The Minimum Wage: Does It Work?

By on January 10, 2007

Does the minimum wage help workers? Two economists debate.

Michael Ettlinger
Economic Policy Institute

Michael Ettlinger is director of the Economic Analysis and Research Network at the Economic Policy Institute. Formerly he was deputy director at Public Campaign and tax policy director of the Institute on Taxation and Economic Policy and Citizens for Tax Justice.

James Sherk
Heritage Foundation

James Sherk is a policy analyst at the Heritage Foundation’s Center for Data Analysis. He has a bachelor’s degree in economics and mathematics from Hillsdale College and a master’s degree in economics from the University of Rochester.

Part 1: Michael Ettlinger: Securing the Wage Floor

In 1938 Congress enacted the federal minimum wage, originally setting it at $0.25 per hour, as part of the Fair Labor Standards Act (FLSA). From the beginning, it was clear that the minimum wage would have to be raised periodically to keep up with rising prices and wage levels. Original proposals for the FLSA provided for a commission that would set the minimum wage after a public hearing and consideration of cost-of-living estimates provided by the Bureau of Labor Statistics (BLS). By this procedure, the wage would have been updated according to changes in the standard of living and inflation. The version of the FLSA that became law, however, left action on future increases to Congress and the president.This inherently political system has, not surprisingly, led to inconsistency in maintaining the value of the minimum wage. Depending on the dominant political philosophy of the times, the minimum wage has trended up or down in its inflation-adjusted value. The trend since its peak in 1968 has been downward, and the current wage of $5.15 is the lowest in fifty years.The long-run trends in the value of the minimum wage reflect a repeated pattern of declines, as inflation has taken its bite, followed by sharp hikes by Congress and the president after several years that may or may not restore the wage’s buying power. Before 1968, most increases more than made up for the decline in value following the prior increase—each boost bringing the minimum wage to new highs relative to prices. Since 1968 the increases have often not made up for the prior decline.

Many of the declines in the minimum wage, as well as the spasmodic boosts by Congress and the president, have been substantial. The largest decline in value relative to inflation was 34 percent between 1978 and 1989—a decline of $2.74 per hour in 2006 dollars (or $5,700 a year for a full-time, year-round worker). Since 1938, the minimum wage has been raised ten times (counting phased-in, multiyear increases as a single increase), and most increases have fallen in the 10–20 percent range. The current period is the second longest without a hike: the value of the minimum wage has dropped by 20 percent since the last increase in 1997.

The up and downs of the minimum wage relative to prices or purchasing power has important implications. A minimum wage that doesn’t buy as much as it used to is a minimum wage that is placing a lower value on work and doing less for minimum wage workers. But another important principle of the minimum wage is that the gap between the standard of living of low-wage workers and the standard of living of other wage earners should not become excessive. By this measure as well, the minimum wage has declined and varied substantially. During the 1950s and 1960s the minimum wage varied between 44 percent and 56 percent of the average wage.[1] It is now only 31 percent of the average wage.

Such a variable, inconsistent, and low minimum wage is literally “no way to run a business.” The gradual declines and abrupt increases take their toll both on workers who rely on the minimum wage and see it fall over time and also on businesses, which find the wage costs for their low-wage workers to be unpredictable and subject to the political winds.

This is why the idea of putting in law automatic annual adjustments, or indexing, has gained increasing support. Other federal and state laws routinely use indexing to ensure that benefits and other dollar values do not lose their value to rising prices. Indexing the minimum wage is a common policy in many other countries and is becoming increasingly common among the U.S. states that have their own minimum wage laws. Indexing the minimum wage assures that low-wage workers do not lose ground to rising prices—ground they can ill-afford to lose—and offers their employers predictable and steady changes in the legal standard.

Choosing an Index

Automatic annual adjustments are a sensible solution to this long-standing problem with the minimum wage. But the question remains: How should the size of those adjustments be determined? Most other developed countries either have implemented automatic increases based on rising prices or require regular meetings of boards authorized to increase the minimum wage based on several factors—usually including rising prices and in some cases rising wages and economic growth. In the Netherlands, automatic increases are based on average wage growth (the increases can be suspended under special circumstances). U.S. states that have indexed their minimum wages have used price indexes to tie the wage to inflation. This form of indexing protects low-wage workers from declines in their standard of living due to the eroding real value of their minimum wage. Another form of indexing could link the minimum wage to average or median wage levels.

Linking to Inflation Measures

States that have indexed to prices have used forms of the BLS’s consumer price index (CPI), which is used for indexing a wide variety of federal and state benefits, exemption levels in the tax law, and pension benefits; it is also widely used in private sector contracts. There are a number of versions of the CPI to choose from, each widely used for government or private sector indexing.

  • Consumer Price Index—All Urban Consumers (CPI-U). The title for this index is somewhat misleading in its use of the word urban, since the index covers 87 percent of the U.S. population. The only populations excluded are those serving in the military, the institutionalized population, and those living in isolated locations. At least a portion of every state is included. Because it would be impractical for the BLS to collect prices from every transaction within the covered areas, it relies on a carefully constructed sample of eighty-seven locations in determining price changes. The sample has been selected to be representative of the entire population covered by the CPI-U.
  • Consumer Price Index—Urban Wage Earners and Clerical Workers (CPI-W). This subset of the CPI-U, covering employed wage earners and clerical workers, is designed to reflect the changes in prices faced by working Americans. In practice, it tracks the CPI-U closely. It is, notably, the index used to adjust Social Security benefits.
  • Consumer Price Index for Specific Areas. The BLS offers versions of the CPI-U and CPI-W to cover four regions of the country (Northeast, Midwest, West, South) and twenty-seven metropolitan areas.

There are merits to each of these as an index for the minimum wage. The CPI-U is the most widely known of the indexes, the CPI-W is most closely targeted at the costs faced by workers, and the area indexes are useful indicators for the areas they cover. The choice for most states has been based on which indexes they use in their other laws.[2]

Linking to Average Wages

Linking the minimum wage to average or median wages, instead of prices, could lead to significantly different adjustments to the minimum wage. Over the past fifty years the CPI-U has gone up 740 percent (i.e., prices have gone up by a factor of 7.40), while the average wage for production, non-supervisory workers (a good proxy for the general workforce) has increased by 922 percent (i.e., wages have gone up by a factor of 9.22). Restoring the minimum wage to half the average wage, the approximate level of the 1950s and 1960s, would result in a substantial immediate boost in the minimum wage—to $8.40 per hour. It would also help stem rising wage and income inequality and connect the pay of low-wage workers more closely both to what employers can afford and also to rising living standards in a growing economy.

