Minimum wage as sales tax on the middle class

Matthew Klein of Barron’s explores the government-mandated minimum wage’s impact on the middle class.

[N]ew research from Peter Harasztosi of the European Commission and Attila Lindner of University College London published in the August issue of the American Economic Review offers some answers. The authors studied how companies in Hungary reacted when the government doubled its minimum wage between 2000 and 2002. …

… The good news is that Hungary’s experience suggests that job losses from the [U.S.] House bill would be minimal, while wage gains for the lowest-paid would be substantial. The bad news is that consumers would foot the bill. Contrary to previous theories that minimum wages improve the bargaining power of workers at the expense of profit margins, Harasztosi and Lindner found that companies simply raised prices. Margin compression was mostly confined to the businesses that also shed the most jobs. …

… Harasztosi and Lindner found that roughly 10% of Hungarian workers affected by the minimum-wage increase lost their jobs, but the rest got a 60% pay bump. They also found that most Hungarian businesses withstood the shock without shedding staff because they raised prices. Consumers paid for higher wages at the low end through what amounted to a massive sales-tax increase. …

… As Harasztosi and Lindner put it, “in cities where mainly rich consumers enjoy the services provided by low-wage workers, this redistribution will be from rich to poor.” Middle-class Americans, however, might want to cut back on evenings out.