On January 1, while confetti was still being swept up in Times Square, a slew of new laws took effect in New York State. Of note, New York State enacted major changes to its minimum wage policy. As of the first of the new year the Empire State minimum wage has risen to $16.50 an hour in New York City, Westchester, and Long Island, and to $15.50 an hour in the rest of the state. Under the new policy, the state minimum wage will also increase another 50 cents per hour in 2026 and then be indexed to inflation starting in 2027.
Albany continues its misguided approach to helping New Yorkers. After three years of inflation at four-decade highs, the new minimum wage policy will make it even more expensive to live, work, and do business in the Empire State. If Albany really wants to provide New Yorkers relief, politicians should set a New Year’s resolution to get out of the way.
Why The Minimum Wage is a Bad Idea
A price tells us how much of a good or service is available and how much people want that good or service. It is what economist Alex Tabarrock calls “a signal wrapped in an incentive,” using the example of oil. When the price of oil rises (all else being equal), it signals to buyers and sellers that oil has become scarcer and gives them an incentive to act on that signal (drive less, buy more fuel-efficient cars; seek, import, or refine more oil). As Tabarrock puts it, the price change informs producers, consumers, and other market watchers: “Find ways to economize on oil or develop substitutes, and you will profit.”
Wages are the price of labor, sold by potential employees and purchased by potential employers. Unlike oil, however, wages tend to be “sticky,” meaning that they do not adjust downward (even when falling wages would help end a recession) as readily as other prices do. This owes to several characteristics unique to wages. First, because wages are often contracted between an employer and employee, and a downward adjustment could result in legal consequences. Additionally, employers tend to be hesitant to cut wages as it lowers morale and, ultimately, productivity. Wages can still adjust downward when employees lose jobs and are rehired by different employers at a lower rate than in their prior position. A minimum wage law constitutes a legal price control requiring employers to pay employees at least a certain wage, complicating matters. As AIER Senior Fellow Dave Hebert put it, “The simple fact is that when the price of anything increases, people respond by purchasing less. With minimum wage legislation, reduced employment is concentrated on the very people who are supposed to be the beneficiaries.”
When employers have less flexibility on wages, they adjust on other margins. That may mean hiring fewer workers, reducing hiring of non-college employees (even when a degree is not essential to the position) or without a criminal record. Other adjustments business owners might make include shortening weekly hours of work, reducing options for customers (as is the case with Chipotle), automating jobs, or in extreme cases, opting to close the business entirely.
In the end, the minimum wage hurts people more than it helps them, and none are negatively impacted more than the poorest Americans. Since 2014, New York State has set a minimum wage higher than the federally mandated minimum of $7.25 per hour. A high minimum wage, combined with other onerous regulations and punitive taxes continues to chase New Yorkers out of the state. Minimum wages are also arbitrary, affecting some businesses more than others. Only a political mind could or would think that setting a single price for labor across the vast spectrum of firms, products, and services makes sense.
Why Indexing the Minimum Wage to Inflation is an Even Worse Idea
The problems associated with minimum wages worsen substantially when increases are indexed to inflation. When the minimum wage is set by legislation, there is at least an opportunity for businesses to increase productivity and wages above the minimum wage. If a minimum wage is indexed to inflation, minimum wage increases could outpace productivity. That means businesses will struggle to keep up with the costs of employment, driving employers to hire less, automate faster, and shrink the number of goods and services their businesses produce.
An inflation-index minimum wage will disproportionately damage small businesses operating on thin profit margins, such as grocery stores, which have a just over a one-percent profit margin. For every sales dollar a grocery store receives in revenue, it earns around one and one-half cent. As businesses shut down or leave the Empire State because of their inability to keep up with the inflation-indexed minimum wage, perhaps lawmakers in Albany will finally learn Thomas Sowell’s lesson: “[T]he real minimum wage is always zero, regardless of the laws…” (When it comes to waiting for learning in the political sphere, it’s best not to hold one’s breath.)
How Can New York Get Back on Track?
Also recently, New York State Governor Kathy Hochul announced that New Yorkers may receive a one-time $500 “Inflation Refund” check from Albany in 2025. It’s a gimmick funded by tax hikes, spending cuts, and/or taking on more debt (read: tax hikes and/or spending cuts in the future) and won’t help struggling New Yorkers.
If politicians in Albany want to help New Yorkers increasingly besieged by the adverse consequences of workplace interventionism, and make the Empire State a place where people want to live and work, there would be no better place to start than with reversing disastrous minimum wage policies. That won’t fix all the problems in New York, but people are more likely to keep their New Year’s Resolutions when they set defined, targeted goals.