Viewpoint: The negative effects of the minimum wage

Tuesday, November 21, 2006

Various state legislators and interest groups around the United States are pushing for increases in the minimum wage. In California, for example, even Republican Gov. Arnold Schwarzenegger now advocates raising the state minimum wage from its current $6.75 an hour to $7.75 by July 2007. But when the minimum wage law confronts the law of demand, the law of demand wins every time. And the real losers are the most marginal workers -- the ones who will be out of a job.

Creates Unemployment. In a free labor market, wage rates re-flect the willingness of workers to work (supply) and the will-ingness of employers to hire them (demand). Worker productivity is the main determinant of what employers are willing to pay. Most working people are not directly affected by the minimum wage because their productivity and, hence, their pay, is al-ready well above it.

The law of demand says that at a higher price, less is demanded, and it applies to grapefruit, cars, movie tickets and, yes, labor. Because a legislated increase in the price of labor does not increase workers' productivity, some workers will lose their jobs. Which ones? Those who are the least productive.

Minimum wage laws mostly harm teenagers and young adults because they typically have little work experience and take jobs that require fewer skills. That's why economists looking for the effect of the minimum wage on employment don't look at data on educated 45-year-old men; rather, they focus on teenagers and young adults, especially black teenagers.

A comprehensive survey of minimum wage studies found that a 10 percent increase in the minimum wage reduces employment of young workers by 1 percent to 2 percent.

To put that into perspective:

* Gov. Schwarzenegger's proposed 15 percent increase in the state minimum wage would destroy about 35,000 to 70,000 unskilled jobs -- putting 1.5 to 3 percent of young Californians out of work.

* Overall, the pro-posed minimum wage increase in California would eliminate about 70,000 to 140,000 jobs.

* A 15 percent in-crease in the mini-mum wage nationwide would destroy about 290,000 to 590,000 young people's jobs, and about 400,000 to 800,000 jobs overall.

Hurts the Poor. Proponents of a higher minimum wage often argue that it's difficult to support a family when the only breadwinner earns the current minimum wage. This claim is flawed, for three reasons.

First, for a minimum-wage increase to help a single breadwinner earn money for his or her family, the worker must have a job and keep it at this higher wage. A job at $5.15 an hour, the current federal minimum, is much better than no job at $6 an hour.

Second, increases in the minimum wage actually re-distribute income among poor families by giving some higher wages and putting others out of work. A 1997 National Bureau of Economic Research study estimated that the federal minimum-wage hike of 1996 and 1997 actually increased the number of poor families by 4.5 percent.

Third, a relatively small percentage of the workers directly affected are the sole breadwinner in a family with children. A study by the Employment Policies Institute shows that in California, for example, only 20 percent of the workers who would have been directly affected by a proposed 2004 minimum-wage increase were supporting a family on a single, minimum-wage income. The other 80 percent were teenagers or adult children living with their parents, adults living alone, or dual earners in a married couple.

Reduces Competition. The main proponents of the minimum wage are labor union officials who use substantial resources to lobby and testify for higher minimum wages. But they have a self-interested motive: hobbling the competition. Almost all union members make well above the minimum wage, but by getting the minimum wage increased, they can reduce competition from less-skilled workers who would receive lower wages. Similarly, large employers who pay more than the minimum, Wal-Mart being the most recent example, also push for higher minimum wages, presumably to make things more difficult for their low-wage competitors.

David R. Henderson is a research fellow with the Hoover Institution and an economics professor at the Naval Postgraduate School. He is coauthor of Making Great Decisions in Business and Life.

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