05 Jan 2007 Raising the Minimum Wage Kills Jobs, But Congress Doesn’t Appear to Care

Posted at 06:58h in Articles, Blog by

As House Democrats pledge to raise the federally-mandated minimum wage by 40 percent, our Ryan Balis asks: “Do Minimum Wage Increases Benefit Workers and the Economy?”

An excerpt:

…the job-killing effect of higher mandatory minimum wages is well documented. As Alex Adrianson of The Heritage Foundation points out: “Raising the minimum wage increases the prices of goods produced by minimum wage workers. Consumers respond by buying less, and employers respond by making less, which means fewer jobs. Employers also respond to relatively more expensive labor by investing in labor-saving technology, which again means fewer jobs.”

At the federal level, the National Federation of Independent Business (NFIB), an advocate on behalf of small and independent businesses, estimates a federal increase to $6.65 an hour would result in 217,000 workers losing their jobs. Some 146,000 workers in the restaurant industry lost their jobs following the last federal minimum wage increase Congress enacted in 1996, according to the National Restaurant Association.

At the state level, raising the wage level by $6.75 to $8.25 per hour in Massachusetts would result in an estimated 26,970 lost jobs and $371 million in lost wages across the state if implemented, according to David Tuerck and Paul Bachman of The Beacon Hill Institute at Suffolk University. Low-wage workers, women and workers over the age of 20 would suffer disproportionate employment losses.

Federal minimum wage increases are also harmful to small business. The NFIB explains:

Mandatory wage increases hurt not only small businesses, but their employees as well. Big corporations do not have to absorb the cost because most minimum-wage jobs are offered by small businesses. Government manipulation of the starting wage has failed as [a] tool of social and/or economic justice. It has not been proven to reduce poverty or narrow the income gap and puts a stranglehold on America’s top job creators: small businesses.

Moreover, mandatory increases remove the flexibility of business owners to decide how much to pay their own employees. As a result, it may be difficult for small businesses operating at the margins to find ways to cut costs while continuing to offer a competitive service and attractive employee benefits. As Mark Alesse and Matthew Guilbault of the New York chapter of the NFIB write:

A small increase of $1.60 per hour would cost a bake shop with ten clerks and bakers over $30,000 per year, not counting the increases that a higher payroll brings in the costs of workers compensation insurance, unemployment insurance, Social Security taxes, Medicare taxes and even liability insurance in some cases. This is money that most small employers simply do not have. So, what will they do? Lay off workers, increase prices, or both.

In addition to hurting ‘mom-and-pop’ businesses, the minimum wage also tends to “price out” low-wage workers and those with minimal educational and skill attainment.

For instance, in Santa Fe, California the unemployment effects of mandated wages have been most pronounced among the least-skilled workers. In 2004, the city mandated a minimum wage increase to $9.50 per hour – an additional increase to $10.50 is scheduled to take effect in 2008 – on private city businesses employing more than 25 people. According to University of Kentucky economist Dr. Aaron Yelowitz, the likelihood of unemployment increased 3.3 percent among city workers and 8.3 percent among less educated individuals (those with fewer than 13 years of education). Usual hours of work also fell most sharply among the less educated group – 3.2 hours per week, compared to only 1.0 hours for the general workforce.

Economic research shows that mandatory minimum wage increases offer little help to the working poor. According to analysis of 2003 Current Population Survey (CPS) data by Richard Burkhauser and Joseph Sabia of Cornell University, over 70 percent of workers living in poor families – the “working poor” – earn hourly wages greater than $7.00 an hour.

Ironically, the primary beneficiaries of a minimum wage increase would be those workers already living in higher-income families. As George Mason University economist Walter Williams points out using U.S. Bureau of Labor Statistics data, the overwhelming majority of minimum wage earners do not fit the poverty-stricken demographic that the minimum wage is intended to assist.

…only 5.3 percent of minimum wage earners are from households below the official poverty line; forty percent of minimum wage earners live in households with incomes $60,000 and higher; and, over 82 percent of minimum wage earners do not have dependents.”

Instead of forcing employers to pay what the “legislative gods” deem appropriate, James Dorn of the Cato Institute argues that legislatures should focus on establishing positive conditions for economic prosperity. Dorn writes, “If legislators really want to help the poor, the best thing they can do is abolish, not increase, the minimum wage.” Dorn concludes, “Policies that increase competition and choice in public education, reduce marginal tax rates on capital and labor, and protect private property rights would be positive steps toward increasing economic freedom, workers’ dignity, and prosperity.”

It’s not clear at all that Congress cares about the job-killing effects of minimum wage increases. The political and public relations benefit of raising them is too tempting for many politicians to resist.

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