Introduction Hurts Economy Helps Economy

Jason Fine's Presentation

Introduction

Raising the minimum wage destroys jobs, hurts the poor, keeps people on welfare, and encourages high school students to drop out of high school. It hurts exactly the workers that it intends to help – the poor, the unskilled, and the young.

One survey indicated that 80% of Americans supported a higher minimum wage. Of those same respondents, less than half, approximately 46%, supported a higher minimum wage if it might reduce the number of jobs available for workers with limited skills.

To get people out of poverty, we need a system that increases opportunities for low-skilled workers. Raising the minimum wage is the wrong solution for helping the poor, the unskilled, and the young.

This graph describes families in poverty and those eligible and ineligible for receiving benefits of a minimum wage increase in 1995

Only 25% of families in poverty were eligible of receiving benefits from a minimum wage increase

Economics of Minimum Wage on Unemployment

The laws of supply and demand apply for the labor market just as they do for other markets. If the government raises the minimum wage (the price of labor), employers will demand fewer employees. At the same time, the supply of labor will increase in response to a higher minimum wage. The final result is more workers looking for fewer jobs.

If there is a minimum wage increase above the equilibrium point, the amount of labor supplied is much greater than the amount of labor demanded

Effect on Employment

This graph describes how as the minimum wage increases, the level of unemployment also rises

When the government was going to raise the minimum wage from $4.25 to $5.15 an hour, estimates were that 100,000 to 625,000 jobs would be lost.

It is important to recognize that most of the jobs that are lost are entry-level jobs. By destroying entry-level jobs, a higher minimum wage harms lifetime earnings of low-skilled workers. The main way that minimum wage hurts the poor is by destroying the first level of the employment chain. Without entry level jobs, low-skilled and young workers cannot start careers and gain valuable work skills.

According to Dr. Lowell Taylor, state-level minimum wage increases led to significant unemployment and decreases in employment growth. Dr. Taylor studied all workers in all sectors of the retail business in California over one year. His conclusion was that for every increase in average wages of 10%, the unemployment level would increase by 7%.

Effect on Welfare Recipients

As minimum wage supports welfare recipients to search for employment, it also makes it more difficult for them to find work. Companies are restricting the amount of jobs they are offering because they only have a certain budget for their human resources and the increase in wage cuts out jobs. Also, the higher minimum wage makes work more appealing to many people. Since there are fewer jobs available in a larger market, it is more difficult for all workers to find employment. The larger pool of job applicants allows employers to be more selective and employers pick the applicants with the most skills from this pool. The applicants with the most skills are almost always never people on welfare.

Overall, welfare recipients suffer because of fewer jobs and the stiffer competition from an increased minimum wage. The result of a higher minimum wage is to keep welfare recipients dependent on the government for a longer period of time.

Dr. Peter Brandon of the Institute for Research on Poverty found that raising the minimum wage kept welfare mothers on welfare longer. Mothers on welfare in states that raised their minimum wage remained on welfare 44% longer than mothers on welfare in states where it was not raised.

Effect on Teenagers & High School Dropouts

Incomes of high school dropouts are not anywhere near the incomes of college graduates. Raising the minimum wage encourages high school students to drop out of high school by increasing the rewards to work. Without a high school degree, advancement in a career and life in general are much more difficult. After these high school students drop out, some don’t find work and the others compete the jobs away from welfare recipients.

As the graph shows, from 1981 to 1990, the minimum wage did not rise and the teenage unemployment rate fell from 25% to 15%

Since the minimum wage increase in 1990, teenage unemployment has gradually risen to more than 20%

In 1981, the Congressionally mandated Minimum Wage Study Commission concluded that a 10% increase in the minimum wage reduced the teenage employment level by 1-3%.

Who Benefits from Minimum Wage Increases?

It is important to note that minimum wage workers are not parents, struggling to feed their children. Most are high school or college students living at home. Therefore, the level of minimum wage is irrelevant to people living in poverty. In 1993, Secretary of Labor Reich said, “after all, most minimum wage workers are not poor.”

Many low-wage workers are found in higher-income households. When the minimum wage increased from $3.35 to $4.25, 57% of the minimum wage increase went to families with incomes at least twice the poverty level. Only 17% went to families below the poverty level. 36% of the benefits went to families whose income was at least three times the poverty level, which was $45,000 for a family of 4.

A 2nd study found that an increase in the minimum wage led to no reduction in poverty rates. The study was based on minimum wage changes that took place in the 1980s. While some members of these groups might have seen a higher income, the higher earnings were offset by the unemployment effect.

