The Impacts of Raising the Minimum Wage

Over the past year, fast food and retail workers around America have staged strikes to demand a minimum wage as high as $15 per hour. These strikes helped reignite the contentious debate on the minimum wage at the local, state and federal levels. Advocates of increasing the minimum wage cite the goal of raising individuals and families out of poverty: a worthy goal to consider when crafting public policy. However, not only does increasing the minimum wage fail to help the poor, but it also disproportionately hurts inexperienced, uneducated individuals by decreasing the employment opportunities available to them.

Economics dictate that if you increase the price of a good beyond the market-clearing price, consumers will buy less of it. In the case of wage rates, assuming other factors constant, if you increase the price of hiring an employee, employers will hire less. Therefore, increasing the minimum wage is likely to decrease opportunities for employment—especially among low-skill, uneducated youths. Numerous academic studies have debated the relationship between increased minimum wage and employment, and the majority of research concludes that raised minimum wage has a negative effect on employment levels. (1)

The first individuals to lose their jobs will be low-skill, and often young, workers. Negative employment effects may not be felt immediately, but as employers are spurred by higher labor costs to make laborsaving capital investments, the impact on low-skill workers will grow. The primary value of a low-paying job for many of these individuals is the training and experience the job provides, not their starting wage rate. Removing job opportunities robs these individuals of the crucial workplace experience needed to start careers and earn a higher wage later in life when they are more likely to be supporting families. More than 40 percent of these young earners are enrolled in school during non-summer months, and for 79 percent, it is a part time job. (2) For many young earners, their wages are supplemental spending cash, not household income.

Perhaps the possibility of fewer available employment opportunities would be more palatable if increasing the minimum wage actually helped impoverished Americans. However, the benefactors of an increase to the minimum wage—those who currently hold a job and earn the minimum wage—are more than likely not living in poverty nor supporting a family on minimum wages alone. Over half, 50.6 percent, of minimum wage earners are between the ages of 16 and 24, with an average annual family income of $69,500. (3) Of the adults 25 and older earning the minimum wage, 75 percent of them live above the poverty line and have an average family income of $42,500 a year. (4)

Raising the minimum wage will primarily help teenagers lucky enough to already have a job, not single parents supporting a family. For the 11 percent of adults living in poverty and earning the minimum wage, increasing the wage rate does not effectively help them. (5) Multiple studies have shown little to no relationship between a higher minimum wage and reductions in poverty. Minimum wage employees who receive more pay as a result of a mandated increase to the minimum wage can lose government benefits like the Earned Income Tax Credit (EITC) and food stamps, yet still not earn enough to move out of poverty. A New York University Law School study found that many potential beneficiaries of an increase to the minimum wage would face effective tax rates of up to 90 percent on their new wages. (6)

The problem plaguing America’s poor is not that they earn a low wage, but that they do not work at all. (7) To truly help the impoverished in America, policymakers should enact policies that expand economic opportunity and lower barriers to entry for employment.

Desire to help the nation’s less fortunate spans the ideological spectrum. Unfortunately, evidence suggests that increasing the minimum wage is not an effective solution.

 

 

Footnotes

1 Neumark, David and Wascher, William. “Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research,” National Bureau of Economic Research. November 2006. Available: http://www. nber.org/papers/w12663.pdf.

2 Sherk, James. “Who Earns the Minimum Wage? Suburban Teenagers, Not Single Parents.” The Heritage Foundation. February 28, 2013. Available: http://www.heritage.org/research/reports/2013/02/who-earns-the-mini- mum-wage-suburban-teenagers-not-single-parents.

3 Ibid.


4 Ibid.


5 Burkhauser, Richard V. and Sabia, Joseph J. “Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor?” Southern Economic Journal. January 2010. p. 592–623.

6 Shaviro, Daniel. “ Effective Marginal Tax Rates on Low-Income Households.” Employment Policies Institutes. February 1999. Available: http://www.epionline.org/studies/shaviro_02-1999.pdf.
7 Sherk, James. “Raising the Minimum Wage Will Not Reduce Poverty.”

7The Heritage Foundation. January 8, 2007. Available: http://www.heritage.org/research/reports/2007/01/raising-the-minimum-wage-will-not-reduce- poverty.

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