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Government’s Helping Hand also Hurts

Thursday, July 5, 2007

The minimum wage increase will hurt our most vulnerable workers.

wageLest it go unnoticed, the federal minimum wage is set to increase. The minimum wage hike was tucked into the war supplemental bill, which the president recently signed into law, and will be implemented in three stages, concluding at $7.25 an hour. Irrespective of battlefield outcomes abroad, it seems the fight against economic illiteracy at home is a battle that is never won.

One wonders why a minimum wage increase must be staggered and delayed if it is the cure-all its proponents portray it to be. The standard rebuttal is employers need time to adjust. But then the need for adjustment implies that the policy is hardly all benefit and no cost.

The fight against economic illiteracy at home is a battle that is never won.

As with everything in a world of scarce resources, there are tradeoffs and opportunity costs to an increase in the minimum wage. For employers, this means they will have fewer resources to devote to the non-labor aspects of their business. This could decrease their output, lower their sales, and reduce their income. On the other hand, higher labor costs are an incentive to introduce new labor-saving measures such as mechanizing the tasks previously accomplished by employees. Doing so often increases productivity, thereby lowering costs and reducing prices, which increases the purchasing power of consumers.

Benefits to producers and consumers frequently accompany increases in the minimum wage, but fewer gains are experienced by the low-end workers whom an increase in the minimum wage is supposed to benefit directly. To be sure, some are helped as they see their incomes rise, but many more are harmed.

University of California – Irvine economist David Neumark has found that for every 10% increase in the minimum wage, the poverty rate increased by ¾ of 1%. The wage increase from $5.15 to $7.25 is a 41% jump, meaning there could be measurable adverse impacts on the poverty rate.  In a 2005 study, Neumark concluded that “although minimum wages increase the incomes of some poor families, the evidence indicates that their overall net effect is, if anything, to increase the proportions of families with incomes below or near the poverty line.”

This makes sense. An increase in the cost of labor causes employers to reduce their demand for labor. In the case of the minimum wage, it is low-end labor that takes the hit.

These workers lose their jobs, have their hours reduced, or face the elimination of new employment opportunities. The third outcome is arguably the worst as it raises the bar for entry (or reentry) into the labor market for those most in need of work and experience. Increasing the minimum wage effectively takes the lowest rung on the proverbial ladder of success and sets it higher off the ground. A 1999 study by John Abowd, Francis Kramarz, and David Margolis examined movements in both the French and American minimum wages and found that a 1% increase in the real (i.e., adjusted for inflation) French minimum wage rate reduced the future employment probability of a man presently employed at the minimum wage by 1.3% (1.0% for a woman).

The negative consequences of raising the minimum wage seldom make the news, but they are all too prevalent and outweigh the advantages achieved. The young and the inexperienced are priced out of the job market, and their plight gets lost in the politics.

The negative consequences of raising the minimum wage seldom make the news, but they are all too prevalent and outweigh the advantages achieved.

Depending on how much credit one gives to the intellectual savvy of lawmakers, the members of Congress who support increasing the minimum wage either don’t understand the economic impact of doing so, or understand it all too well. They can take credit now for a feel-good policy and the instances of success it produces, and then they can take care of those who are disadvantaged by the wage hike by promoting a whole new set of welfare and job-training legislation. Add to that the consolidated hold of the votes and money of the unions, whose pay scales are tied to the minimum wage, and increasing the rate has no significant political downside.

Airing the economic casualties of government intervention does not serve the purposes of expanding the state or perpetuating political careers, and so it does not occur. And because the mindset of big government prevails in America’s education establishment – our classrooms are case studies on the inferior fruits of monopoly – successive generations are never taught the harm of government help. Socialism is fueled by less information and intelligence, not more.

The battles that don’t require bullets can be as difficult as those that do. Efforts to educate about the minimum wage are the requisite salvoes to reverse economic losses and promote economic opportunity for those who need it most. The good news is that time is on our side: without further intervention, natural inflation and an absence of further rate increases would eliminate the pernicious effects of the minimum wage by giving employers more hiring flexibility and by providing more job opportunities.

There is no guarantee this will come to pass so neatly, though. It may require a fight.

John Santoliquido is a Policy Associate for the 362,000-member National Taxpayers Union, a non-partisan citizen group founded in 1969 to work for lower taxes and smaller government.

Image credit: Photo by Flickr user J Wynia

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