It hurts the very people it’s supposed to be helping.
It hurts the very people it’s supposed to be helping.
P resident Biden and his fellow Democrats are pushing hard to increase the federal minimum wage to $15, and polls show strong support for the measure. That’s understandable — after all, who doesn’t care about poor people and want them to do better?
The problem is that Americans don’t fully understand how the minimum wage works, or the many ways it hurts the very people it’s supposed to help. As the National Bureau of Economic Research (NBER) notes in a new review of the relevant academic studies, the economic consensus on minimum-wage laws is much clearer, and much more clearly negative, than the press often makes it out to be: The data show that increasing the minimum wage results in a significant net increase in unemployment. The increase is particularly pronounced among young adults — and most pronounced of all among low-skilled workers.
After an exhaustive review of studies on state-level minimum-wage increases enacted since the early 1990s, the authors conclude that “there are far more negative than positive studies, and that there is a very large number of negative and [statistically] significant estimates.” In particular, nearly 80 percent of the studies show negative employment impacts, and more than 55 percent show negative impacts with higher than 90 percent statistical confidence. On the other side, only 20 percent of studies show any positive impact, and barely 5 percent show positive impact with greater than 90 percent statistical confidence.
Many people seem to think that merely by passing a law, we can make an hour of someone’s time worth more than it is in the free market. But that is simply not true. In a free society, government cannot, through any law or regulation, determine what an hour of somebody’s labor is actually worth. Only the market can do that. That is because, except in a planned economy like China’s, business owners cannot be required to operate at a loss. They will only pay their workers what they can afford, given what consumers are willing to pay for their goods and services. The only thing such laws really do is segregate those workers whose marginal product is below the minimum wage and deprive them of the right to work. Employers must then adjust their inputs in accordance with what they can obtain for goods and services in sectors where demand may or may not be elastic.
As the NBER review suggests, people routinely mischaracterize the findings of academic studies of this issue. Just this week, for example, the Economic Policy Institute (EPI) described a 2019 analysis by the Congressional Budget Office (CBO) as concluding that raising the minimum wage to $15 an hour “would raise the earnings of 27 million low-wage workers.” But the CBO actually didn’t go that far. What it said was that wages would likely rise for 17 million low-wage workers and might rise for 10 million more — if the economy underperformed for the next five years. It also concludes that hiking the minimum wage to $15 an hour would likely result in a net loss of 1.3 million jobs, and perhaps as many 3.7 million jobs.
The EPI also estimates that a $15 hourly minimum wage would raise the annual earnings of affected workers by $91.1 billion, and that every dollar of that increase would save federal taxpayers 34 cents in welfare and earned-income tax credits and other benefits. But again, the CBO study comes to a much different conclusion: “The $15 option would reduce real incomes by $9 billion overall,” with an $8 billion increase in incomes for those below the poverty line more than offset by a $16 billion loss of income for those above the poverty line.
More-precise data on the social distribution of these projected gains and losses are difficult to come by, but it is crucial to note something about the increased income for those “below the poverty line.” According to the U.S. Census, about 10.5 percent of the population currently is below the poverty line, and we know that any increase in income won’t be evenly distributed within that demographic. Why? Because the main benefits of a minimum-wage increase are derived by squeezing the labor market at the very bottom of the skill ladder in order to inflate wages for those on the rungs just above the bottom. Raising the minimum wage of a particular job makes it attractive to a new cohort of workers — those with a slightly higher skill level who would be unwilling to take it at the lower wage.
Hence, even the few studies that show a small net loss or a net increase in employment as a result of minimum-wage hikes hide a highly regressive disparate impact. Millions of the lowest-skilled workers are tossed out of the labor market entirely, but that effect is to some extent canceled out by the entry of higher-skilled workers into the labor force at the higher wage.
This is just one example of the paradoxically regressive impacts of the minimum wage. In a 2019 article published by the Foundation for Economic Education, John Phelan noted several other ways that minimum-wage increases can hurt low-income workers. Many employers choose to lay off workers and automate rather than paying the higher wage. Others try to make their employees work harder in fewer hours on the job. Cutting workers’ hours is further incentivized by the Affordable Care Act and other laws that impose costly mandates on employers with respect to full-time workers, defined as those who work 30 or more hours per week; by keeping workers below that threshold, employers can avoid the mandates. As a result, raising the minimum wage is likely to accelerate the transition from full-time to part-time employment propelled by the Obama administration.
Perhaps the most regressive impact of the minimum wage, and perhaps also cruelest, is the replacement of opportunity with dependency. For the least-skilled, least-educated workers, the best and often the only way to climb out of poverty is by learning skills and making connections in the workplace. But the combination of a high minimum wage and the threat of losing welfare benefits in effect pushes the least-skilled Americans out of the labor force entirely. Thus shut out of the most effective avenue of social mobility available to them, they predictably become stuck in a cycle of dependency that tends strongly to trap their children and their children’s children as well, an insidious new kind of segregation.
“No person in America can make it on $8, or $10, or $12 an hour,” says Senator Bernie Sanders. Sanders’s point itself is debatable: $12 an hour means $24,000 a year for a full-time employee, well above the poverty line even for a household of four with a single income, not to mention two. But even if he’s right, the unfairness of earning $12 an hour for even a brief period cannot justify cutting people off — against their will — from the opportunity to learn and earn more by the fruit of their own labor.