The Indexing Debate

The indexing of the minimum wage has been challenged on the grounds that it results in minimum wage levels that are too high or too low. Among the arguments:

  • Indexing the minimum wage from a low level will keep it at a low level, valuing work too little and leaving low-wage workers unable to support themselves and their families.
  • During periods of economic downturn or high inflation, price-based indexing will lead to a runaway minimum wage that causes economic harm.

Does Indexing Keep the Minimum Wage Low?

If indexing is put in place at a time when the minimum wage is at a historically low level, will substantial, needed increases become politically difficult to obtain in the future? It is important to remember that indexing a minimum wage does not increase the minimum wage relative toprices or average wages; rather, it locks the wage in place. For example, if the minimum wage is $6.00 per hour and prices go up 3 percent, a price-indexed minimum wage would go up by 3 percent to $6.18 per hour. That $6.18 would, however, on average, buy the same amount as $6.00 did the year before. So, in terms of purchasing power and quality of life the minimum wage has stayed the same. If the minimum wage is too low from the start, indexing will maintain its limited buying power and perhaps stand in the way of needed increases.

This concern is not based on a fundamental characteristic of indexing but instead on a reading of the politics of the minimum wage. The fear is that once indexing is put in place it will take the political steam out of proposals for future increases. If that’s true, indexing from too low a level will, indeed, lock the minimum wage at too low a level. The validity of this concern is difficult to judge at this point. The states that have thus far indexed their minimum wages for inflation have either started at relatively high minimum wage levels or only begun indexing recently.

Could Indexing Cause the Minimum Wage to Spiral Too High?

Minimum wage opponents have raised the alarm that in times of economic downturn, or high inflation, price-based indexing will cause the minimum wage to reach excessive levels that will cause job loss and further drive up inflation. There are two bases for this concern. The first is that a minimum wage indexed to inflation would increase, in nominal terms, at too rapid a rate during a period of high inflation. Second, during an economic downturn, average wage growth can lag price increases. A minimum wage rising significantly faster than other wages could distort labor markets—making it harder for employers to employ low-wage workers.

But minimum wage increases due to price indexing, relative to the increases that have been enacted legislatively, are small. With the exception of one, highly unusual period discussed below, inflation rarely exceeds 5 percent a year; it has exceeded 4 percent only once in the last twenty years (4.1 percent in 1998). Given that recessions rarely last more than a year and rarely coincide exactly with the effective date of an indexed increase, the overlap between a higher minimum wage and a period of recession is likely to be small (and, as explained below, indexing will not lead to excessive minimum wages leading into recessions). A 5 percent increase on the current $5.15 would bring the wage to $5.40 per hour (which would still be its lowest real value in fifteen years). Such an increase would add less than 1/100th of a percent to the national wage bill. Thus, during recessions, indexing will typically cause only a single, small, nominal minimum wage increase that will be effective only for a portion of the recession period.

Moreover, this phenomenon would not be a new one: The current system of federal minimum wage adjustments also results in increases during recession years. The federal minimum wage was enacted during the Great Depression and was increased again before its end, in part to preserve wages in the face of extreme unemployment. Since then, four increases have gone into effect during recessions and four more have gone into effect during the same years as recessions but shortly before or after their beginning or end. Thus, increases during periods of economic weakness have not been seen heretofore as economically damaging.

A measure of whether growth in a minimum wage is excessive is to compare it to average wage growth. A minimum wage growing consistently and substantially faster than average wages might distort the labor market. This, however, proves not to be a concern with respect to indexing. An indexed minimum wage might, during some periods of high inflation or economic sluggishness, grow somewhat faster than average wages, but in most other periods it will lag average wage growth. As noted above, if the minimum wage had been indexed to the CPI-U over the last fifty years, it would have increased in nominal dollar value by 740 percent over that period. Over that same fifty years average wages grew in nominal terms by 922 percent.

Had the change in the nominal minimum wage been indexed to the CPI-U in 1956, the minimum wage would have occasionally gained ground on the average wage but never substantially. Indexing for prices would not have caused the minimum wage to reach excessive levels during times when the economy was doing poorly or inflation was high—the lag in the more typical years prevents that. One reason for this is that, during periods of high inflation, average wages grow at a faster rate than during periods of low inflation, so a minimum wage adjusted for inflation doesn’t necessarily gain much ground against average wages. For example, consider the ten years from 1973 to 1982, the period of highest inflation in fifty years. Prices rose between 5.8 percent and 13.5 percent a year, but eight of those ten years also rank in the top ten for nominal average wage growth. In all of those years, average wages grew at least 5.8 percent, and in three of those years wage growth exceeded inflation.

During periods of high inflation prices generally rise across the board. Wages go up faster, inputs purchased by businesses are on the rise, and the prices businesses charge and revenues they receive increase. The cost of indexing the wages of low-wage employees is a very small part of this picture. Minimum wage workers should not, uniquely among workers, get no increases in their wages during periods of high inflation. They are the workers most in need of having their incomes keep up with rising prices.

Indexing in the States Has Been a Success

Four states—Washington, Oregon, Vermont, and Florida—now index their minimum wages to prices using the CPI, and in these states wages have maintained their purchasing power for hundreds of thousands of workers without adverse effects. Washington indexed its wage through the most recent recession with no ill-effects; during that period, low-wage sectors of the economy that are affected by the minimum wage actually outperformed higher-wage sectors.[3] Nor have the annual inflation adjustments in Washington and Oregon (the two states with the longest history of indexing) fueled inflation.[4] BLS price indices for areas within Washington and Oregon have actually dropped relative to the national inflation rate after the states began increasing their minimum wages.[5]

The Minimum Wage Can Have Little Impact on Inflation

It is not surprising that the minimum wage has not fueled inflation in the states where it has been tried. Although the minimum wage is important as a demonstration of commitment to the value of work and as a support for low-wage workers, there are simply not enough low-wage workers with enough aggregate income to substantially affect overall prices. A national minimum wage increase from $5.15 to $7.25, a 41 percent boost—a much more substantial hike than any increase that would result from indexing—would raise the total labor costs of the country by only 0.22 percent, too little to cause a noticeable increase in inflation in the context of an economy experiencing constant adjustments in wages and prices on much more substantial scales.

