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Commentary

Minimum Wage Merry Go Round


     
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President Obama’s call for a $9 an hour federal minimum wage in his State of the Union address makes me feel a bit like Bill Murray’s character in Groundhog Day. The only difference is that, instead of reliving the same day again and again, I have to keep reliving the same bad idea proposed by yet another politician.

In his speech, Obama said, “Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour. This single step would raise the incomes of millions of working families.” Yet this claim flies in the face of economic theory and real world evidence.

Every introductory economics student learns that mandating a minimum wage above market rates will increase unemployment among the least productive workers. Simply put, minimum wages raise the cost of employing low-skilled labor. Businesses respond by using less of it.

Certainly, advocates of the minimum wage, like Obama, implicitly recognize this reality. Otherwise, why is Obama only asking to raise the wage to $9 an hour? Wouldn’t poor workers be helped even more if he raised their wage to $100 an hour? Such a high minimum wage would result in massive unemployment and unfortunately, it’s actually happened before in the United States.

In 1938, the federal government set the first U.S. minimum wage at 25 cents per hour. At the time, the average wage in the United States was 62.7 cents per hour, so most workers were unaffected. However, the law also applied to Puerto Rico, which was poorer and underdeveloped relative to the United States. Many workers in Puerto Rico earned only 3 to 4 cents per hour at the time. The result of the minimum wage was massive business bankruptcy and high unemployment in Puerto Rico.

The reason we don’t observe massive unemployment caused by the minimum wage is precisely because the minimum wage has been left below the market wage for most employees. More than 98 percent of full-time hourly employees already earn more than the federal minimum wage.

Young part-time workers, particularly minorities, are the most negatively affected by an increased minimum wage. Although raising the minimum wage to $9 an hour wouldn’t cause mass unemployment for most of the population, the 24 percent increase would harm these workers.

Six of the 10 states with the highest teen unemployment rates have state minimum wage mandates higher than the federal requirement. Only Washington state has a minimum wage above $9 an hour and about 30 percent of its teens are unemployed.

Informed apologists for minimum wage laws often cite David Card and Alan Krueger’s 1997 book, Myth and Measurement, which argued that the negative employment aspects of the minimum wage are minimal to non-existent. Of course, one reason they found little evidence of negative effects is precisely because the minimum wage has been kept low enough that it is not binding for the vast majority of workers.

More importantly, nearly 20 years of research since that study has pointed in the other direction. Economists David Neumark and William Wascher surveyed the vast literature studying the effect of the minimum wage in their recent book, Minimum Wages. They find that the bulk of the evidence accumulated over the last 20 years indicates that the minimum wage reduces employment for the least skilled workers and lowers their earnings. Card and Kruger’s study is an outlier, not the norm.

Basic economic theory, advanced empirical research, and common sense, all lead to the same conclusion: minimum wage mandates hurt the very people they are intended to help. Unfortunately, good economics doesn’t always coincide with good politics. So economists are doomed to endlessly fight this same battle over and over again, each time a politician finds it politically expedient to peddle some minimum wage economic illiteracy.


Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been Assistant Professor of Economics at San Jose State University, Associate Professor of Economics at Suffolk University, a Fellow with the Mercatus Center's Global Prosperity Initiative, and a Visiting Research Fellow with the American Institute for Economic Research. He is also the editor of the Independent Institute books, Housing America: Building out of Crisis and Making Poor Nations Rich.






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