December 2, 2021

Twin Cities Saw Massive Decline in Restaurant Jobs After Passing Minimum Wage Increase, New Fed Paper Shows

The minimum wage hikes in Minneapolis and St. Paul are not even fully phased in yet—but some of their hidden costs are already becoming visible.

St. Paul restaurants and retailers began cutting jobs and reducing hours even before the city’s new minimum wage went into effect in July last year, according to a pair of analyses commissioned by the Federal Reserve Bank of Minneapolis and the University of Minnesota.

The research, published Sunday by the St. Paul Pioneer Press, shows that full-service restaurants saw a 16 percent decline in jobs, while limited-service restaurants, such as fast-food joints, saw a drop of 27 percent.

Minneapolis, which began raising its minimum wage two years before St. Paul, lost nearly 3,000 restaurant jobs over the same period. Researchers said the findings suggest restaurants were fairly sensitive to the mandated wage hikes.

“The estimates of job loss in the restaurant industries of both St. Paul and Minneapolis are particularly large compared with other studies of minimum wages, implying that at least some businesses in the Twin Cities were quite sensitive to the actual or imminent increases in labor costs,” Lisa Camner McKay, a writer-analyst with the Opportunity and Inclusive Growth Institute at the Minneapolis Fed, wrote in a summary of the findings.

The wage hikes, it should be noted, are not yet fully phased in.

The wage floor will continue to rise over the next several years—at different paces depending on the size of the business—until 2027, when the minimum wage for the smallest businesses in St. Paul will hit $15 per hour.

The Hidden Costs of Minimum Wage Laws

The results appeared to surprise some economists, who noted the task of tracking the effects of minimum wage hikes was complicated by numerous factors, including the COVID-19 pandemic, federal relief checks, social unrest, a labor shortage, and other factors.

“This needs to be interpreted with caution,” said Anusha Nath, an economist who worked on the analyses for the Minneapolis Fed.

The results, however, should come as little surprise for several reasons.

For starters, as economist Antony Davies and political scientist James Harrigan have observed, a tiny percentage of US workers actually make the minimum wage—but an overwhelming percentage of those who do are restaurant workers. This means any impact of minimum wage laws is likely to be most visible in the restaurant sector.

Second, we know the general effect minimum wage increases have on labor markets. As Texas A&M economist Jonathan Meer has pointed out, the minimum wage is a blunt instrument that has several adverse hidden costs.

Sure, some workers may benefit from a pay hike, but this comes with numerous other tradeoffs. For some workers, Meer notes, this means the loss of benefits such as health insurance or a flexible work schedule. For others, as research highlighted by the Harvard Business Review shows, it’s reduced hours and less compensation overall. For some it’s a doubled workload.

None of these tradeoffs are appealing for workers, but they’re admittedly better than the worst effect of minimum wage hikes: being priced out of work altogether.

‘For a Low Wage You Substitute Unemployment’

While many are loath to admit it, there is overwhelming evidence that minimum wage laws reduce employment.

“[The] body of evidence and its conclusions point strongly toward negative effects of minimum wages on employment of less-skilled workers, especially for the types of studies that would be expected to reveal these negative employment effects most clearly,” wrote economists David Neumark and Peter Shirley, who recently analyzed “the entire set of published studies” since the 1990s.

Progressive politicians contend they are fighting poverty with minimum wage hikes, but the great writer and economist Henry Hazlitt had it right when he pointed out that minimum wage laws create poverty.

“For a low wage you substitute unemployment,” Hazlitt famously observed in Economics in One Lesson. “You do harm all around, with no comparable compensation.”

Indeed, what happened in St. Paul and Minneapolis is no anomaly.  Following labor’s “Fight for $15” victory in New York City in 2015, the Big Apple saw the sharpest month-to-month annual decline in restaurant jobs since the 9/11 attacks.

Because minimum wage laws effectively outlaw jobs people would otherwise fill, Nobel Prize-winning economist Milton Friedman saw them as “about as clear a case as one can find of a measure the effects of which are precisely the opposite of those intended by the men of good will who support it.”

It’s true that not all minimum wage increases cause equal harm. A minimum wage well below the market value of labor will have no real economic impact, while relatively modest hikes will be less harmful than high wage floors, as the oft-cited Card-Kruger study shows.

But as the data out of Minneapolis and St. Paul show, the bigger the minimum wage increase, the more harmful the economic consequences.

This article, Twin Cities Saw Massive Decline in Restaurant Jobs After Passing Minimum Wage Increase, New Fed Paper Shows, was originally published by the Foundation for Economic Education and appears here with permission.  Please support their mission.