Conclusion

The minimum wage has, over the years, had many ups and downs. Breaking the cycle of declining purchasing power and sudden increases would benefit low-wage workers and their employers. Ensuring that minimum wages keep up with either the cost of living or average wages is consistent with a thriving economy. The increases that are seen with minimum wage indexing are moderate, by several measures, and pose no risk to the economy. Indexing the minimum wage is a modest step forward in ensuring that low-wage workers do not see their wages decline over time and that low-wage employers can anticipate predictable changes in the minimum wage.


Notes

[1] The average wage used here is for production, non-supervisory workers.

[2] Among states that currently have indexing, Washington and Florida use the CPI-W and Oregon and Vermont use the CPI-U.

[3] See Marilyn P. Watkins, “Still Working Well: Washington’s Minimum Wage and the Beginnings of Economic Recovery” (Economic Opportunity Institute, January 2004); Jeff Chapman, “Employment and the Minimum Wage: Evidence from Recent State Labor Market Trends” (Economic Policy Institute, May 2004).

[4] Although the Washington minimum wage is the highest in the country, it is not because of indexing. Washington started with the highest minimum wage, and indexing has kept the state in the lead.

[5] The Seattle-Takoma-Bremerton rate was between 1.2 and 1.4 percentage points above the national rate in the two years prior to the beginning of the Washington minimum wage hikes. Since then it has been between 1.5 points below and 0.8 points above the national rate. The Portland-Salem index was 0.3 and 1.1 points above the national rate in the two years preceding the major increases in the Oregon minimum wage and has been between 0.9 points below and 1.1 points above the national rate since then. There is no evidence that the minimum wage is having any impact on overall inflation in these two states.

Part 2: James Sherk: Good Intentions Are Not Enough

The federal minimum wage has not increased in almost a decade. During that time inflation has steadily eaten away the purchasing power of a $5.15 hourly wage. It seems only fair for the government to step in now and boost the earnings of America’s lowest paid workers. Why would anyone oppose raising the minimum wage and then adjusting it for inflation afterwards?Despite the best of intentions, raising the minimum wage—with or without indexing it to inflation—will not do what its supporters want, and it will have many unintended consequences.Many of those who would benefit from a higher minimum wage do not come from disadvantaged backgrounds. Nor do minimum wage workers need the government to step in before they will earn a raise. And because of the perverse way many government aid programs are structured, a higher minimum wage will do little to help the neediest minimum-wage families.Raising the minimum wage has other effects, however. It causes businesses to hire fewer workers. Worse, it particularly discourages businesses from hiring the least skilled workers who most need assistance. Losing access to entry-level positions deprives many unskilled workers of the opportunity to learn the skills they need to advance up a career ladder. Because of this, raising the minimum wage harms workers’ job prospects years after it takes effect. Good intentions are not enough to make good policy, nor do they abolish the law of unintended consequences.

Who Earns $5.15 an Hour?

Many people naturally assume that most minimum wage workers live in poverty, but this is not the case. Only a small minority of those earning the federal minimum wage—fewer than one in five—live at or below the poverty line.[1] Why do so few minimum wage workers live in poverty when a minimum wage job is not enough to put a family of three above the poverty line?

Part of the answer is that many minimum wage workers are not trying to support themselves with their job. The majority of minimum wage workers are between the ages of sixteen and twenty-four.[2]They are high school and college students who are trying to supplement their family’s earnings, not stake it out on their own. Similarly, more than three-fifths of all minimum wage earners work only part-time.[3]

The other part of the answer is that very few minimum wage earners are trying to support an entire family on their income. Barely one in twenty-five minimum wage workers are single parents working full time. Even looking at the minority of minimum wage earners who are over the age of twenty-four, and thus more likely to be parents, just one in sixteen are single parents working full time—no different from the population as a whole.[4] So while a minimum wage job will not put a family of three over the poverty line, very few minimum wage workers are trying to do so.

Some minimum-wage workers do fit the stereotype of a single mother struggling to support her family on a meager income, but most do not. Most of the benefits of a minimum wage increase would instead go to workers early in their careers with limited familial obligations.

Workers Earn Raises

It is also mistaken to believe that minimum wage workers’ incomes will rise only if the government raises the minimum wage. Michael Ettlinger implicitly assumes this when he argues:

The gradual declines and abrupt increases take their toll both on workers who rely on the minimum wage and see it fall over time and also on businesses, which find the wage costs for their low-wage workers to be unpredictable and subject to the political winds.

But virtually no workers start at the minimum wage and then stay there for decades. Minimum wage jobs are the first rung on a career ladder that soon leads to higher paying jobs. Very few of the workers who earned the minimum wage a decade ago still earn it today.

This is because minimum wage jobs are entry-level positions. Minimum wage workers are typically low skilled and have little workforce experience. Fully 40 percent of minimum wage workers did not have a job the year before.[5] Minimum wage jobs teach these workers valuable job skills, such as how to interact with customers and coworkers, or accept direction from a boss—expertise that is difficult to learn without actual on-the-job experience. Once workers have gained these skills, they become more productive and earn higher wages.

The evidence shows that minimum wage workers quickly earn raises. Between 1998 and 2003—a time when the federal minimum wage did not rise—over two-thirds of workers starting out at the minimum wage earned more than that a year later.[6] Once workers have gained the skills and experience that make them more productive, they can command higher wages.

