Why Minimum Wage Hurts the Economy
Introduction Hurts Economy Helps Economy
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
• Of everyone in the poverty level, only 25% of the people will benefit from the 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 increases in response to a higher minimum wage. The final result is more workers looking for fewer jobs.
If we have 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 625,000 to 100,000 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 hierarchy. 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 10% increase in average wages from an increase in minimum wage resulted in a 7% increase in unemployment
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 a lot of people. Since there are fewer jobs available in a larger market, it is more difficult for all workers to find employment. The expanded collection 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 not 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. 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?
