Legislators in Maryland are again debating raising the state minimum wage, this time from $7.25 to $10.00 per hour (a 38 percent increase) and indexing it to the cost of living so that future changes would be automatic, with no vote or legislative accountability required. Also included is an increase in minimum wages to employees who receive most of their compensation in tips. The bill would raise the minimum wage for tipped workers from 50 percent to 70 percent of the full minimum wage.
This is motherhood and apple pie legislation. Who can be opposed to paying employees a wage that allows them to live more comfortably? If $10 an hour is good, why not require $20 an hour, or maybe $50?
The answer is obvious. Markets set wages. To stay in business and keep people employed, businesses have to be competitive. The cost of wages is reflected in the price of the product or service to the consumer. When labor costs go up, employers have two choices. They can attempt to pass the price increases on to customers (and perhaps lose their customers) or find a way to cut costs.
Maryland businesses that have to compete with surrounding states are already disadvantaged by sales and corporate taxes and fees that make them less competitive. For Maryland restaurants, whose employee compensation is largely tip income, the requirement to pay 70 percent of the increased $10 minimum wage forces a 93 percent increase in required restaurant wages. That would result in increasing menu prices, cutting employees or maybe closing the doors. (More than 50 percent of restaurants fail in their first year of business, and 90 percent of those who make it through year No. 1 don’t make it through their second year.)
More important than the impact on employers is the impact of minimum wages on Maryland workers — the human element. Who is this law attempting to help? A study by the Heritage Foundation demonstrates that 97 percent of wage earners make more than the minimum wage. The majority of those paid the minimum wage are young people ages 16 to 24. They are largely students working part-time and living in households averaging $53,000 per year. They are gaining valuable work experience and learning skills.
The main impact of minimum-wage laws is to hurt the unskilled and poor, who are priced out of entry-level jobs. Employers will not hire workers whose lack of skill does not produce enough to justify paying $10 per hour, plus fringe benefits such as Social Security, unemployment insurance, vacation or sick leave and health care.
Youth unemployment in Maryland is more than 20 percent, but for black teens, studies place that figure at more than 40 percent. Laws that deny young people the chance to get their foot on the first rung of the ladder are devastating to their future. Black economist Thomas Sowell calls minimum-wage laws a “major social disaster.”
“When you set minimum-wage levels higher than many inexperienced young people are worth, they don’t get hired. It is not rocket science,” he writes.
The Department of Labor reports that only 4 percent of minimum-wage workers are single parents with full-time jobs. Many economists argue that expanding the Earned Income Tax Credit is a far better way to help the working poor, without disrupting the underlying labor market. Russell Sykes of the Empire Center for New York State Policy argues, “[The Earned Income Tax Credit] doesn’t lead to job loss, it doesn’t deter hiring, and, since it penetrates to about 80 percent of [low-income] working families with children, it already raises the effective minimum wage for a mom with two kids from $7.25 to $10.44 an hour.”
Raising the minimum wage will only dig Maryland deeper into the economic hole. Worse, it will result in jobs lost, especially among the working poor, as employers cut corners in order to cover the increased costs of labor. Fixing unemployment and giving workers a reasonable, living wage are laudable goals, but continuing to increase the minimum wage is not the way to achieve them.
Ellen Sauerbrey is chairman of Maryland Business for Responsive Government and former minority leader of the Maryland House of Delegates.