Workers also have a say in how quickly they become more productive. Most minimum wage earners work part time, and many are students and young adults who desire this flexibility. But minimum wage workers who choose to work longer hours gain more skills and experience than those who work part time, and as expected, they earn larger raises. A typical minimum wage employee who works thirty-five hours or more a week is 13 percent more likely to be promoted within a year than a minimum wage worker putting in fewer than ten hours per week.[7]

Likewise, better-educated employees are more productive and so more likely to receive raises. Workers with college degrees who start at the minimum wage are ten percentage points more likely to earn a raise within a year than those who have not graduated from high school.[8]

The notion that workers are trapped earning $5.15 an hour for much of their working lives is misguided and ignores the true value of minimum wage jobs. It is not the low wage that the jobs pay in the present but the role that they play in starting out low-skilled workers in the workforce, providing them with the skills they need to advance in the economy.

The Poverty Trap

Most minimum wage workers do not come from poor families. Most are learning valuable skills that will provide them with rapid upward mobility and allow them to leave minimum wage jobs far behind. The stereotype of a minimum wage worker is not true in the vast majority of cases. But for some it is. Some workers without a realistic possibility of promotion are trying to support children on a minimum-wage income. Even if most of the benefits go to those who do not need it, would not the minimum wage be an effective way to help these particularly disadvantaged workers get ahead?

Unfortunately, because of the perverse structure of many government anti-poverty programs, increases in the minimum wage would do next to nothing to help these workers. While the minimum wage affects all low skilled workers, the government has a vast array of programs directly aimed at helping low-income families. Programs like Temporary Aid to Needy Families, Medicaid, child-care assistance, housing assistance, and food stamps provide low-income families with generous food, housing, childcare, and medical benefits, as well as direct income supplements. These programs ensure that a low-income family living off of a minimum wage income lives well above the poverty line, even though their minimum wage earnings alone would leave them below it.

These programs phase out as workers’ earnings rise. For each dollar a worker earns above a certain level, he or she loses a portion of their benefits. Truly needy workers earning the minimum wage who qualify for many of these programs, such as a single parent trying to raise a family, would lose almost as much in forgone government benefits as they would gain from an increased minimum wage. Raising the minimum wage to $7.25 an hour would increase a minimum wage worker’s earnings by 41 percent. After adjusting for lost benefits, however, his or her total income would rise only 3 to 5 percent in most states. In some states, like North Dakota, low-income families would actually be worse off than before.[9]

The poorly thought out structure of well-intentioned government anti-poverty programs means that that raising the minimum wage will do next to nothing to help minimum wage workers who truly need assistance. Suburban high school students who do not receive government assistance would see their earnings rise, but not the heads of low-income families. What they would gain in higher wages they would lose in reduced benefits. And that assumes that they would keep their jobs.

Fewer Job Opportunities

The true minimum wage is always zero. A business can always choose not to employ a worker. Raising the minimum wage raises wages only for workers who get or keep a job at the new and higher wage. When the cost of hiring workers goes up, however, businesses hire fewer workers. Some workers get a raise, but others lose their jobs.

Most research on the minimum wage shows this to be the case. A recent paper examining research on the minimum wage found that two-thirds of recent minimum wage studies found that it reduces employment, with all but one of the most reliable of those studies coming to the same conclusion.[10]

Nor are indexed minimum wages any less destructive. Ettlinger points to two papers to demonstrate that indexed minimum wage laws in Washington State and Oregon have not hurt employment in those states.[11] But more recent and thorough research from economists at theUniversity of Oregon comes to the opposite conclusion.[12] Unlike the papers Ettlinger references, this new research takes advantage of the timing of the minimum wage increases in those states to come to its conclusions. Oregon and Washington have similar economies, but they increased their minimum wages at different times. By comparing low-wage employment in Washington to that of Oregon when Washington’s minimum wage increased, and vice versa, researchers can draw better conclusions about the effects of the minimum wage. This paper also takes into account other factors such as population and income growth that could affect employment.

The researchers found that the minimum wage strongly reduced employment in restaurants, where many workers earn the state minimum wage. They did not find evidence that the minimum wage cost jobs in hotels, probably because their research showed that most hotels in those states paid their employees above the minimum wage anyway. But when the minimum wage rose, workers in industries that paid the minimum wage lost their jobs, and indexing did nothing to stop this from happening.

Some studies have found that the minimum wage does not reduce employment, but most of these studies were lacking in an important way: They did not look at the long-term effects of the minimum wage on employment.[13] Most of these studies looked at employment rates shortly before and shortly after the minimum wage increased and then concluded that the increase had little effect on jobs. But it can take time for employers to fully adjust to a minimum wage increase. One alternative to hiring many unskilled workers to do a job is hiring a few skilled workers to operate machines to do the same work. Many businesses start making this switch when the minimum wage—and thus the cost of hiring unskilled workers—rises. Since it takes time for businesses to switch their production processes over to use more skilled labor, it can take time for job loss to occur.

Many researchers have found that this is the case. Minimum wage increases have small employment effects when they first take place but destroy a significant number of jobs within a year or two of being passed.[14] Studies that show that minimum wage hikes do not cost jobs three months after they take effect do not show that the minimum wage does not cost jobs but only that it takes time for the full effects to be felt in the economy.

Discourages Hiring Unskilled Workers

This points to another serious drawback of raising the minimum wage. It discourages companies from hiring the very workers who need the jobs the most. Minimum-wage workers earn low wages because they have fewer skills than other workers. They earn less because they are less productive. They are exactly the workers who need entry-level jobs so that they can gain experience and develop their skills.

When the government raises the minimum wage, it forces companies to pay their least skilled workers as much as more skilled workers would earn. Given the choice between hiring a completely unskilled worker for $7.25 an hour or a more productive worker for the same rate, companies nearly always choose the worker who can produce more. By raising the minimum wage the government makes it particularly difficult for unskilled workers to find a job.

Research has repeatedly shown that companies hire more skilled workers and fewer unskilled workers when the minimum wage rises.[15] It is the logical business decision, but it leaves many unskilled workers out in the cold. The workers who need entry-level jobs the most so they can gain skills in the workforce become the very workers companies least wish to employ.

Long-Term Consequences

The fact that a higher minimum wage denies unskilled workers entry-level jobs suggests that it could also have long-term consequences. A worker who does not gain experience today will be at a competitive disadvantage not just tomorrow but potentially years later.

