March 5, 2014

THROWDOWN THURSDAY: Raising the Minimum Wage: Good Motivations, Bad Policy

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Most supporters of an increased minimum wage have only the best of intentions.  They, like the rest of use, want Americans to earn higher pay, thus helping to alleviate the economic difficulties faced by many in this nation.  Economic mobility is a shared goal.

The problem, of course, is that admirable intentions do not necessarily make for good policy. There is a world of difference between having the right intention and getting the desired result. Proponents of a higher minimum wage provide a good illustration of this truth.

The most contested issue in academic and policy circles regarding the minimum wage is the likely effect that increasing it has on employment levels. It is hard to find much agreement on this question, as opinions vary substantially. A recent Congressional Budget Office Report estimated that, if the President’s proposed minimum wage of $10.10 were enacted, hundreds of thousands of jobs would be lost. Prof. Richard Burkhauser, policy analysis and management, said the expected job loss would “be closer to one million,” due to his belief that labor markets would be more sensitive to changes in the minimum wage than the CBO projects. Prof. Christian Weller, public policy and public affairs, University of Massachusetts Boston, however, contends that the effect on total employment would be minimal, making nearly all low-wage workers better off.

How should we seek to resolve this dispute? The most effective way of doing so is to consider the matter from the perspective of those who make employment decisions in this country — business owners.

The past few years have not been kind to businesses. Those that survived the recession are just beginning to see their profits return to pre-recession levels, while others have not seen any improvement. Put aside the question — to which I think there is a clear answer — of whether it is right to place more costs on businesses during difficult times, and consider how many business are likely to respond should the minimum wage be raised.  Bear in mind that payroll is a large expense for businesses, and it is difficult for companies, particularly those that operate on small profit margins, to simply “absorb” the cost when gross revenues are not increasing. Businesses will not magically discover extra money with which to pay workers and make everyone richer.

The options faced by the employer are thus quite limited, and tend to come down to a few different choices: raising prices, reducing employee work hours and laying off workers. Who benefits if employers take some of these measures? Consumers do not because they will face higher prices. Businesses also do not benefit because higher prices could drive away customers and layoffs make running businesses harder. Even the group about which proponents of a higher wage care most — the lowest paid in our economy — are not necessarily helped.

Low-wage employees experience minimum wage changes differently. Consider a workplace consisting of three employees, each paid $7.25 per hour. Suppose that the first of these employees contributes $8.00 per hour in value to the company, the second $9.50 per hour, and the third $10.00 per hour. If the minimum wage were raised to $8.50 per hour, the second and third workers would get a raise and be made somewhat better off.  But the unintended consequence is that it is now effectively illegal for the company to employ the first worker without accepting a $0.50 loss per hour. It is widely known that companies only employ someone if they expect to profit off that person’s labor.  Once the profit goes away, so does the job.

But not everyone thinks this result is so bad. Former Secretary of Labor Robert Reich commented that even if low-paying jobs are lost, “maybe those aren’t the kind of jobs we ought to preserve in the first place.” That is an awfully callous perspective to have when it comes to workers who, unlike Secretary Reich, could use an additional $7.25 per hour, especially compared to the little-to-no money they would be earning if unemployed.

This demonstrates what is perhaps the most regrettable effect of a higher minimum wage: It locks the lowest skilled individuals out of the labor market. If an individual cannot get a first job at a low-wage, he or she is precluded from gaining the skills necessary to access higher-wage segments of the labor market. This has played out most perniciously in minority communities. In 1980, Milton Friedman explained that the high African American teenage unemployment rate in the United States was primarily due to two failures of government.  The first was poor public education in the inner cities, which put African Americans in an unequal position, and the second was a minimum wage law that meant that those who received a poor education could not get jobs.  Unfortunately, Milton Friedman’s description of the effect of the minimum wage on minorities, and other poor workers, is as true today as it was a few decades ago. The minimum wage has become a tool for relatively well-paid workers to keep others out of the labor market. After all, major labor unions support raising the minimum wage not because their members, who typically earn far more than the minimum wage, would benefit from it, but because raising the wage helps eliminate competition from the presently low-skilled individuals who may never get a chance to develop their talents.

Lifting the poor out of poverty requires policies that create jobs and economic growth, not policies that (badly) redistribute income. An increase in the minimum wage, despite the best intentions of its supporters, would hurt many of the very people who need the most help.

Julius Kairey is a junior in the College of Arts and Sciences. He may be reached at [email protected] Always Right appears alternate Thursdays this semester.