September 27, 2011

September 27, 2011 | Commentary on Jobs and Labor Policy, Jobs

Minimum Wage -- Another Example of Good Intentions Gone Wrong

Medieval doctors treated patients with leeches. Their intentions were good. They believed bloodletting removed poisons from the body. Unfortunately, the treatment actually made their patients worse. The same holds true for many modern economic remedies, like the minimum wage.

People of good will want to help low-income workers earn more. So why not just require employers to pay them more? This would give them more money which, when spent, would boost demand. What’s not to like?

Unfortunately, it doesn’t work like that. The real minimum wage is $0; employers do not have to hire additional workers. No small business owner will pay $7.25 an hour to a worker whose efforts raise profits by just $5 an hour. At least, no small business owner that wants to stay in business.

Most studies find that, when the minimum wage goes up, employment goes down. A higher minimum wage prices many unskilled and inexperienced workers out of the job market. Researchers estimate that the recent increase in the federal minimum wage eliminated the jobs of 300,000 youth.

This can hurt these workers for years. The primary value of minimum wage jobs are the on-the-job training they provide. A minimum wage job teaches inexperienced workers valuable skills: the disciplines of going to work each day, taking directions from a supervisor, interacting with customers and co-workers.

As workers gain these skills they become more productive and earn raises. Two-thirds of minimum wage workers get a raise within one year. Minimum wage positions provide the on-the-job-training and experience necessary to get ahead.

Raising the minimum wage reduces the availability of entry-level jobs. Until they gain basic employability skills, however, workers cannot climb higher. Researchers compared workers who were teenagers in states that raised their minimum wage to those in states that did not. A decade later these workers earned slightly less. Higher minimum wages saw off the bottom rung of many workers' career ladders.

Unsurprisingly, the minimum wage does not reduce poverty. Study after study has examined poverty rates and minimum wages. Raising the minimum wage does nothing—nothing—to reduce the poverty rate. Like putting leeches on an asthmatic, it simply does not work.

The evidence does not show raising the minimum wage significantly increases poverty rates either. But that is primarily because it directly covers so few workers. If Congress raised the minimum wage to $30 an hour it would cost millions of jobs.

This effectively happened to American Samoa. When Congress last raised the federal minimum wage, it extended the provision to cover this territory. But American Samoa has a much lower cost of living than the continental U.S. and a much lower wage scale. The new, higher minimum covered virtually all the workers in the islands’ tuna canning industry. The result? Mass layoffs and sharply higher unemployment.

Unlike bloodletting, raising the minimum wage feels good. But good intentions do not prevent the minimum wage from hurting the workers it is meant to help.


About the Author

James Sherk Research Fellow, Labor Economics
Center for Data Analysis

First appeared in FOX News