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The Minimum Wage Just Went Up in 22 States. Job Numbers Are About to Go Down. Some layoffs have already been announced. Here's why it'll only get worse.

By Jonathan Hoenig

Key Takeaways

  • A substantial body of economic research indicates that minimum wage increases can have negative employment effects, particularly on low-skilled workers.
  • The new $20 per hour minimum wage for fast-food workers in California, while a victory for labor leaders, has already led to significant job cuts and operational changes.
  • Notably, two major Pizza Hut franchises eliminated delivery services, cutting 1,200 jobs, pointing to the higher minimum wage as a contributing factor.

Opinions expressed by Entrepreneur contributors are their own.

Maskot | Getty images

The minimum wage went up in 22 states this year, including California, where fast-food workers now earn $20/an hour — leading to jubilation by labor leaders.

They may not be happy about what comes next: There will be fewer jobs to go around. The evidence is already here. While politicians were patting themselves on the back this January, two major Pizza Hut franchises in California eliminated their delivery service, cutting 1,200 jobs. Early this year, same-day delivery service Shipt announced it was pausing its Seattle operations entirely, resulting in layoffs. Both companies cited a higher minimum wage.

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Cold, hard economics

To be clear: These are not the acts of spiteful business owners, who, as they are sometimes portrayed, greedily do not want to pay their workers a fair wage. These are the results of cold, hard economics — because when minimum wages go up, and create a sudden increase in labor costs, entrepreneurs often do not have the cash to employ the same number of people.

Economists have studied minimum wage laws for decades, and a large majority of their reports — some 80 percent by one measure — point to negative employment effects. The impact is especially hard on low-skilled workers, who are exactly the workers these laws are intended to help. Minimum-wage supporters do not seem to appreciate this.

"We did not just raise the minimum wage to $20 an hour for fast food workers," said one California Assemblymember, Chris Holden, at the ceremony to sign that state's new minimum wage law. "We helped a father or mother feed their children, we helped a student put gas in their car, and helped a grandparent get their grandchild a birthday gift." And while they'd never acknowledge it, they also prompted that same father or mother to lose his job and their children never to be able to find one in the first place.

Supporters see some people earning $1 more a year. What they don't see is the jobs eliminated, consumer prices hiked and business destroyed as a result. Artificially hiking wages also means firms offer smaller pay increases, require better attendance or impose additional tasks on workers to try and make up for the loss.

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Passing the expense to customers

Of course, no business wants to lay people off. Entrepreneurs will try to afford these increased wages, which means they'll need to bring in more revenue. And where will they find it? The only reliable place they can: Bypassing the expense onto consumers, in the form of higher prices. A 2004 review found that a 10 percent increase in the U.S. minimum wage raises food prices by up to 4 percent. If a low-income worker's pay went up because of the minimum wage, much of those new earnings will then disappear through the higher-cost products they buy.

Cold-hearted capitalists aren't the only ones saying this. Christina Romer, the former chairwoman of President Obama's Council of Economic Advisers, has acknowledged that the minimum wage causes unemployment. Even New York Times columnist Paul Krugman, perhaps the most famous liberal economist, explicitly noted its destructive impact in 1998.

If this seems like academic theory removed from the real world, consider that just last week, Sweet Lady Jane, a Los Angeles bakery popular with A-list celebrities, closed up shop for good after 35 years — citing labor costs as one of the reasons.

Given the clear damage that minimum wage laws do, why do so many politicians and community leaders continue to advocate for them — and therefore, continue to hurt exactly those they allegedly want to help? Unfortunately, the answer is simple: It's basic politics. This policy makes them look good.

Most people care about doing what they think is right. And because we're taught from an early age that "helping the poor'' is our moral obligation, many people support raising the minimum wage because it makes them feel principled — despite the fact that, economically speaking, it hurts employees, employers and the economy writ large.

There should be nothing "moral" about this policy, because there's nothing "moral" about harming low-skilled workers.

Both Chipotle and McDonalds have already promised price hikes in California to offset the April 1 minimum wage increase to $20. "It's causing us to have to increase our menu prices, as well as limit labor just to stay profitable," a small restaurant manager told local news.

Yes, the minimum wage was raised on January 1st across the country. If you care about the less-well-off, it's nothing to celebrate.

Jonathan Hoenig is a professional investor and Fox New Contributor.

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