Minimum wage raises hurt the poor and unemployed

Minimum wages are back in the headlines as a result of initiatives in states, proposals in some cities, as well as efforts by President Obama to raise the federal rate. The way to think about whether or not raising the minimum wage is a good idea is to consider who is supposed to benefit from the increase and what the goal is. The poor and most disadvantaged are those we should all care about, and for whom proponents of the increase say we should be taking these actions. And the goal articulated in the president’s December speech is to reduce inequality. On both counts – helping the poor and reducing inequality – raising the minimum wage will have the perverse effect of making matters worse.

If the goal is helping the poor — something we should all be in favor of — we should first make sure that people who earn the minimum wage are the poor. Perhaps surprisingly to some, the vast majority of minimum wage earners aren’t poor. The average family income of a minimum wage worker is $50,000, whereas the US poverty line for a family of four is less than half that at $22,350.

When President Obama called for raising the minimum wage in his 2013 State of the Union address, he argued that it was to help full time workers. Yet more than two thirds of workers earning the minimum wage are part-time workers. Moreover, most are also between the ages of 16 and 24, and few are parents with children or spouses dependent on their income.

This is intuitive. A large number of minimum wage earners are high school or college students from middle class households. In a short time, many will graduate and go on to earn above average incomes. A not insignificant number will end up very wealthy. So raising the minimum wage is a blunt instrument, if your primary goal is helping the poor.

Even if raising the minimum wage helps few poor people, might it still be a useful policy tool for reducing inequality? There’s a push by labor groups to raise the federal minimum wage from $7.25 to $10.10 per hour. A recent ballot measure in the city of Sea-Tac increased the minimum wage there to $15 (although a judge recently removed most workers from its application) and Seattle’s new mayor wants to raise it to $15 for city workers, and consider a $15 rate for the entire city. Arguments for these moves include reducing inequality and providing a “fair” and “living wage”.

President Obama and Paul Krugman on the minimum wage

The obvious question (and one many economists have long asked) is what’s magical about the numbers proponents of these perennial increases choose? If $10.10 or $15 is going to have such a beneficial impact, why stop there? Wouldn’t making the minimum $20 or $50 produce even greater benefits?

President Obama answered this question himself in The Audacity of Hope:

“It may be true — as some economists argue — that any big jumps in the minimum wage discourage employers from hiring more workers.”

One economist who has argued this is Paul Krugman (variously described as a former Enron adviser, New York Times blogger/columnist and a Nobel Prize winner in economics) in his book Essentials of Economics.

“[W]hen the minimum wage is above the equilibrium wage rate, some people who are willing to work–that is, sell labor–cannot find buyers–that is, employers–willing to give them jobs.”

Put more simply, not all employers will be able to afford an increase and will lay off workers, reduce existing hours, abandon hiring more employees or shelve plans to give existing ones more hours — recall that most workers earning the minimum wage work part-time.

To state the obvious, a “living wage” or a “fair” wage (whatever those may be) only helps those who have a wage. Raising the minimum wage will have the opposite effect of what supporters intend it to do. It will increase inequality, not decrease it, by increasing unemployment and by reducing hours worked by those fortunate enough to not lose their jobs.

Mandatory minimum wages (especially high ones) reduce opportunities for those who need them the most — people with few skills or checkered pasts. They need someone to take on the risk of hiring them or to invest in training them. They need employers with the flexibility to create opportunities.

Minimum wages do just the opposite, by mandating how much employers must pay, rather than allowing willing employees to negotiate terms with willing employers that might not involve a high starting “minimum” wage, but instead allow, for instance, an employee to prove him or herself at a lower initial rate and/or to be invested in with training. People who care about the poor and reducing inequality should support greater labor market flexibility, not less.