Minimum Wage Hike Could Lead To Job Losses

(CBS)

The U.S. unemployment rate has reached 9.5 percent, according to the government's figures. Which bring us to today's EconWatch question: Will increasing the minimum wage during a deep recession help -- or hurt -- unemployment?

We're about to live through that experiment in applied economics. On Friday, the U.S. minimum wage is set to increase from $6.55 an hour to $7.25 an hour. That makes it 11 percent more expensive for businesses to employ a minimum-wage worker.

(The last time the minimum wage was increased was July 2008 as part of the second-to-last step in a series of increases required by a law enacted the year before. This week's increase is the last.)

As anyone paying even scant attention to the news in the last year knows, economists often disagree more than they agree. Some economists, including Nobel laureates, say the spending package known as the "stimulus" bill was a great idea. Others, including Nobel laureates, think it wasn't. More generally, business cycle theory and Keynesian economics are points of sharp disagreement.

The effects of a minimum wage on unemployment are an exception to that rule. Perhaps it's because the economic laws at issue are straightforward, but economists generally agree that increasing the minimum wage also decreases employment; workers who aren't worth $7.25 an hour to their employer won't have a job.

"Most noneconomists believe that minimum wage laws protect workers from exploitation by employers and reduce poverty," says Econlib.org's Concise Encyclopedia of Economics. "Most economists believe that minimum wage laws cause unnecessary hardship for the very people they are supposed to help. The reason is simple: although minimum wage laws can set wages, they cannot guarantee jobs. In practice they often price low-skilled workers out of the labor market."

It's true that some research has indicated otherwise. The most famous study comes from economists David Card and Alan Krueger, who conducted telephone interviews of fast food restaurants in the neighboring states of Pennsylvania and New Jersey before and after the 1992 increase in New Jersey's minimum wage. Their book suggested that minimum wage hikes have little effect on employment.

Other economists looked at the Card and Krueger data; one evaluation suggested that the New Jersey employment variation was seasonal and, using actual payroll data from fast food chains, calculated that New Jersey employment fell 4.6 percent relative to Pennsylvania. Another analysis calculated that a 1 percent decrease in the minimum wage increases the probability of an unemployed worker getting a job by around 1 percent.

Greg Mankiw, a Harvard University professor who was the chairman of the council of economic advisors under George W. Bush, wrote a textbook that said in part:

The minimum wage has its greatest impact on the market for teenage labor... Many economists have studied how minimum-wage laws affect the teenage labor market. These researchers compare the changes in the minimum wage over time with the changes in teenage employment. Although there is some debate about how much the minimum wage affects employment, the typical study finds that a 10 percent increase in the minimum wage depresses teenage employment between 1 and 3 percent. In interpreting this estimate, note that a 10 percent increase in the minimum wage does not raise the average wage of teenagers by 10 percent. A change in the law does not directly affect those teenagers who are already paid well above the minimum, and enforcement of minimum-wage laws is not perfect. Thus, the estimated drop in employment of 1 to 3 percent is significant.

Other research is more counter-intuitive. One paper by David Neumark and Olena Nizalova says that: "Exposure to minimum wages at young ages may lead to longer-run effects. Among the possible adverse longer-run effects are decreased labor market experience and accumulation of tenure, lower current labor supply because of lower wages, and diminished training and skill acquisition."

While this debate may never be completely resolved, it's probably fair to say, as George Mason University's Don Boudreaux argues, "the theoretical case that (employers) respond in ways unfavorable to low-skilled employees is too powerful to dismiss."

Let's assume for the sake of argument that's true. Going back to our original Econwatch question, this implies that politicians who might be only mildly worried about increasing unemployment rates during an economic boom should be much more worried about job losses in a recession. (Shadowstats.com's alternate way of calculating unemployment, using the earlier methodology that counts discouraged workers, puts the rate at around 20 percent.)

No wonder that David Neumark, a professor of economics at the University of California, Irvine, says now is the worst time to raise the minimum wage. "Given present economic conditions, the imperative should be to create and enhance job opportunities," he argues. "I do not expect President Obama or congressional Democrats to give up their long-held support for a higher minimum wage. However, they should delay the increase in the minimum wage scheduled for this summer."

Of course, that never happened. Politicians love to tout increases in the minimum wage; it's a near-perfect opportunity to claim that Americans' salaries will increase without any negative effects. In the next few months, look for the real world to put that theory to the test.

[jhow4536]

I think the debate on this issue is ridiculous.

First, the minimum wage was recently raised due to legislation enacted in 2007, when the economic system showed no signs of falling apart. It's not as if the legislators who enacted the law were trying to make a statement about whether it would make more jobs or lose jobs, because the current crisis was not an issue at that point.

