played a predominant role in decreasing the LFP of teens, while competition from immigration played a minor role, and increasing returns to school played an insignificant role. The increase in minimum wages explains 25 percent of the shift from teens being employed and enrolled in school to being exclusively enrolled in school. 

Critics argue that the drop in teenage LFP is a result of the recession. However, Neumark and Shupe note that the drop in LFP is not linked to the business cycle. Rather, the downturn in the LFP occurred long before the Great Recession.

A low labor force participation rate for teenagers has negative implications for their future. Neumark and Shupe’s study found no indication that higher minimum wages, and therefore more time spent exclusively in school, led to greater human capital investment. Instead, the main effect of the higher minimum wage was to reduce employment opportunities for younger workers. As a result, teenagers invested less into human capital, which could lead to lower earnings in the future.

If cities and states continue to raise their minimum wages, hours for low-skill work could shrink more, and the teenagers could face an outsized effect of the increase, derailing their human capital accumulation. Other states should follow Arizona and roll back increases in the minimum wage.

 

Emily Top is a research associate at Economics21.

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