Other effects of the minimum wage also suggest that it could affect workers earnings years after it rises. Research shows that raising the minimum wage causes some teenagers to drop out of school to take the now higher paying jobs, replacing less-skilled teenagers in those positions.[16] Not only do the less-skilled teenagers lose experience, but the former high school students shortsightedly give up the benefits of a better education—a loss that will harm them throughout their careers.

This has led economists to examine the long-term consequences to workers of raising the minimum wage. Researchers examined the earnings and employment of adult workers who were teenagers when their states raised the minimum wage above the federal level. Their findings are stark: For over a decade after passage, higher minimum wages noticeably lowered both these workers earnings and their likelihood of holding a job.[17] The reduced number of entry-level jobs and increased high-school dropout rates mean that the minimum wage hurts workers long after it becomes law.

Conclusion

Raising the minimum wage is a well-intentioned but counterproductive way of helping disadvantaged and unskilled workers get ahead. Much of the benefits flow to teenagers or young adults, and most minimum wage earners will quickly earn a raise anyway. The minimum wage also does little to benefit truly disadvantaged workers because most of what they would gain from higher wages they would then lose in the form of lower government benefits.

The minimum wage exacts a steep price for its ineffectiveness. It destroys jobs and makes employers particularly unlikely to hire the least skilled and experienced workers in society. It hurts workers years after it increases.

Good intentions are not enough. The minimum wage should not be increased, nor should it be indexed to inflation, which would simply guarantee that the minimum wage would increase every year, compounding the harm it does to unskilled workers. Rather than trying to force companies to pay unskilled workers more—and leading companies to employ fewer unskilled workers—we should look for ways to help disadvantaged workers improve their skills and advance up a career ladder.


Notes

[1] Rea Hederman and James Sherk, “Who Earns the Minimum Wage: Single Parents or Suburban Teenagers,” Table 1. Heritage Foundation WebMemo #1186, August 3, 2006.

[2] Ibid.

[3] Ibid.

[4] Ibid., Table 2 and footnote 6.

[5] David Macpherson and William Even, “Wage Growth among Minimum Wage Workers,” Employment Policies Institute, June 2004, p. 3.

[6] Ibid., p. 3, 5, Table 1. Wage figures are inflation-adjusted.

[7] Ibid., p. 8, Table 4, and p. 11, Table 5. Note that the “typical” minimum wage earner is defined as the median minimum wage earner.

[8] Ibid.

[9] Rea Hederman and Sam Hyman, “Low-Income Workers May Be Worse Off If Congress Increases the Minimum Wage,” Heritage Foundation WebMemo #1187. August 3, 2006.

[10] David Neumark and William Wascher, “Minimum Wage and Employment: A Review of Evidence from the New Minimum Wage Research,” NBER Working Paper #12663, p. 115. November 2006 (NBER subscription required).

[11] See Marilyn P. Watkins, “Still Working Well: Washington’s Minimum Wage and the Beginnings of Economic Recovery” (Economic Opportunity Institute, January 2004); Jeff Chapman, “Employment and the Minimum Wage: Evidence From Recent State Labor Market Trends” (Economic Policy Institute, May 2004).

[12] Larry Singell and James Terborg, “Employment Effects of Two Northwest Minimum Wage Initiatives: Eating and Drinking and Staying Merry” (forthcoming in Economic Inquiry).

[13] See David Card, “Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage,” Industrial and Labor Relations Review 46, no. 1 (Oct. 1992): 22–37; David Card and Alan Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton, N.J.: Princeton University Press, 1995).

[14] Neumark and Wascher, pp. 18–21.

[15] See Kevin Lang and Shulamit Kahn, “The Effect of Minimum-Wage Laws on the Distribution of Employment: Theory and Evidence,” Journal of Public Economics 69, no. 1 (July 1998): 67–82; David Neumark and William Wascher, “The Effects of Minimum Wages on Teenage Employment and Enrollment: Evidence from Matched CPS Surveys,” in Research in Labor Economics, vol. 15 (Greenwich, Conn.: JAI Press, 1996).

[16] Neumark and Wascher, “The Effects of Minimum Wages on Teenage Employment and Enrollment.”

[17] David Neumark and Olena Nizalova, “Minimum Wage Effects in the Longer Run,” National Bureau of Economic Research Working Paper No. w10656, June 2004.

Part 3: Michael Ettlinger: The Minimum Wage: A Policy That Works

One of the most pressing economic problems of our time is the gap between overall economic growth and the living standards of working families, a gap that has grown sharply over the current economic expansion. We need policy interventions that target this gap, helping to reconnect the living standards of low-wage workers with the growth in the overall economy. The minimum wage is precisely such a policy. It will not close the wide gap between productivity and earnings, but it will help reduce it, particularly for those workers with the least bargaining power in our economy.It is a fundamental premise of economics that as productivity (output per hour worked) grows, so do the living standards of those responsible for that growth. After all, if the workforce is more efficiently producing goods and services, it makes sense that their living standards should reflect such gains. And, in fact, average living standards do increase over time. The problem is that changes in the structure of our economy have led to increasing inequality of outcomes. And in that climate, average results tell us less and less about how different groups are faring.We enter this minimum wage debate with this inequality context in mind and with the following basic social value: Whether it’s a home health aide dressing the wounds of homebound senior, a cashier on her feet all day in retail, or a CEO of a global corporation, all the bakers should get their fair slice of the pie. They shouldn’t all get the same slice; some are demonstrably more productive than others. But it is a basic premise of economics, as well as a basic democratic value, that those who contribute to the economy’s productive capacity should receive compensation commensurate with their contribution.

This premise has been violated in recent years. Though productivity is up 20 percent since 2000, the real income of the typical working-age household was down 5 percent ($3,000 in 2005 dollars) between 2000 and 2005. The momentum of the tight latter-‘90s recovery kept real earnings of low-wage workers rising through 2002, but since then they are down 3.6 percent (“low-wage” here refers to those at the tenth percentile of the wage scale).

This is the also the context for the policy discussion regarding the increase in the minimum wage. The policy helps to make work pay when the market fails to appropriately remunerate the least advantaged workers. This, in fact, was the motivation for the enactment of the minimum wage: the realization that sometimes market forces, as well as non-market forces (such as discrimination), could drive the pay of the lowest paid workers below privation levels. Congress recognized that in such cases, market intervention was justified and necessary.