The pie graph shows that only 2.8% of workers affected by minimum wage are single parents

Approximately 57% of minimum wage workers are single individuals, almost 36% of them living with their parents

In 1995, Richard Vedder and Lowell Gallaway of the National Center for Policy Analysis concluded that only 1.2% of all minimum wage workers were adult heads of households with incomes less than $10,000.

This graph shows that 57% of those that benefited from this minimum wage increase were from families with household incomes greater than $45,000

Only 17% of those that benefited had incomes below the poverty line

Effects on Businesses

Increases in the minimum wage hurts entrepreneurs. Every day, many entrepreneurs take risks and struggle just to make a small profit. Essentially, the minimum wage acts as a tax on their labor. If the minimum wage is more than their ability to pay for labor, these businesses will not hire additional labor and will potentially have to fire people in order to stay at their ability level to pay for labor. In the long run, minimum wage increases will inhibit entrepreneurs from growing their companies.

Herman Cain Testimony

Herman Cain, CEO & President of Godfather’s Pizza, Inc. presented his testimony on minimum wage to the Joint Economic Committee of Congress. A couple of points from his argument were:
• 4.7 million workers receive minimum wage, 7.8 million people receive unemployment, 9 million adults are on welfare
• More than 35% of Americans under 35 had their first job in the restaurant industry, an industry that is full of minimum wage jobs

Herman presents three ideas as to why minimum wage does not work. The first is that minimum wage increases reduce entry level job opportunities. A few weeks before his testimony, a colleague in Oregon told him about a homeless 17 year-old he hired in the mid-1980's. He gave the teenager a job chopping lettuce, deveining shrimp and sweeping floors. That 17 year-old worked his way up. He's now the executive chef at the restaurant. But the job that brought him into the business no longer exists. When Oregon raised its minimum wage a few years ago and the restaurant owner looked for ways to cut costs, this job was one of the first to go. Now Herman’s colleague buys lettuce already chopped from a nearby automated facility. Herman explains, “when you make it more expensive to hire people who lack basic work skills and experience, you risk shutting them out of the workforce."

His second point is that minimum wage jeopardizes current jobs by hurting the businesses that are already marginally profitable. When the government raises the cost of doing business for businesses that are barely surviving, they are risking having businesses let employees go and shut their doors permanently.

Herman’s third point is that a minimum wage increase is an ineffective way to get someone out of poverty. According to Herman, minimum wage workers are mostly under the age of 25 and work part time. 9 out of 10 of his hourly employees chose to work less than 35 hours a week even though working full time was available. He believes the best way to get people out of poverty is to get them into the job market and give them a chance to acquire basic skills.

Herman states that the government should “focus on creating more jobs, not on raising the cost of entry-level employment; not on eliminating existing jobs; and not on taking away the opportunity for people to determine their own futures.”

Sources

Organizations Against a Minimum Wage Increase
The Cato Institute

The Heritage Foundation

Employment Policies Institute

Joint Economic Committee on Minimum Wage
The Case Against a Higher Minimum Wage

Raising the Minimum Wage: The Illusion of Compassion

Minimum Wage: Economics Untangled

Minimum Wage Talking Points: Part 1

Minimum Wage Talking Points: Part 2

The Minimum Wage: JEC Briefing

Minimum Wage Hearing Testimony 1

Minimum Wage Hearing Testimony 2

Others
Regulation: Sense and Nonsense on the Minimum Wage

Economic Policy Institute Minimum Wage Issue Guide

Policy Debate: Does an increase in the minimum wage result in a higher unemployment rate?

John Pearis' Presentation

Effects on Businesses Continued

What businesses are considered "minimum wage employers"?

In the U.S., the federal minimum wage and higher wages mandated by individual states hurts businesses, especially small businesses. According to the National Federation of Independent Business, a small business advocacy organization, big corporations do not have to absorb the cost because most minimum-wage jobs are offered by small businesses. And the Small Business Association (SBA) reports, "Among all minimum wage workers, 54 percent work in businesses with fewer than 100 employees and two-thirds work in businesses with fewer than 500 employees."

As for small business market share, the SBA goes on to state that, "in 1998, 590,000 new businesses were established in the United States. Of these, 565,000 employed fewer than 20 workers. But there were also 541,000 firms that went out of business that year and 512,000 of them had 20 workers or less."

