Dr. Richard F. Bieker of Dover is a retired economist. He has taught and/or conducted research at a number of institutions, including Delaware State University, the University of Delaware, Purdue University and Central Michigan University. He has also served as a Fulbright Scholar at Slovak University of Agriculture and the American University of Armenia, and his research has been published in a variety of journals.
Delaware’s minimum wage increased to $15 per hour in January. Only five other states have a higher minimum wage. Those in the General Assembly who voted for the higher minimum wage were undoubtedly well intentioned. Some proponents of it argued that it would provide a “living wage” and lift a significant number of households out of poverty. Unfortunately, this law is based on a questionable assumption, and its implementation will likely lead to unintended negative consequences for Delaware’s most vulnerable workers, the very people it is intended to help. There are better ways to improve the economic well-being of less-skilled workers.
Even if an increase in the minimum wage does not lead to an increase in unemployment, the assumption that increasing it will lift a large number of Delaware households out of poverty is questionable. Before the raise, only about 16% of Delaware’s labor force earned less than $15 per hour. It is estimated that about 72% of these workers are the primary household earners. The remainder, many of whom are teens, work to supplement family income or to earn extra spending money. An individual who earns a minimum hourly wage of $15 and works 32.4 hours per week (the average private-sector workweek in Delaware in November 2024) for 52 weeks would have annual earnings of $25,272. This is below the poverty line for a family with three or more members. Given the above data, it is unlikely that raising the minimum wage to $15 will have a significant effect on the number of households in poverty.
Unfortunately, increasing the minimum wage to $15 per hour will likely increase the unemployment rate in the short run and reduce the labor force participation rate (i.e., the percent of the civilian population that is either working or looking for work) in the long run. And it will disproportionally harm the less-skilled workers and young people just entering the labor force.
The wage rate is the price that business firms must pay for the use of labor. When the price of using less-skilled workers rises, firms look for ways to use less of it. One way they may do this is to substitute more-skilled and higher-paid workers for the lower-skilled workers, as the wage differential between the two groups decreases. Also, they may use innovative technologies that require less unskilled labor. For example, they may accelerate the use of self-checkout kiosks, online banking, e-commerce platforms, automated inventory management systems and GPS-guided equipment. Advances in artificial intelligence will likely accelerate the rate at which such substitutions are possible for larger, highly capitalized firms. Smaller firms with lower profit margins may not have the resources necessary to implement these innovative technologies, and they cannot pass on to consumers the increased costs associated with higher wages. So, they will simply shut down, and their employees will be without jobs.
So, the result of the legislation is that it will likely cause the unemployment rate to increase. The only unknown is the extent to which it will rise. Who will become unemployed when employers reduce the quantity of labor they demand? It will be precisely those workers that the legislation is intended to help, i.e., the less-skilled, low-wage workers. Especially hard hit will be teens who rely on part-time jobs to gain work experience and develop skills that prepare them for careers. When these entry-level opportunities are cut off, teens are not able to gain work experience early in life. And this lack of early work experience can have long-term negative consequences. Studies have shown that early employment plays a significant role in developing a strong work ethic and in acquiring general work skills that are transferable to other workplace situations. By reducing access to these opportunities, the minimum wage increase could inadvertently hinder the career prospects of these young people.
While the most immediate effect of a binding minimum wage above the market rate is an increase in the unemployment rate, the long-run effect is likely to reduce the labor force participation rate among less-skilled, low-wage workers. If these less-skilled workers are unable to find employment, they will drop out of the labor force. This is problematic because it is essential to keep as many people as possible in the labor force to have a productive and growing economy. This is particularly true for a state like Delaware, which currently has a labor force participation rate of only 58%. A decrease in the labor force participation rate means that more and more people who are not in the labor force are dependent on fewer and fewer people who are. In this regard, it is important to note that Delaware’s labor force participation rate has fallen from 71% in 2001 to its current level. Over that same period, Delaware’s economy, as measured by real gross domestic product, grew at an annual rate of only 0.8%, compared to 2.1% for the overall U.S. economy.
Fortunately, there are ways to keep less-skilled workers from leaving the labor force and keeping them employed and, at the same time, improving their economic well-being. These include increasing the earned income tax credit, implementing effective job training and education programs to allow less-skilled workers to improve their skills, and providing financial support directly to employers to subsidize a portion of their less-skilled employees’ wages. These are some of the alternatives that the General Assembly should consider during its 2025 session.
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