Second, it is true (but misleading and definitely not good for America) that lowering the minimum wage creates more jobs. Certainly it does, but at what cost? Should the people of the United States be forced to work 3 or 4 jobs at $2/hour, giving all their time just to survive? That's what is happening to the masses in China right now, is that what we want in America?

Or do we want to set a better standard for ourselves, for our children, and their children? It isn't the workers who need to carry the brunt of the failed economy, it wasn't they who failed it. Other things can be done to create jobs, such as renewed investment in American industry, and responsible investment of capital in real commodities, not derivatives. The government should work to make America attractive for industry while at the same time protecting the human dignity of the employees. Remember, it's OUR government. It's a DEMOCRACY. The government is us and should work for us. Not the top 1%.

[babooph]

The US propaganda system -7.35/hr labor will ruin economy-having the rich taxed will ruin the economy-clearly we need 1$/hr labor& the other $6.35 given to the rich as a rebate-then we can all work as poolboys,lawnboys & maids,selling our organs for any medical aid we need-all that extra Chivas will create a need for organs for the rich.

[EPIonline]

Increasing the minimum wage will only destroy jobs. Teenagers will be disproportionately hurt by the minimum wage hike. A 2006 University of Georgia study found that for every 10 percent increase in the minimum wage, teen employment would decline by 4.6 to 9.0 percent. This proved to be true when last summer?s 12 percent hike in the minimum wage corresponded with a five percent teen unemployment spike. Congress should stop the minimum wage hike if it wants to save jobs and help teens gain invaluable experience and skills from a summer job. For more information, check out www.minimumwage.com or www.teenunemployment.com

[kansas1946]

Fortunately, I have been around a long time, and I have heard the same arguments against every hike in minimum wage for decades. In fact, I used to agree with all of the negative, but the negative never seemed to happen with each increase. If congress wanted, they could exclude workers under eighteen, have a separate minimum for them from six-teen to eight-teen, but either way, all I know is that the sky will not fall and it will not significantly affect jobs.

[swin5]

Eliminate the minimum wage law entirely. Replace it with a law that states that the highest salary (including benefits and perks) paid in any company to any body, including the CEO, can not be more than 10 times the salary paid to the lowest paid worker at that company.

[aChangeOfIdeas]

swin5 I think your idea is great! It would mean they would have all their janitorial services and perhaps some of their other employees "farmed out" to agencies instead of in-house to get around it. The ones on top have learned to lie, steal, and cheat to get their mighty positions so if you change the rules, they will simply lie, steal, and cheat their way around them in another way. With that said, I would still vote for some version of your plan!

[proud_churchgoer]

My families business have offshored all of its jobs years ago. This is the fault of liberals who pass silly liberal labor laws like the 40 hour work week, minimum wage and the repeal of child labor. Americans need to demand from their representitives a level playing field so American workers can compete.

[sddemocrat]

These businesses have known for a year that the minimum wage was going to increase. I wonder if that is why the unemployment is at 9.5 percent, to help these businesses absorb the cost of the higher minimum wage?? I think that these business are already preparing by decreasing their workforce to help them through the recession and when it stabilizes they will be hired back.

[aChangeOfIdeas]

Raising the minimum wage probably won't lose that many jobs. What usually happens, if the business is scraping by like so many are right now... is that they will cut the employee's hours just enough to keep things the same. So instead of working 9-5 you'll work 10-5 but when you come in at 10 there will be an hour's worth of dishes in the kitchen that haven't been washed yet. Eventually you'll get your hours back after a few months after they get tired of seeing dishes piled up.

[keb1965]

Something that was not addressed in this article should be of concern to everyone. While I agree that people should be paid a fair wage, I also understand that I have worked 25 years and have applied myself to get to the point that I make a halfway decent wage myself. I can support my family and occasionally do something fun like go to Disney or take a cruise, BUT the real problem for me, especially in Florida where the minimum wage is at least $1 more than in the rest of the country, I find myself being able to do less with the same amount of money.

Consider that when minimum wage increases, employer bottom line decreases i.e. business pays more money and they keep less. Whether that is a good thing or not is for another discussion, however, these businesses WILL and DO increase their prices to make up the difference, and as a result, those who make minimum wage will still not be able to afford to live the same lifestyle as those who make more, so they are no better off because higher wages mean higher cost of goods produced. It is simple economics.

Take those like myself who make a significant amount more than minimum wage. I will not get an increase in my pay ... in fact, I haven't had a pay increase in 4 years, yet the minimum wage continues to increase and the cost of goods along with it. I can not afford to do the things I did 4 years ago, even though I have less debt and the same wage.

So, the net effect is higher minimum wages dilute higher paid employees salaries and increases cost of goods. Sounds like we all lose.

[proudmilvet]

On Top of that, Go to Sleep It's past your Bedtime!