Of course, policymakers must always be mindful of unintended consequences. With the minimum wage, the concern is that by raising the price of low-wage labor above market levels, low-wage workers’ employment prospects could be diminished. This is a valid concern, but—and this fundamental point is constantly overlooked by those with a vested interest in keeping labor costs as low as possible—it is an empirical, not a theoretical, question.

That is, while simple, if not simplistic, economic theory predicts that higher minimum wages will lead to worse employment outcomes of affected workers, what matters is the reality: How have past increases played out in the real-world low-wage labor market?

Like most questions in empirical economics, there exists no widely agreed upon answer. But any objective look at the evidence leads to this conclusion: Moderate increases in the minimum wage have their intended effect. They benefit the vast majority of those whose wages place in the “sweep” (the distance between the old and the new minimum, i.e., those directly affected by the increase).

This conclusion does not wholly deny the theory. Credible research has found negative, zero, and even positive effects on the employment of affected workers. But those effects are small, implying little impact on employment either way. Wage effects, on the other hand, can be quite economically meaningful to a family trying to make ends meet.

More and more, economists and policymakers are recognizing these facts. In 2006, over 650 economists, including five Nobel Prize winners and six past presidents of the American Economics Association, signed a statement that stated: “We believe that a modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effects that critics have claimed.”

Policymakers and the public have also clearly stated their view. With the purchasing power of the federal minimum wage is at its lowest point in over fifty years, 83 percent of Americans now believe it should be raised. In 2006, seventeen states raised their state minimum wages—eleven through legislative action and six through citizen ballot initiatives. That brought the number of states with minimum wages higher than the federal level to twenty-nine.

There’s a reason for all this affection for the minimum wage and demand for its increase among economists, the public and policymakers: It works.

The Real Value of the Minimum Wage and Who Earns It

An increase in the federal minimum wage from its current $5.15 per-hour to $7.25 would provide a much needed wage increase for 13 million workers. Eighty percent of those workers are adults age twenty or over. Over 6 million children would see their parents’ income rise. The income of minimum-wage workers is very important to their families. Families with affected workers rely on those workers for over half their earnings. Forty-six percent of all families with affected workers rely solely on the earnings from those workers.

The fact that raising the minimum wage raises wages is indisputable. The question opponents raise is whether it also does harm. The two most common criticisms are diminished employment prospects and the claim the minimum wage doesn’t only help low-income people but also helps the middle class.

The job-loss argument is predicated on the simple model of the free market setting a fair price. Yet this pristine model falls apart when one side holds all the bargaining chips. In another context, this is why laws exist against monopolies. If only one supplier supplies a good, it can charge more than the good is worth because the purchaser is powerless to obtain it elsewhere. Low-wage workers are in the opposite position of the monopolist. They lack the skills that command higher wages, but because they need to work to survive, they cannot withhold their labor from the market. The monopolist can set the price at almost whatever level it wants, while the low-wage worker must take almost whatever is offered for his or her labor. Minimum wages exist for the same reason that laws against monopolies exist—they deal with situations in which the market fails to set fair prices.

There are essentially two types of studies of this issue. The first are broad attempts to synthesize all that has happened to employment as minimum wages have gone up, or lost value, nationally and across all the states over time. These studies attempt to account for other factors that might explain changes in employment.

The challenge in such studies is to try to accurately isolate the impact of the minimum wage from everything else that’s going in the economy—no one disputes that employment is much more greatly affected by things other than the minimum wage. And all of these other factors vary greatly from state to state, year to year. Thus, these studies are now viewed less favorably than those that take a more narrow focus. Interestingly, however, the findings of these “time-series” studies tend to generate estimates that are broadly similar to the newer research, discussed next. That is, the job loss estimates from this work also tend to hover around zero[1].

The other type of study that has been conducted is the pseudo-experiment that has been made possible by state minimum wage increases. State minimum wage increases permit close examination of what happened in the state, relative to similar states, in a very constrained time frame. Such experiments are rare in empirical economics and offer researchers the chance to isolate the impact of the wage change and test its impact on employment and other relevant outcomes. The most noted and well-regarded of these was by Card and Krueger, who examined the impact of a New Jersey minimum wage impact on the low-wage restaurant industry relative to just across the border in Pennsylvania. They found no adverse impact on employment. Since then, there have been many more state minimum wage increases, and in each case the predictions of minimum wage opponents that there would be large job loss in low-wage sectors have failed to materialize.

Studies such as Card and Krueger’s have prompted a rare event in the “dismal science”: Economists have rethought their positions on the issue. Former Federal Reserve vice chairman and current Princeton economist Alan Blinder commented, “My thinking on this has changed dramatically. The evidence appears to be against the simple-minded theory that a modest increase in the minimum wage causes substantial job loss.”[2] The latest version of his popular introductory economics textbook reflects his change in thinking:

Elementary economic reasoning … suggests that setting a minimum wage … above the free-market wage … must cause unemployment.… Indeed, earlier editions of this book, for example, confidently told students that a higher minimum wage must lead to higher unemployment. But some surprising economic research published in the 1990s cast serious doubt on this conventional wisdom.[3]

It cannot be denied that the minimum wage debate is fraught with confusion. Deep-pocketed lobbyists representing low-wage employer groups have an obvious vested interest in the outcome of this debate, as do advocates for low-wage workers. As we’ve noted throughout, on the key point of unintended consequences, studies show negative, zero, and positive effects. This means that partisans will simply cherry-pick the studies that suit their needs. What is an objective observer to do—short of reading all the studies, evaluating their strengths and weaknesses, and forming an opinion on that basis? How can he or she develop an informed view on the policy with all this noise?

If there is such a person left in this heated debate, here’s an instructive way to think about the issue. Ignore, for a moment, the research that shows zero impacts on jobs and consider only the work that finds negative effects. In general, minimum wage opponents claim that there is about a 1–2 percent employment loss for every 10 percent minimum wage increase. Let’s say, for argument’s sake, that it’s 1.5 percent. That implies that a 40 percent increase in the minimum wage would cut low-wage employment by 6 percent. In the low-wage labor market, however, there is generally job growth and always a great deal of turnover and changing of jobs. In that environment, a reduction in employment implies a risk of longer gaps in employment, not low-wage workers facing complete and perpetual unemployment.

