What's the Right Minimum Wage?

2,344,340 Views
Oct 27, 2014

What's the perfect minimum wage: is it $10 an hour? $15? $20? How about zero? That's right. Zero. While Congress discusses a minimum wage hike, economist David Henderson shows that any minimum wage makes it harder for unemployed people (particularly young people) to find work, and forces business owners to cut the hours of lower-skilled employees.

A person’s wages should be determined by the forces of supply and demand—not by the whims of the government.

  • The same principles of supply and demand that control the market place, also naturally apply to the job market and wages.View Source
  • • As economist David R. Henderson explains, when the government forces increases in wages without the market improving, the result is employers hiring fewer people and/or cutting hours.View Source

Past increases in the minimum wage have led to an increase in the overall poverty rate.

  • Because a higher minimum wage increases unemployment among low-skilled workers, it adversely affects the poor by making fewer jobs available for them.View Source
  • Past increases in the minimum wage made some lower and middle-class people poorer and led to an increase in the overall poverty rate.View Source
  • By one estimate, only 11% of people who would benefit from an increase in the minimum wage actually live in a poor household.View Source

The people most hurt by the minimum wage are those who most need entry-level jobs—young and low-skilled Americans. 

  • Young workers are often the most vulnerable on the job market because they usually have the fewest job skills.View Source
  • During the Great Recession from 2006 to 2009, increases in the minimum wage accounted for 43% of unemployment among young and low-skilled workers.View Source
  • Research found that youth (under age 25) unemployment rose 2.8% after the last federal minimum wage hike from $5.15 to $7.25 between 2007 and 2009.View Source
  • Related reading: “Sense and Non-Sense on the Minimum Wage” – Cato InstituteView Source

The minimum wage does not create wealth. Rather, it’s a trade-off that helps some people and hurts many more.

  • The large majority of data-driven economic studies demonstrate that increases in the minimum wage also increase unemployment.View Source
  • When wages increase, people are often willing to work even though employers can’t afford to hire them, leading to a demand-side inequality causing higher unemployment.View Source
  • For a recent example, see Seattle’s minimum wage increase.View Source
  • Read economist David R. Henderson on the negative effects of the minimum wage.View Source

A mandated higher minimum wage harms everyone, including even those who already have jobs.

  • For those with jobs, increases in minimum wage often lead to the reduction in benefits, employee hours, and training that would otherwise increase their skills and value to the company.View Source
  • Read economist David R. Henderson on the negative effects of the minimum wage.View Source

A higher minimum wage hurts the poor more than anyone else.

  • Because a higher minimum wage increases unemployment among low-skilled workers, it adversely affects the poor by making fewer jobs available for them.View Source
  • Past increases in the minimum wage made some lower and middle-class people poorer and led to an increase in the overall poverty rate.View Source
  • By one estimate, only 11% of people who would benefit from an increase in the minimum wage actually live in a poor household.View Source

A person’s wages should be determined by what they can offer employers and what employers need—not by the whims of the government.

  • The same principles of supply and demand that control the market place, also naturally apply to the job market and wages.View Source
  • As economist David R. Henderson explains, when the government forces increases in wages without the market improving, the result is employers hiring fewer people and/or cutting hours.View Source

By artificially imposing a higher minimum wage, the government increases unemployment.

  • The large majority of data-driven economic studies demonstrate that increases in the minimum wage also increase unemployment.View Source
  • When wages increase, people are often willing to work even though employers can’t afford to hire them, leading to a demand-side inequality causing higher unemployment.View Source
  • For a recent example, see Seattle’s minimum wage increase.View Source
  • Read economist David R. Henderson on the negative effects of the minimum wage.View Source

A higher minimum wage hurts the young and least-skilled the most. 

  • A higher minimum wage creates more unemployment for the young and least-skilled, precisely the group that most needs work experience. During the Great Recession from 2006 to 2009, the increases in the minimum wage accounted for 43% of unemployment among young and low-skilled workers. The young are the most susceptible because they have the fewest skills that could be valuable to an employer. Youth (under age 25) employment rose 2.8% after the last federal minimum wage hike that occurred between 2007 and 2009.View Source

It’s a statistical fact that increases in the minimum wage are directly responsible for people losing their jobs.

  • The large majority of data-driven economic studies demonstrate that increases in the minimum wage also increase unemployment.View Source
  • When wages increase, people are often willing to work even though employers can’t afford to hire them, leading to a demand-side inequality causing higher unemployment.View Source
  • For a recent example, see Seattle’s minimum wage increase.View Source
  • Read economist David R. Henderson on the negative effects of the minimum wage.View Source

In a free market system like ours, the market for jobs and wages is subject to supply and demand. A mandatory minimum wage messes this up.

