This piece first appeared on Townhall Finance.
My social entrepreneurship students are confronted with an unpleasant but hard reality toward the end of their semester. Helping the most vulnerable populations, they find, often means abandoning the naive simplicity behind the $15 minimum wage. In fact, the concept of a “living wage” becomes an abstraction with little relevance to empowering the economically vulnerable and a policy option for the privileged.
This hard lesson becomes evident when they are building their social enterprises with the express purpose of empowering marginalized populations by creating a sustainable social business. This practical consequence doesn’t square with their intuition, and certainly runs against the narrative spun by progressives.
Yet, in many places in the United States, indeed perhaps most, the practical effects of a $15 minimum wage is to deprive highly vulnerable populations such as those recovering from drug or alcohol addiction, formerly incarcerated people, refugees struggling to learn English, or those without formal work histories, a vital lifeline to sustained employment and income security.
This difficult lesson is hard to fathom at first. After all, advocates of the $15 wage rate seem to trot out studies that show the effects would be minimal. Moreover, proponents paint a sympathetic portrait of a single mother, often a person of color, who is barely making ends meet.
Labor Markets Work in Powerful But Subtle Ways
This portrait, and characterization of the academic research, is misleading. While it’s true economists are finding the effects of mandated wage increases are more complex than previously thought, the lesson is not that business hiring decisions no longer respond to incentives or prices. On the contrary, the bulk of the research shows that markets work in more subtle but powerful ways.
A recent (2021) paper by economists David Neumark and Peter Shirley is illustrative. They examined 66 minimum wage studies published since 1992. For the studies where authors provided reliable estimates, 79.3% found that higher minimum wages were associated with reduced employment. More than half showed these effects were “statistically significant.” Only 5.8% of these studies found the effects of minimum wages to be positive – leading to higher employment – and statistically significant. “To be clear,” Neumark and Shirley write, “the evidence is not unambiguous.” Higher minimum wages reduce employment, and the effects are most pronounced for the less skilled and less educated.
In other words, the bulk of the academic research shows what business owners and hiring managers know in practice and my students learn in the classroom: lower skilled workers don’t get jobs when their wage rate exceeds the amount they can produce to justify their employment. Those individuals are at the bottom of the wage scale in the lower tiers of the labor market. They are, in short, the most marginalized workers.
Many people without business or hiring experience have trouble making this connection. They look at numbers such as the so-called “living wage” in the abstract, on face value, and without understanding that labor markets are driven by supply – workers – *and* demand – employers. What workers want to be paid has to be balanced by what employers can and are willing to pay.
Once someone is exposed to the practical aspects of running a business, the fallacies of most minimum wage arguments become evident.
Moving Beyond Platitudes
Very few of the 320 plus students who have taken my social entrepreneurship seminar since 2014 come from the business school. The vast majority are social science majors, eager to change the world and correct its wrongs. They are social justice warriors.
The course’s design, however, requires students to move beyond platitudes and political slogans to grapple with the difficult realities of empowering the most marginalized people in our society. The real rubber meets the road they spend nearly eight weeks crafting a practical, sustainable enterprise with market-driven revenues to give these individuals a lift up in the economy. They can’t ignore the realities of markets where wages have to be paid through revenues generated by consumers willing to pay for products and services.
Of course, they try. Students typically begin with a business frame that includes empowering people with a living wage. In Tallahassee, located in very affordable North Florida, this is about $13 (and significantly lower than the proposed $15 national minimum wage). As they fill out their frame, they discover that the living wage is aspirational, at best, for those in the very bottom tiers of the labor market. This is almost always true in their start-up phases.
Paying someone $15 per hour with an erratic work history, few identifiable skills, or poor language skills is not just uneconomical, it’s financially disastrous and unsustainable. It’s far better for them to pay a lower wage, structuring the work environment to give inexperienced and low-wage workers formal labor market skills than to lose money.
Minimum Wages are the Wages of Privilege
These realities are fortunately part of the internal debate among Democrats as they grapple with President Biden’s pledge to raise the national minimum wage to $15 per hour. In reality, a $15 minimum wage is a wage of privilege. Democrats need to ask themselves if they truly are interested in giving a leg up for the nation’s most economically vulnerable populations. If they are, they need to find ways to support these populations without raising the minimum wage.
Samuel R. Staley, PhD, is Director of the DeVoe L. Moore Center in the College of Social Sciences and Public Policy at Florida State University where he supervises research and teaches courses on social entrepreneurship and economic development.
The feature image is from AP Photo/Ted S. Warren.