Politics & Policy

Minimum-Wage Hikes Don’T Add Up

The sentiments may be admirable, but the economics are faulty.

Sen. John Kerry counts himself among those who have concluded that millions of low-wage, mostly young or unskilled workers deserve a raise. A pretty hefty one, too: He’s called for an increase in the federal minimum wage from $5.15 to $7 per hour.

The sentiments behind this may be admirable, but the economics are faulty. Compensation for unskilled, low-wage workers tends to rise quite rapidly without any government intervention. And any increase in the minimum wage would decrease the number of jobs available to unskilled workers. Good intentions don’t cut it. Congress should reject a minimum-wage hike.

Behind calls for a minimum-wage hike is the assumption that it’s up to government to increase wages for unskilled and inexperienced workers — that wages will not naturally increase in a market economy even as these workers gain experience and skills. The supporters of an increased minimum wage tend to see low-wage work as a “dead-end” where promotions, raises, and new opportunities simply don’t exist. In this worldview, pay increases not ordered by government never occur.

But the dead-end job is largely a myth. Minimum-wage earners typically receive raises and promotions or find more lucrative work without any governmental help. According to economists William Even and David Macpherson, in a report for the Employment Policy Institute, between 1998 and 2002 typical minimum-wage workers saw their wages climb by 10.4 percent within a year of beginning work — and this during a period in which the minimum wage didn’t change.

Moreover, recent Census data show that only 15 percent of workers earning within $1.50 of the minimum wage belong to poor families, while 20 percent belong to families whose total earnings exceed $80,000 per year. The average low-wage worker had a total family income of more than $40,000. Concern for the working poor may motivate many supporters of minimum-wage increases, but the working poor make up only a small portion of those who would benefit from a higher minimum wage.

Nonetheless, minimum-wage jobs play a valuable role in the economy, and their value to workers goes beyond the modest monetary compensation. In many cases these jobs provide a valuable introduction to the working world for teens and young adults who still live with their families. Most of these workers will reduce their hours or leave their jobs as needed for classes and move out of minimum-wage work shortly after completing their education. But even those who must work full-time at minimum-wage jobs gain experience and a work record they can parlay into raises, promotions, or more lucrative jobs.

Nobody wants to work for the minimum wage any longer than necessary, but that’s no reason to adopt a policy that is likely to reduce the number of low-wage jobs available. In fact, most economists contend that increases in the minimum wage lead to at least a modest reduction in job openings available to unskilled and inexperienced workers.

Increases in the minimum wage in 1990 and ‘91 led to a 12 percent decrease in employment opportunities for teens, according to calculations based on Bureau of Labor Statistics data. Minimum-wage hikes in 1996 and ‘97 led to less-dramatic but still substantial decreases in opportunities for teens.

But teens aren’t the only ones who lose out. Minimum-wage increases also have been linked to increases in welfare caseloads.

While Sen. Kerry and nearly all Americans sympathize with minimum-wage workers, we should resist calls to raise their wages by government decree. Government can’t force employers to pay higher wages without making jobs scarcer for unskilled workers. The good news is that compensation for minimum-wage workers will rise naturally along with their experience and skills.

All we need to do is stay out of the way.

– Paul Kersey is a policy analyst who specializes in labor issues at The Heritage Foundation.


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