Many states have recently suffered from labor shortages, high inflation, and the ever-worsening supply chain crisis. Unfortunately, quick “fixes” such as minimum wage hikes advocated and adopted by many policymakers in response to this perilous economic situation only make matters worse, especially for small business owners.
Due to a recent hike in the minimum wage, New Jersey Assembly lawmakers proposed Assembly Bill 4493, legislation that would provide corporate tax credits (CBT) and gross income tax credits (GIT) to restaurant owners intended to offset the negative impacts of the state’s minimum wage increase. AB 4493 moves in tandem through the legislative process with accompanying legislation, Senate Bill 2836.
The legislation would provide a tax credit to restaurant owners equal to the hours worked by an employee in a tax year multiplied by the difference between the current state minimum wage and the state minimum wage before the recent increase.
AB 4493 limits the number of employees that can be used to calculate the amount of the tax credit, caps the amount of the credit at $12,500 per employee, and limits the availability of the credit to 10 years immediately following the effective date the invoice’s. Additionally, a taxpayer will not be allowed to claim a credit for more than three restaurant locations, and credits will only be available to a taxpayer with five or fewer restaurants.
A legislative initiative such as this clearly illustrates the justified skepticism about the effectiveness of minimum wage increases, particularly regarding their deleterious effects on small business owners.
Every US state has experienced some degree of government-imposed lockdown due to the sudden onset of the coronavirus pandemic, with small businesses bearing the brunt of this economic pain. The government-mandated shutdowns have sent shockwaves through the entire small business ecosystem that are still being felt, which is exactly why the minimum wage hikes couldn’t be more timely. In an analysis based on self-logged closings in their database, Yelp estimates that 60% of American businesses have been devastated by the pandemic.
Given the ongoing economic turmoil, it’s no surprise that New Jersey lawmakers have turned to implementing minimum wage increases to provide relief to their struggling constituents. Yet these efforts have been both ineffective and counterproductive ways to combat the problem, ultimately leading to the need for legislation such as AB 4493.
Arbitrary minimum wage increases produce unintended consequences that often inflict even more suffering on the very people they are meant to benefit. Although well-intentioned, minimum wage hikes are a significant reason for the use of self-checkout kiosks by grocery chains and fast-food restaurants, which disproportionately eliminate jobs for vulnerable people. and low income.
A 2017 paper from the National Bureau of Economic Research (NBER) studies the effects of the aforementioned scenario, using data collected from 1980 to 2015. The authors conclude that “increasing the minimum wage significantly decreases the share of automatable employment held by workers low-skilled… Our work suggests that large increases in the minimum wage in the United States in the coming years will shape the types of jobs occupied by low-skilled workers and create employment problems for some of them .
A recent study by the Congressional Budget Office (CBO) examines how gradually increasing the federal minimum wage to $15 an hour by 2025 would negatively impact employment and household incomes. While the study finds that an increase in the minimum wage raises wages for some workers, it also leads to job loss for many others, which ultimately hurts small businesses the most.
The impact on small businesses is substantial, forcing them to reallocate scarce resources from profit-generating businesses to higher labor costs. This often results in lower hiring levels, reduced working hours and higher prices for consumers. An increase in the minimum wage can even lead to the bankruptcy of companies that can no longer make ends meet in the face of such costs.
Minimum wage increases are rarely a viable economic solution. A much quoted joint study between the Federal Reserve and the University of California-Irvine found that 85% of credible studies on the subject clearly show job losses for low-skilled workers in the face of minimum wage increases. In yet another study conducted by the Federal Reserve, the authors claim that [minimum wage increases] are “probably not sufficient to meet the needs of a household. While raising workers’ wages seems like a good solution, the proposal makes the mistake of equating minimum wage workers with the working poor. On the contrary, if the objective is to reduce poverty, it seems that using a more targeted approach…might be the most effective way to accomplish the task.
Further illustrating the negative usefulness of such a policy, a recent report by the Employment Policies Institute (EPI) found that raising the minimum wage would cost the US economy about two million jobs. The EPI study notes that of those two million, the jobs most likely to disappear are in the restaurant and hospitality industries decimated by the pandemic. Forcing small businesses in these industries to raise their labor costs would inflict even greater harm on the few who managed to survive.
The country’s persistent macroeconomic vulnerability is also important to consider. While the unemployment rate has fallen in recent months as the economy reopened, the labor force participation rate has not rebounded in the same way. As of April 2022, two million workers are still out of the labor force compared to pre-pandemic levels, according to the Federal Reserve. As for inflation, the June 2022 Consumer Price Index (CPI) report reflected an increase of 9.1%, the largest increase since the peak of “stagflation” in 1981.
Finally, it is important to recognize that a preponderance of small business bankruptcies would significantly reduce government revenue capture, as bankrupt businesses would no longer contribute to property taxes, income taxes, sales and use taxes. and various regulatory fees. While minimum wage increases can be politically popular, the downstream effects of these increases create significant fiscal challenges at the state and municipal levels.
While attempts to strengthen a minimum standard of living and to protect low-skilled workers are laudable, the overall economic effects of forced minimum wage increases do not achieve any of these laudable goals and lead to the need for legislation such as as Assembly Bill 4493. The New Jersey minimum wage hike would not have passed, eliminating the need for a bill like this.
Arbitrary minimum wage increases, out of step with the laws of supply and demand, do little to lift struggling individuals and families in New Jersey out of poverty while destroying the livelihoods of many small business owners. As this legislation moves through the New Jersey Assembly, lawmakers should see the long-term economic benefits of granting a reprieve to restaurant owners. They could also consider changing previous legislation creating those minimum wage hikes that galvanized this new legislation.
The following documents provide more information on minimum wage laws.
Busting 5 Minimum Wage Myths
James Sherk of The Heritage Foundation debunks five myths about minimum wage hikes often used by proponents of minimum wage laws: “A higher minimum wage would help some workers, but few of them are poor. The wider effect undermines the ability of potential workers living in poverty to get their foot in the door of employment. Raising the minimum wage might help politicians win plaudits from the press, but it wouldn’t reduce poverty rates.
Unintended consequences of the minimum wage increase
Antony Davies of the Mercatus Center examines the arguments for and against minimum wage increases and presents new results comparing the employment of workers with different levels of education.
The Negative Effects of Minimum Wage Laws
Mark Wilson of the Cato Institute reviews the economic models used to understand minimum wage laws and examines the available empirical evidence. Wilson describes how most of the academic evidence shows that minimum wage laws have negative effects, and he explains why some studies have produced seemingly positive results.
The Employment and Family Income Effects of Raising the Federal Minimum Wage
The Congressional Budget Office is examining how raising the federal minimum wage to $10, $12, or $15 an hour by 2025 would affect employment and family income across the country. This shows that while increases in the minimum wage will raise wages for some people, it will also lead to many workers across the country losing their jobs.
Two-thirds of Americans support raising the federal minimum wage to $15 an hour
The Pew Research Center conducted a survey in the spring of 2020 regarding public approval of raising the federal minimum wage to $15 per hour. This shows the overwhelming tendency of many people across the country to believe that minimum wage increases are a viable way to lift Americans out of poverty.
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