Learn from Minnesota: Be Wary of the Minimum Wage Hikes

By: Noah Williams

Nationwide the “Fight for $15” movement to increase the minimum wage to $15 per hour has gained momentum, with several municipalities and now the state of Massachusetts adopting plans for such minimum wage hikes. Those who advocate for such policies should learn from the experience of past minimum wage hikes. In particular, Minnesota’s experience shows that minimum wage increases lead to employment losses for precisely those low-wage workers that the policy is designed to benefit.

The contrast between the policies and labor market outcomes in Minnesota and Wisconsin shows the effects of the minimum wage increases. Beginning in 2014, Minnesota began a series of minimum wage increases which in less than four years increased the effective minimum wage by 33%. By contrast, Wisconsin increased its state minimum wage in 2010 to keep pace with the federal minimum wage, but has not increased it since.

The minimum wage increases had a substantial effect on the labor market in Minnesota. Before the wage hikes 4.7% of Minnesota’s hourly workforce earned the minimum wage or less, but by the time of the increase in 2016 this share had more than tripled to 15.4%. The increase in affected workers was heavily concentrated among young workers and workers in the restaurant industry, and both of these groups experienced employment losses.

Young workers, those under age 24, make up 21% of Minnesota’s hourly workforce but 54% of the total number of minimum wage workers in the state. Before the minimum wage increases began, youth employment was relatively constant in both Wisconsin and Minnesota, with a slight increase in Minnesota and a slight decline in Wisconsin in the 2012-2014 period. However after Minnesota began its minimum wage increases in 2014 there was a big fall in youth employment in Minnesota, and an increase in Wisconsin over the same period.  In particular, youth employment averaged 9% lower, a reduction of 35,000 young workers, in Minnesota in the three years following the minimum wage increases compared to the preceding three years. During the same span, youth employment increased by 10.6%, or 43,000 jobs, in Wisconsin. While other factors certainly played a role in driving these changes, the timing of the trend break and the concentration of youth employment in minimum wage jobs suggests that much of it was driven by the minimum wage increases.

In addition, about 60% of Minnesota’s hourly restaurant workers earn the minimum wage or less, by far the highest concentration of minimum wage earners in a single industry. From the beginning of 2010 until July 2014 fast food restaurant employment in Minnesota and Wisconsin grew at the same rate.  However beginning with the first minimum wage hike in Minnesota a gap opened up, as fast food employment in Minnesota stagnated while it has continued to increase in Wisconsin.  In total, from July 2014 to May 2018 fast food restaurant employment grew by 4.8% in Minnesota but 8.8% in Wisconsin.  While other factors may have played a role, the timing of the trend break suggests that the minimum wage increases in Minnesota accounted for much of this 4 percentage point gap.

Beyond the lost employment, the minimum wage increases had other economic effects. Part of the increased wage costs employers faced have been passed on to consumers through higher prices. The relative price of restaurant food in the Minneapolis metro area had fallen by 2% in the four years preceding the minimum wage hikes, but it has risen by 6% in the four years since.  On the benefit side, earnings for affected workers grew more rapidly in Minnesota than Wisconsin following the minimum wage hikes, with average annual pay at limited service restaurants increasing by 5.5% more in Minnesota from 2014-2017.

Overall these results are consistent with a competitive market for low wage workers in Minnesota. The distortions from the minimum wage increases led to higher incomes for some workers, but lower employment particularly among young and low-skilled workers, and higher prices for the products of low-skilled labor.  These negative impacts should give policymakers pause before they consider further minimum wage increases, such as the currently fashionable calls for a $15 minimum wage. Particularly in a state like Wisconsin, this would be an enormous increase, more than doubling the current minimum wage up to a level which is 88% of the state’s median hourly wage. Such a minimum wage hike would dramatically distort the state’s labor market and hurt those it is intended to help.