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?
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”
An interesting concept is that 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 level of ability to pay for labor. In the long run, minimum wage increases will inhibit entrepreneurs from growing their companies
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.
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 or eliminate personnel. 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. Failing to do so will make a business less competitive in the marketplace.
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, as I discussed early in the presentation. 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”
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 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:
- Earned income tax credits
- 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
