In his 2013 State of the Union Address, President Obama proposed increasing the national minimum wage from $7.25 to $9.00 an hour, with the stated goal of raising the incomes of millions of working families. Minimum wage laws attempt to create a minimum standard of living to protect the health and well-being of employees by mandating a base level of pay that employers are required to pay certain covered employees.
In an Expert Commentary from the Mercatus Center, senior research fellow Keith Hall, a former commissioner at the Bureau of Labor Statistics, argues there are two major flaws in the president’s plan. First, there are not millions of working families making the minimum wage. Hall points out that approximately 1.7 million people currently earn the federal minimum wage, and about half of these people are under 25 and one-third are teenagers.
Second, Hall argues increasing the minimum wage is likely to reduce the amount of low-skilled employment, employer job training, and worker benefits. This effect would be magnified in the current economy, expanding already rampant unemployment for people under age 25. This has proven true of the recent increases in the minimum wage. Mark Perry of the American Enterprise Institute found that when the minimum wage was increased by 41 percent between 2007 and 2009, teenagers experienced a dramatic increase in unemployment: “Jobless rates for 16-19-year-olds increased by ten percentage points, from about 16% in 2007 to more than 26% in 2009.”
Supporters of these laws argue they protect workers from exploitation by employers and reduce poverty. Opponents of minimum wage laws cite evidence the artificial wage hikes increase unemployment and poverty. When minimum wage laws require businesses to pay their workers higher wages, businesses have to make adjustments elsewhere to offset the increased costs in order to maintain profitability. These cuts lead to reduced hiring, fewer work hours for employees, diminished fringe benefits for employees, and higher prices for consumers.
Increasing the legal minimum wage is not an effective method of addressing poverty and can harm the economy by creating barriers to entry for less-skilled and less-educated workers. Increasing the minimum wage to $9 per hour will increase both the number of unskilled workers looking for work and overall unemployment.
The following articles examine minimum wage hikes and their effects on employment.
Minimum Wages and Poverty: Will the Obama Proposal Help the Working Poor?
Richard V. Burkhauser and Joseph J. Sabia examine the effectiveness of minimum wage increases in reducing poverty. They argue that if policymakers are truly interested in helping the working poor, they should concentrate on policies such as the EITC that directly help the working poor without disrupting the underlying labor market, and should abandon politically popular but ineffective anti-poverty measures such as the proposed minimum wage increase.
Research & Commentary: Earned Income Tax Credit vs. Minimum Wage Laws
The Earned Income Tax Credit (EITC) and minimum wage laws have been two of the primary mechanisms the federal and state governments have used to help low-income families move out of poverty. A debate is currently ongoing in many state legislatures and Congress over which of these two policies is more effective and should be expanded. Recent studies have shown the EITC to be more effective in reducing poverty. In this Research & Commentary, Matthew Glans examines the Earned Income Tax Credit and minimum wage laws from multiple perspectives.
Raising the Minimum Wage Hurts Vulnerable Workers’ Job Prospects without Reducing Poverty
James Sherk of the Heritage Foundation argues that although minimum wage laws are intended to reduce poverty, in reality the minimum wage encourages teenagers to drop out of school and reduces low-income workers’ future job prospects and earnings.
Increasing the Mandated Minimum Wage: Who Pays the Price?
D. Mark Wilson of the Heritage Foundation examines minimum wage increases, arguing the increases are not cost-free and someone has to pay for them. “Economic research indicates that those who pay the most are unskilled youth through fewer job opportunities, consumers through higher prices, and taxpayers through higher taxes or fewer services,” he writes.
Let’s Review the Adverse Effects of Raising the Minimum Wage on Teenagers When it Increased 41% between 2007 and 2009
Mark Perry of the American Enterprise Institute examines the effect of the 2007 and 2009 minimum wage increases on teenagers. “Artificially raising wages for unskilled workers reduces the demand for those workers at the same time that it increases the number of unskilled workers looking for work, which results in an excess supply of unskilled workers. Period.”
The Effects of Minimum Wages on the Distribution of Family Incomes: A Nonparametric Analysis
David Neumark, Mark Schweitzer, and William Wascher present evidence of the effects of minimum wages on family incomes. Although minimum wage increases do raise the incomes of some poor families, the evidence indicates their net effect is, if anything, to increase the proportion of families with incomes below or near the poverty line. Thus it would appear that reductions in the proportion of families that are poor or near-poor should not be counted among the potential benefits of minimum wages.
Who Earns the Minimum Wage? Suburban Teenagers, Not Single Parents
James Sherk of the Heritage Foundation examines which workers actually receive the minimum wage. Sherk finds data from the Bureau of Labor Statistics and the Census Bureau show most minimum-wage earners are young, part-time workers and relatively few live below the poverty line. Their average family income is over $53,000 a year. “A hike in the minimum wage primarily raises pay for suburban teenagers, not the working poor. If Congress and the president seriously want to help the working poor, they should look elsewhere,” he writes.
Racial Disparities in the Employment Consequences of Minimum Wage Increases
This study from the Employment Policies Institute investigates whether the effect of minimum wages on the employment and hours of young, low-skilled men differs by race. The authors find the consequences of the minimum wage for this subgroup were more harmful than the consequences of the recession.
The Negative Effects of Minimum Wage Laws
Mark Wilson of the Cato Institute reviews the economic models used to understand minimum wage laws and examines the empirical evidence. Wilson describes why most of the academic evidence points to negative effects from minimum wages, and he discusses why some studies may produce seemingly positive results.
Raising the Minimum Wage Will Not Reduce Poverty
James Sherk of the Heritage Foundation argues that the evidence shows (1) a higher minimum wage causes employers to cut back on the number of workers they hire and employees’ working hours; (2) the beneficiaries of higher minimum wages are unlikely to be poor because most minimum-wage earners are not poor; and (3) few individuals living in poverty work at minimum-wage jobs or indeed any job.
The Negative Effects of the Minimum Wage
David R. Henderson of the National Center for Policy Analysis examines several negative effects of the minimum wage, including its effects on unemployment, job benefits, and competition.
Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research
David Neumark and William Wascher review the literature on the employment effects of minimum wages—in the United States and other countries—that was spurred by the new minimum wage research beginning in the early 1990s. Their review indicates there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. Their review found very few studies that provided convincing evidence of positive employment effects of minimum wages.
Thinking about Local Living Wage Requirements
Timothy J. Bartik of the W. E. Upjohn Institute for Employment Research reviews what is currently known about the benefits and costs of different varieties of a “living wage”: a local government requirement, now adopted by more than 50 local governments, for wages above the federal minimum imposed on employers with some financial link to the local government. The paper concludes moderate living-wage requirements applied to the local government’s own employees, and contractors’ and grantees’ employees who are funded by the local government, may do more good than harm. Excessive living wages or living wages applied to non-city-funded workers are more likely to have negative side effects.
Living Wage and Earned Income Tax Credit: A Comparative Analysis
Writing for the Employment Policies Institute, Mark Turner and Burt Barnow argue “living wage” laws are vastly less efficient than localized Earned Income Tax Credit programs.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the FIRE Policy News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].