In a 2005 report, The National Center for Policy Analysis highlights the vulnerability of small businesses, stating how they "create 75 percent of new jobs annually but they are also responsible for most job losses." The report also mentions that adverse economic conditions and miniscule profit margins put them at a much higher risk of bankruptcy than their larger corporate counterparts.

So exactly how much does a minimum wage increase cost businesses?

When the government implements an artificial price floor, businesses are not able to negotiate terms of employment as they see fit. Instead of rewarding a workers effort based on the real value a worker adds to the firm, employers are forced to pay a minimum sum that often may not reflect the workers efforts and may in fact be greater than the value of services they provide for the firm. For example, some businesses like fast food restaurants cannot afford to hire as many full-time positions as they wish and rely on several part-time workers. Older workers tend to be replaced by younger workers too.

When faced with an increase in the minimum wage, businesses must either raise the prices of their goods and services, eliminating personnel or encouraging or coercing them to worker harder and be more productive. Since passing the extra cost of hiring workers onto consumers is generally an unfavorable option, businesses take the hit instead and cut their least skilled workers from the payroll. Not doing so will make a business less competitive in the marketplace and could potentially cause the business to fold and fail completely.

A Jerome Levy Economics Institute survey of small businesses revealed that if there was a mandatory increase at the federal level from $5.15 to $6.00 per hour, "more than 20% of small business owners" would "reconsider their employment decisions." Being forced to pay $6.00 an hour to a worker who only contributes $5.15 worth an hour to the bottom line is not an economically sound practice for employers.

After reviewing research fifty years of research on the minimum wage, one of the U.S. Congressional Joint Economic Committee's conclusion was that, "higher minimum wages encourage employers to cut back on training, thus depriving low wage workers of an important means of long-term advancement, in return for a small increase in current income. For many workers this is a very bad trade-off, but one for which the law provides no alternative."

In 2001, D. Mark Wilson of the Heritage Foundation wrote, "The last time the minimum wage was increased, restaurant menu prices increased 2.6 percent in 1997 compared with a 1.7 percent increase in the consumer price index. Inflation in the service sector, in which most minimum wage workers are employed, rose 2.8 percent in 1997—1.1 percent higher than the overall inflation rate." This goes to prove that even though many low wage workers in service industries may make slightly more than the minimum wage, harm is still done when price increases are greater than the inflation rate.

Other consequences?

The nature of minimum wage also gives employers an improper yet strong incentive to hire workers illegally. According to Georgetown University economics professor Alfred Tella, "Employers who evade the increased labor costs by paying illegal workers less than the new higher wage by going underground or paying off the books would eliminate potential new job opportunities for legal workers. Because illegal workers are exploitable, their dollar equivalent worth to some employers could be more than the new higher minimum wage, in which case the illegals would be retained at the expense of legal workers. Going off the books would also save employers the significant costs of employment taxes and non-wage benefits, which could lead them to fire legal workers and hire illegals. Honest business people who follow the rules would try to compete with employers who disregard the law. But the gap between off-the-books pay and legal compensation would force many small businesses to fail or succumb and break the law."

What are sound anti-poverty alternatives to a minimum wage?

Since it was passed into law in the early 20th century, the U.S. minimum wage has been touted by politicians and groups like labor unions as a policy that counteracts poverty and helps protect workers from being exploited by their employers. But a federally mandated wage has proven itself as misguided public policy and failed to yield such an outcome. The nature of today's globalized business environment and the cost of complying with domestic regulations like the minimum wage has made it more difficult for firms to turn a profit and fairly reward diligent workers whose output contributes to the overall success of the company.

In spite of these dissapointing trends, there are more economically and socially sound steps to reduce income inequality and help empower the poor and working class. These alternatives to the minimum wage include:

The Earned Income Tax Credit (EITC): designed to aid lower and middle-class workers, this is linked to a family's income. This tax credit should be increased accordingly from its current rate in order to be a truly effective substitute for a minimum wage increase. Opponents of such measures like the Economic Policy Institute argue this increase in the EITC would involve higher federal budget costs, which is true. However these increased costs can certainly be counteracted by cutting wasteful federal spending or revising the tax code.

Creating more personal retirement accounts, enabling lower and middle-class workers to deposit some of their Social Security payroll taxes and invest the money privately as they wish

Enforce existing immigration laws to shrink employers' incentive to hire illegal workers, including illegal immigrants. Cutting down on the number of workers paid under the table will create fairer job opportunities for those seeking work. And those who are currently employed can then have the peace of mind and well-being knowing there is less of a chance of being fired or demoted by their employer so the firm can hire cheaper laborers, oftentimes off the books.