Raising the Minimum Wage Brings Minimum Benefits

Thursday, 14 Mar 2013 07:41 AM

By Neal Asbury

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The president made the case during his most recent State of the Union address that the way to prosperity was to raise the federal minimum wage to $9 an hour by 2015, from $7.25, where it has been since 2009. The rationale is that raising the minimum wage would help the middle class and businesses alike.

If that were the case, how do we explain the fact that since the federal minimum wage was instituted in 1938, it has been raised 22 times? If it did what it was supposed to do, there would be no reason to adjust it.

The Cato Institute, while analyzing the findings of economic theory and empirical research regarding the minimum wage over the past 70 years, discovered that minimum wage increases tend to reduce employment. The higher the minimum wage relative to competitive-market wage levels, the greater the employment loss that occurs.

In fact, the Department of Labor's own assessment of the first 25-cent minimum wage in 1938 found that it resulted in job losses for 30,000 to 50,000 workers, or 10 to 13 percent of the 300,000 covered workers who previously earned below the new wage floor.

In another part of its study, the Cato Institute found that “only 20.8 percent of all minimum wage workers are family heads or spouses working full time, 30.8 percent were children and 32.2 percent are young Americans enrolled in school. The popular belief that minimum wage workers are poor adults (25 years old or older), working full time and trying to raise a family is largely untrue. Just 4.7 percent match that description. Indeed, many minimum wage workers live in families with incomes well above the poverty level.”

“While minimum wages ostensibly aim to improve the economic well-being of the working poor, the dis-employment effects of minimum wages have been found to fall disproportionately on the least-skilled and on the most-disadvantaged individuals, including the disabled, youth, lower-skilled workers, immigrants and ethnic minorities.”

So the conclusion is that the minimum wage really doesn’t help the middle class or employers, as Obama has proposed. Instead, it punishes the very workers he wants to help.

A 1978 article in the American Economic Review reported that 90 percent of surveyed economists believe the minimum wage increases unemployment for low-skilled workers. A similar 1992 survey found that 79 percent of economists believed a minimum wage increases unemployment for low-skilled workers.

Economists at Cornell and American Universities have estimated that the minimum wage hike proposed by the president “would eliminate at least 467,000 jobs, and would not reduce poverty, as a majority of beneficiaries live in households with incomes about the poverty level.”

Take, for instance, what would happen to unskilled African American teenagers aged 16 to 19 years old already experiencing an unemployment rate of a staggering 37.8 percent. The unemployment rate for unskilled white teenagers is at 20.8 percent.

If the minimum wage rate goes to $9.00 an hour, these would be the first workers to be let go.

In an interview with Fox Business Network, David French, senior vice president for government relations at the National Retail Federation, said, "A minimum wage hike right now would be one more factor driving up costs for employers and creating headwinds for job creation, especially among the small businesses that create most of our nation's new jobs."

And that’s the crux of the alternative to raising the minimum wage. As I’ve written many times, the real solution to helping create more jobs is to let small companies — our job creators — run their companies without government interference. Let the market determine what a good hourly rate should be. Let the market provide affordable loans so companies can hire and buy products to run their businesses — creating more jobs. I’m talking about manufacturing jobs — jobs that pay good wages and add value to the economy.

Michael Strain, a research fellow at the American Enterprise Institute, writing for The Exchange, sums it up succinctly: “Our labor market crisis is a national emergency. Ideally our government would be implementing policies to help workers get jobs. But surely the government should not actively increase the cost of hiring workers. An increase in the minimum wage would do exactly that — by design. The president was wrong to call for a minimum wage increase, most especially in a labor market in crisis.”

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