Walmart recently announced one of the most expansive private wage raises in history, boosting the pay of approximately half a million employees to at least $10 an hour. But it’s been greeted with a collective “meh” from activist groups and populist policymakers who want the government – not the market – to be the catalyst of low wage growth.
Walmart is one of many big companies – including the GAP, TJ Maxx, and Panera Bread – that have recently given pay bumps to their lowest paid employees. Panera Bread CEO Mike Bufano has even gone so far to declare a “war for talent” for these employees. At White Castle, we’ve been able to partially buck this trend by paying the average hourly team member 35 percent more than the minimum wage and giving access to benefits. (More than 1 in 4 of our 10,000 team members has been with us for 10 years or more.)
Partially as a result of this increased demand for labor, wages are rising for most entry-level employees. According to data from the Bureau of Labor Statistics, average hourly earnings for low wage sectors like retail and leisure and hospitality are rising approximately 36 percent faster than the private economy as a whole.
While that’s good news for America’s working class, which has largely been bypassed by the economic recovery to this point, it’s bad news for those who have based their career on the familiar trope that the market isn’t increasing wages so government must step in and raise them.
Take Labor Secretary Thomas Perez, for instance. At an AFL-CIO “Wage Growth” summit last winter, he led a clamoring group of activists arguing that low wages are “a choice” that can be overcome by government policies like raising the minimum wage.
Even purported defenders of free markets have relied on similar flawed logic. New York Chamber of Commerce CEO Carlo Scissura said in a recent New York Daily News op-ed that “market forces are not generating the shared prosperity that most Americans hope for; a wage boost for the lowest-paid workers is clearly the most direct way to correct that.”
In addition to being empirically incorrect – as evidenced by BLS data and the wage growth at big companies – these claims overlook the fact that government wage hikes have real consequences, no matter how market wage growth is faring. Foremost among these is the reduced job opportunities that come as a result of job creators scaling back on shifts, hours, and expansion in an attempt to absorb the minimum wage’s higher labor costs.
Despite attempts by minimum wage proponents like Secretary Perez to downplay these disemployment effects, economists overwhelmingly conclude that they exist. In fact, in an analysis of two decades of research on the topic, economists from UC Irvine and the Federal Reserve Board find that 85 percent of the best studies conclude that minimum wage hikes reduce job opportunities – especially among the least skilled.
But you don’t have to consult the academic literature to understand this phenomenon. You can likely just talk to small business owners in an area where the minimum wage has recently risen. For instance in San Francisco, which recently passed a $15 minimum wage, several small businesses have either closed or announced they will close citing the city’s minimum wage hike as the driving reason. In nearby Oakland, it’s been reported that at least 10 small businesses in and around Chinatown have closed since January partially as a result of the city’s recent minimum wage hike to $12.25.
Ironically, then, government-imposed wage hikes can reduce the demand and increase the supply of labor, disrupting factors partially responsible for market-based wage increases — including the one that many low paid employees are enjoying now. In this sense, government wage hikes are little more than siren songs that divert the sailing of the economy.
Jamie T. Richardson is vice president of government affairs at White Castle and a member of the Job Creators Network.