  • A wage is the price paid by an employer for the supply of labor. In economic theory, the law of supply states that when the price of something rises, people will produce (or supply) more of it. They will produce less when the price falls. Applied to the market for labor, this means that when wages rise, more people are willing to work, and when wages fall, fewer people are willing to work. The demand for labor is determined by the willingness of employers to hire a worker. In economic theory, the law of demand states that when the price of something rises, people will purchase (or demand) less of it, and when the price of something falls, people will purchase more of it. This means that when wages rise, employers tend to prefer to hire fewer people. Or they might have their employees work fewer hours to cut back on their labor expenses. In other words, the supply and demand for labor depend in large part on the wage paid to workers. When a government forces wages to be higher than what the natural interaction of supply and demand for wages would dictate, bad things result for workers, employers, and customers alike.View Source

Imposing a higher minimum wage increases unemployment.

  • The large majority of data-driven economic studies demonstrate that increases in the minimum wage also increase unemployment. When wages increase, people are often willing to work, even though employers do not want to hire them. This kind of demand-side inequality has historically caused a large part of unemployment. This is precisely what happens when the minimum wage increases. This is currently happening in Seattle. Businesses are closing as a result of the new $15 minimum wage law passed there.View Source

The right minimum wage is $0.00. 

  • In 1987, The New York Times editorial board declared that “the right minimum wage [is] $0.0,” citing “a virtual consensus” among economists that “[r]aising the minimum wage by a substantial amount would price working poor people out of the job market.”View Source
  • The large majority of data-driven economic studies confirm that argument.View Source
  • Read economist David R. Henderson on the negative effects of the minimum wage.View Source

"The Right Minimum Wage: $0.00." 

That was the headline of an editorial in one of America's most prestigious newspapers. Can you guess which one? The Wall Street Journal, perhaps? Right city; wrong paper. This editorial appeared in the New York Times in 1987.  "There's a virtual consensus among economists," the Times wrote, "that the minimum wage is an idea whose time has passed." So, economists and the liberal paper were on the same page (pun intended). 

Why? 

Because they understood that a minimum wage does not guarantee jobs. It guarantees only that those who get jobs will be paid at least that minimum.  And that leads to two bad outcomes: unemployment and higher prices.  
I can best explain this by asking a simple question: What is a wage?  A wage is the price of labor.   Now, what happens if the price of labor rises, not because workers have become more productive, not because a business must pay higher wages to hold on to valuable employees, but only because the government requires it?  

When the minimum wage rises, employers will adjust. They will use less labor.  They'll fire current employees or cut back on their hours.  They will also raise prices for their goods or services. These are undesirable consequences.  But let's also consider another bad effect  Businesses will hire fewer workers, especially those with little or no job experience.  

Suppose you're young and haven't worked many jobs before. Maybe you've never had a job and are trying to land your first one. The work you can offer an employer may be worth only, say, $7 an hour.  You agree. He agrees. And you have your first job. 

But what if the minimum wage set by the government is higher than $7? What if it's $10 or more?  Well, you won't get the job. You may be willing to work for $7 an hour, but under minimum wage laws, it would be illegal for you to do so. 
This very point was made by Paul Samuelson, one of the leading economists of the twentieth century, and a prominent liberal.  I paraphrase from his classic textbook Economics: "What good does it do a black youth to know that an employer must pay him a minimum wage if the fact that he must be paid that wage keeps him from getting a job?" 

And, that young person loses more than a paycheck.  He also loses valuable work experience: learning to accept responsibility, dealing with a boss, getting along with co-workers -- all the things that demonstrate to an employer that he made the right choice in hiring; and all the things that will help that young person get a better paying job down the road. 

A recent study found that in some cities the unemployment rate for teens without a high school diploma approached 50%. Pricing these teens out of the labor market does them no favors. It's not doing the rest of society any favors, either. Teenagers who can't find jobs often find trouble.  
Advocates of a higher minimum wage argue that, while some young people might be priced out of the job market, this is outweighed by the fact that those who have minimum wage jobs will get a wage increase. But that doesn't mean they'd be better off. 

It's true that the government can force business owners to pay its minimum wage workers more per hour, but it can't force these business owners to pay them more per week.  According to the Los Angeles Times, after Connecticut raised its minimum wage to $10.10 an hour, a 20 year old woman who worked at a donut shop in Hartford was soon disappointed when her hours were cut from 35 per week to 27.  

Employers will look for other ways to cut costs. The Economic Policy Institute, a union-funded organization that pushes for higher minimum wages, admits this.  "Employers," they write on their website, "may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale."  How would an employer get higher productivity? By working the employees harder. How would an employer cut training costs? By training them less.

So, let's summarize. Raising the minimum wage makes it harder for young and inexperienced workers to get jobs, to get on that crucial first rung of the employment ladder. And many of those who do benefit from a wage increase will likely find those benefits undone.  They will work fewer hours, will work harder per hour, and will get less training

Sounds like the New York Times had it right back in 1987. 

I'm David Henderson, the editor of The Concise Encyclopedia of Economics, for Prager University.

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