Workers are not likely to actually get laid off as a result of the increase, but rather employers would simply adjust by not replacing workers who vacate a position or not adding workers as quickly. When new workers look for a job, under this worst-case scenario, there will be 6 percent fewer jobs available than before the minimum wage was raised. On average, then, these job seekers would have to wait 6 percent longer to get a new job that will pay 40 percent more once they get it. On an annual basis, workers are 36 percent better off than they were before. In other words, putting well-founded skepticism regarding the negative effects aside, it is unclear why low-wage workers should be concerned. The benefits far outweigh the costs even in the gloomiest scenarios.

The other criticism most often leveled at the minimum wage is that it isn’t targeted well-enough at the poor. I offer two answers to this criticism. First, the minimum wage does reach many workers who clearly need the extra income, and second, it’s important to have a floor on the labor market regardless of target efficiency.

It is untrue to say that low-income families and workers don’t benefit from the minimum wage. As the statistics cited above indicate, many individuals and families would benefit from an increase in the minimum wage. Our research on working families (such as Figure 6 from this document: http://www.epi.org/content.cfm/webfeatures_viewpoints_raising_minimum_wage_2004) shows that most of the gains from the increase reach their intended beneficiaries. Over half of the benefits flow to families in the bottom 30 percent, families that receive only 14 percent of total income. In other words, from a targeting perspective, the distribution of gains is highly progressive.

But it is also true that some who aren’t in poverty would benefit also. The prime example is young middle-class workers living at home. But opposing the minimum wage on the grounds that it helps young people saving for or working through college or otherwise trying to get ahead is really missing the point. Anyone who’s willing to work should receive decent compensation. It’s just fair that they should be given an opportunity to earn enough to achieve their goals. The issue isn’t whether they “need” the money as much as whether they “deserve” it. Anyone willing to put in an hour’s work deserves more than $5.15 per-hour (which, translated to a full-time job, is less than $11,000 per year). Besides, it’s not just the impoverished in this country who need a raise. Young people working for college “need” a raise too.

Recall our discussion in the introduction regarding Congress’s initial motivation for enacting the policy back in 1938. It is a statement that we will not let the market drive wages down to unacceptably low levels. No American should be compelled to work at a rate that, assuming full-time labor, every weekday, all year long, amounts to the $10,712 that the current minimum wage provides. This is equally as true for a middle-class youth working to raise money for college as it is for a single mother supporting a family. The minimum wage is not just about helping the impoverished. It is about fairness, the value of work, and the opportunities that work provides.

A related targeting argument maintains that minimum wage workers don’t remain at the minimum wage for long. Thankfully (and obviously) this is true, but the fact that a minimum wage worker who starts at $5.15 might earn $5.30 the next year is no argument against raising the minimum wage to $7.25. The age/wage trajectory—the inverted U-shaped path that workers earnings follow over their lifetime—means that most who start at the minimum will soon pass through it. But an increase in the wage floor can help raise the level of profile without harming the trajectory.

It’s also the case that a minority of workers remains at or near the minimum wage for years. According to research by William J. Carrington and Bruce C. Fallick, a considerable portion of workers continue to earn wages near the minimum wage for extended periods of time. Women, people of color, and individuals with lower levels of education are more likely to remain at a level near the minimum wage for extended periods of time[4]. Once finished with school, 15.1 percent of women and 16.2 percent of blacks spent at least half of the first ten years of their careers in jobs that paid no more than $1.50 above the minimum wage. Another study done by the Center for Economic and Policy Research found that over a third of prime-age adults (age twenty-five to sixty-four) in minimum wage jobs remained in minimum wage jobs three years later.[5]

A final targeting-type argument, made by James Sherk, is that higher minimum wages won’t raise the income of low-wage workers who receive means-tested benefits, because the wage increase will lead to benefit losses. Yet considering that any wage increase, mandated or otherwise, would have this effect, it’s an argument against means testing, or so-called “cliff effects” (the sudden loss of benefits when incomes surpass the eligibility level). By this logic, the only way for working recipients of means-tested benefits to keep from losing ground is to make sure their wages don’t rise, an obviously perverse incentive. Instead of using this argument to inveigh against minimum wages, those worried about this impact should work to promote much higher phase-out rates for means-tested benefits.

Conclusion

Every advanced market economy in the world has some type of minimum wage policy. The United States has had the policy on the books for almost seventy years. Twenty-nine states have acted on their own to raise their minimums above the federal level. Hundreds of cities have implemented “living wage” programs, which provide higher wages to workers under city contracts or on subsidized projects. “Davis-Bacon” laws require private construction firms with government contractors to pay prevailing wages.

Granted, this doesn’t sound like the “invisible hand” that Adam Smith introduced centuries ago. But there’s a reason for these policies. Free markets are wonderful mechanisms—there is no other system of economic organization that consistently generates as much productivity, innovation, entrepreneurship, and wealth. Yet anyone whose eyes are open to the wide disparities and deep struggles of millions of working Americans has to admit that sometimes, the invisible hand is all thumbs.

The minimum wage is a statement by Americans through Congress that we will not accept a certain market outcome: that of a wage level that deeply devalues work. Of course, economists and policy makers are absolutely correct to ask and investigate whether this market intervention has distortionary, undesirable outcomes.

Research suggests it does not in the sense that moderate increases of the magnitude currently under discussion have their intended effect. They help give a boost to our lowest wage workers while chipping away at the large and growing gap between their fortunes and those of the rest of us. Sometimes the invisible hand needs a little nudge, and as the federal minimum wage has been stuck at $5.15 for almost a decade, now is one of those times.


Notes

[1] Jared Bernstein and John Schmitt, “Making Work Pay: The Impact of the 1996–1997 Minimum Wage Increase” (Economic Policy Institute, 1998); Liana Fox, “Minimum Wage Trends: Understanding Past and Contemporary Research” (Economic Policy Institute, October 25, 2006).

[2] (Chipman 2006).

[3] (2006, 10th edition, 493)

[4] William J. Carrington and Bruce C. Fallick, “Do Some Workers Have Minimum Wage Careers?” Monthly Labor Review (May 2001): 17–27.

