Who Wins and Loses when Minimum Wage Increases?

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By Kevin Price, Publisher and Editor in Chief, USDR.

We have all heard the saying that “The Road to Hell is paved with good intentions.” This saying could not be more true than when it comes to minimum wage. Liberals determine whether a policy is “good” entirely on what it should do, rather than what it will do. Liberal policy makers decide they want to raise the incomes of individuals (salaries), when they should seek to increase the spending power of individuals (which would happen from increased productivity and the lower costs that follows).

Increasing the minimum wage, which is intended to raise the living standards of millions of Americans holding unskilled and entry level positions, finds itself playing a much different role. Instead of making individuals more financially well off, minimum wage increases always lead to massive layoffs. In fact, a study from Ball State University suggests that the recent minimum wage increases may have led to the elimination of 550,000 jobs. This level of lost jobs makes an eloquent case for opening up the possibility that such wage levels should be reconsidered.

Part-time workers monitored by the Bureau of Labor Statistics (from 1999 to 2009) found that raising the minimum wage to its current high of $7.25 during this recession, contributed to many businesses reducing the number of jobs they have available through attrition or to eliminate them entirely, according to Michael J. Hicks of Ball State’s Center for Business and Economic Research (CBER).

The findings of the study did not end there:

The youngest and least qualified Americans are those who suffer the most from minimum wage laws. Approximately 67 percent of teenagers and young adult minimum wage workers are members of households with incomes that are at least twice the poverty level (for example $44,000 for a family of four). This means that the vast majority of these jobs do not “make or break” a household’s income, but are important ways for people to get the tools they need to get better jobs in the future. But if the job costs too much due to the government, the opportunity will never arrive.
Adult workers working at minimum wage have limited skill. Raising the salary, in many cases, will force employers to consolidate many positions and eliminate many of these jobs. No one benefits from this kind of result.
About two-thirds of all adult minimum wage workers have a high school degree or less. Frankly, the preparation of these workers are commiserate with their skill, training, and abilities.
One benefit of a lower minimum wage is that it provides individuals the incentive to be more competitive in the job market. Artificially high wages would reduce incentives to improve ones situation, would lead to higher prices for goods made, and leads to the elimination of many jobs. Minimum wage has many down sides, but not many causes for enthusiasm.

The study goes on to make several “real world” recommendations:

The development of a “sub-minimum” wage that would lead to the creation of lower minimum wages for students and new hires would be assisted in keeping jobs.
A student minimum wage would allow employers to hire seasonal workers without having to pay the full cost of adult employment.
Introducing a tenure-scaled minimum wage would give employers an incentive to “take a chance” on less skilled and unskilled workers.

In addition, there are several aggressive steps that could be taken on the minimum wage front. The most important, in my opinion, is eliminating the current minimum wage entirely, but instead have the federal government mandate the states to have minimum wages of their own. This would allow states like Michigan, Ohio, and other struggling states to be able to tackle their unemployment problem in creative ways that make sense to their particular circumstances. For example, they could have a different minimum wage for cities with disproportionately high unemployment, in order to make them more competitive.

There are winners to minimum wage increases. Union workers “win” because many union contracts have clauses that tie their wage scale to the minimum wage. When the minimum wage goes up, the union pay scale goes up. Furthermore politicians who vote for minimum wage increases win because they gain more union votes. Finally, government entities, such as Social Security will enjoy collecting more money from those who still have a job after a minimum wage increase.

Surveys show that unemployment remains the most pressing issue facing voters today. Our continued high unemployment puts us at a level we have not seen in a quarter of a century. The American people are looking for Congress to take serious steps to eliminate the barriers between people and jobs. Reforming minimum wage is an excellent place to start.