When, in the first State of the Union speech of his second term, Barack Obama suggested raising the federal minimum wage nearly two dollars, it sparked a firestorm of controversy. Lionized by leftists as a solution to rampant poverty, those on the right criticized the policy as an economic inhibitor. As a question of worker rights, the popular minimum wage is quite easy defend. Closer inspection of the economic data used in its defense, however, demonstrates that the policy has negative effects for the entire economy, with the harm exacerbated for the low-skilled unemployed in poverty that the policy was originally supposed to help.
A Populist Panacea
Historically, the minimum wage—dubbed by Edward Kennedy “one of the best antipoverty programs” available to the government—has been an extremely popular political provision. Although according to the Bureau of Labor Statistics only about 5.2 percent of Americans earn wages at or below the minimum, raising the minimum wage has earned historically high public approval ratings. Gallup’s March poll, which found a 71 percent approval rating, produced nearly identical results as a 1994 Wall Street Journal poll (72 percent).
However, while the issue has enjoyed bipartisan support among the masses, politicians have increasingly taken party-line positions on the topic. President Obama’s proposal to raise the minimum wage to $9.00 won support in March from over 90 percent of self-described liberals polled by Gallup, with over half of conservatives and two-thirds of moderates backing it as well. By contrast, a March bill aiming to raise the federal minimum wage to $10.10 produced a strict division amongst the parties in the House of Representatives; each and every Republican voted against the bill, and they were joined by only six of the 190 Democrats.
“No matter where or when, the public supports the minimum wage,” David Madland, the Director of the American Worker Project at the Center for American Progress Action Fund, told the HPR. Madland, who supports both raising the minimum wage and indexing it to inflation to preserve its real value, said that as the parties have become more homogenous, the previously economic issue has become a political one. “There is a big philosophical divide on whether you think government should raise standards and ensure that people that work full time don’t live in poverty or whether you believe that the market is always right,” Madland says, making a publicly incontrovertible issue a contentious political one.
Madland argues that the minimum wage not only boosts the incomes of workers but also has little effect on unemployment. In response to the contentions of House Speaker John Boehner—who claimed raising the minimum wage would cost lower-income workers their jobs—Madland points out that workers on higher wages tend to work harder and stay on their job longer. The benefits are not limited exclusively to the worker here, either; with lower turnover, employers cut their labor costs.
Furthermore, Madland points to a series of articles written by Arindrajit Dube, a professor at the University of Massachusetts, Amherst and Michael Reich, a professor at the University of California, Berkeley, among others, that indicate minimum wage increases do not reduce employment in these states. Reich et al. focused on state-level data during recessionary periods in the early parts of the century and during the Great Recession and concluded there was no statistically significant impact from minimum wage raises on either hours worked or employment levels.
“The standard theory says that if you raise the price of something, then the purchasers will buy less of it,” Madland observed. “When you [actually] do it, the academic research says that doesn’t happen.”
Missing the Boat
Yet, the economics at hand at not as easily resolvable as Madland contends. The policy has spillover effects far beyond the immediate effect on employment. According to Mark Wilson, a former deputy assistant secretary of the U.S. Department of Labor and author of a Cato Institute paper titled The Negative Effects of Minimum Wage Laws, the law is not a social panacea.
“Somebody has to pay for it,” Wilson told the HPR. He points out that companies forced to raise labor costs minimize costs elsewhere, causing effects an employee feels indirectly over time. Because such costs are implicit and indirect, consumers have a harder time seeing the costs of the minimum wage than the plainly evident benefits—a situation Wilson analogizes to current tax law. “If everyone at the end of the month had to write a check to the IRS instead of having it withheld from their wages, people would know exactly how much they are paying [the government],” Wilson says. “Now it is hidden from them. It’s a similar situation in terms of the minimum wage effects.”
These penalties, perhaps appropriately steered by the market’s “invisible hand,” result in lower prices and fewer potential job opportunities. Wilson cedes that job losses are rare, but asserts that workers would see their policy benefits remanded to the company through reduced benefits and smaller raises in the future. Since the workers paid minimum wage are typically low-skilled employees with few alternatives, the long-term job security comes at the cost of a decrease in lifetime earnings.
Additionally, Wilson notes, a lack of change in the employment of low-skilled workers means that the policy does little for the unemployed. Taking into account Madland’s assertion that “the vast majority of people working on the minimum wage are adults and many have been there for quite some time,” the pool of people most disproportionately affected by the change are those who generally seek labor at minimum wage—low-skilled, unemployed adults. Madland clarifies that teenagers make up a minority of those seeking minimum wage jobs, meaning the effect of the policy is to increase barrier to employment for the individuals who need labor the most.
Wilson’s study corroborates simple economic logic; raising the minimum wage, he finds, increases the likelihood and duration of unemployment for low-wage workers and discourages part-time work. A 2005 Journal of Human Resources study is even more pessimistic, contending that “the net effect of higher minimum wages is … to increase the proportion of families that are poor and near-poor,” propagating the exact inequity it intended to solve.
A More Complicated Issue
Ultimately, while the economics of the issue are distinctly negative, policy frequently isn’t so simple. Bentham-esque economic utilitarianism is rarely at the forefront of policy maker’s minds; advancing the cause of the many at the general expense of the few has long been considered a prurient social goal. Benefits like TANF come from taxes levied on high-income corporations and individuals even when doing so inhibits the market’s ability to maximize production and societal utility.
Minimum wage advocates like Madland point out that there are groups disproportionately affected by the minimum wage like African Americans and women who stand to gain even as their employers lose. “The minimum wage is a worker issue for all workers but women are disproportionately affected,” Madland told the HPR. Two-thirds of workers on the minimum wage, he says, are women, with both discrimination and historical job gendering playing a part. “You have huge gender equity issues that increasingly becomes part of the debate,” he says. “If people understood how much the minimum wage is important to women, it would enjoy even greater support than it already does.”
Social factors like the ones Madland discusses must be weighed against the predominantly economic argument that Wilson makes. Ultimately, when it comes to advancing the welfare of the worst-off workers, there is little argument against raising wages. However, raising wages creates unforeseen and often difficult-to-see indirect effects in the marketplace that illuminate the harsh economic consequences of such a policy. The policy’s negative effects on the unemployed only compound the policy, whose surface benefits belie the economy-wide negative effects it poses.
Photo Credit: Reuters