[5] Heather Boushey, “No Way Out: How Prime-Age Workers Get Trapped in Minimum Wage Jobs” (Center for Economic and Policy Research, 2005).

Part 4: James Sherk: Workers Earn What They Produce

Is America a land of opportunity or a land where hard work is not rewarded? To hear many on the left—not just Michael Ettlinger—speak, America is fast becoming a country of haves and have-nots, a country where many work hard all day but do not bring home the fruits of their labor.But this is not the case. Minimum wage workers earn low wages not because of excessive corporate power but because they are not yet very productive. Insisting that it is “not fair” for minimum wage earners to be paid lower wages than more productive workers misses the point. No company that wants to stay in business can afford to consistently pay its workers more than they produce.

When well-intentioned policy makers do try to help low-wage workers get their “fair share” by raising the minimum wage, they do not accomplish what they set out to do but actually wind up hurting the very workers they intend to help. Policymakers should instead look for ways to help workers become more productive and earn more instead of adopting policies that reduce the availability of entry-level jobs.

Pay Follows Productivity

In a competitive market, workers earn wages commensurate with their productivity. If hiring a new employee will increase a business’s profits by $55,000 a year, then that business will never pay that worker more than $55,000 unless the worker becomes more productive.

However, because firms compete to hire workers, the business does not have much freedom to pay that worker less than $55,000 a year either. There are many other firms that could hire that same employee. If the company offered a lower salary—say $40,000—then competitors could make an easy $10,000 by hiring the worker for $45,000. They would get a worker who increases profits by $55,000 a year for only $45,000. But then another company could offer to hire the worker for $50,000 a year, and the worker would take that job and the raise until yet another company offered more.

The same competitive pressures that force companies to outdo each other in lowering their prices—even though they would love to charge more—force them to pay their employees wages commensurate with their productivity. Of course this process does not happen instantly, just as prices do not fall immediately everywhere when one company finds a cheaper way of making a product. It takes time for companies to learn how new technology changes the productivity of their workers and for firms to find new workers. But ultimately companies pay their workers what they produce not out of generosity but because competitive pressures force them too.

Compensation Is Cyclical

Ettlinger believes that this process has broken down recently, arguing that “though productivity is up 20 percent since 2000, the real income of the typical working-age household was down 5 percent.” If the market will not reward workers for their efforts, then the case for the government stepping in appears strong.

Fortunately, competition has not collapsed in the United States: Workers can still expect to be paid the fruits of their labor. For one, though wages have stagnated since 2000, workers’ total compensation—including the 30 percent of pay made up by benefits like paid vacation, retirement plans, and health insurance—has risen sharply. One government measure of total compensation, called “Employer Costs for Employee Compensation,” shows that total compensation has risen by 3 percent since 2003 and 9 percent since 2000 after adjusting for inflation.[1]

When you include all compensation (not just wage compensation), the gap between productivity and inflation falls to just a few percentage points. This small gap does not mean that workers are being shortchanged; it simply reflects the fact that it takes time for competitive pressures to work themselves out in the economy. The same thing happened in the 1990s. For several years after the 1991 recession, productivity growth outstripped worker pay. At this point following the end of the 1991 recession, productivity had risen 8.4 percent, while compensation had risen only 5.2 percent.[2]

When unemployment fell sharply in the late 1990s, companies started giving workers large raises as they competed intensely with each other to hire more productive workers. Up and down the corporate pay scale, workers’ earnings rose. By 2000, pay had caught up fully to the productivity gains of the early 1990s.[3] Nothing was broken in the economy; it just doesn’t adjust overnight.

That productivity has risen faster than compensation during the recovery from the 2001 recession is no more a reason for alarm now than it was in 1996. With unemployment lower and workers in scarce supply—unemployment has fallen to 4.5 percent—productivity gains will translate into income gains for American workers. This has already begun, as wages have begun rising rapidly in recent months. Inflation-adjusted wages have risen 2.5 percent over the past year, the fastest rate since 1998.[4]

Minimum Wage Workers Are Less Productive

Minimum wage jobs are entry-level positions: fully 40 percent of minimum wage workers did not have a job the year before.[5] Most are teenagers or young adults—workers with less experience than most.[6] Minimum wage workers also have less education than most Americans, being substantially more likely to have less than a high school education and substantially less likely to have graduated from college.[7]

Minimum wage workers have low wages because they lack the skills needed to earn higher wages. Ettlinger argues that this is proof that minimum wage earners need the government to step in to stop corporate exploitation:

One side holds all the bargaining chips … they [minimum-wage earners] lack the skills that command higher wages, but, because they need to work to survive, they cannot withhold their labor from the market. The monopolist can set the price at almost whatever level it wants, while the low-wage worker must take almost whatever is offered for his or her labor.

But no one company has a monopoly on employing unskilled workers. Corporations must compete with each other to hire workers. Burger King competes with Wendy’s who competes with Pizza Hut to hire employees. If Pizza Hut managers cannot find enough workers to fill their shifts, they have to offer raises or risk going out of business. And if companies could truly employ all the workers they wanted for a pittance, they would never offer raises to minimum wage workers. But two-thirds of minimum-wage workers earn a raise within a year.

Nor are most minimum wage workers in a position where they need to work to survive and will take any offer. Over three-fifths of minimum wage earners work part time.[8] These are the very workers who are least attached to the workforce and are most willing to work more hours when their wages rise—and also most willing to quit if they are not paid enough. Remember that the average family income of a minimum wage worker is close to $50,000.[9]

Forcing Companies to Pay Workers More Than They Produce

When the government raises the minimum wage, it intends to raise the wages of low-income workers. But minimum wage laws cannot force an employer to pay workers more than they produce. No business that wants to avoid bankruptcy court can do that. Instead, companies respond by hiring only workers who produce more than the new minimum wage.

One way businesses do that is by hiring fewer workers. If McDonald’s already has ten workers cooking burgers, then hiring an eleventh employee does not greatly increase the amount of hamburgers they produce. Hiring a twelfth employee adds even less in productivity. At some point, as a company adds more workers, the value added by hiring one more worker falls below the wages that company has to pay to attract workers, and the company stops hiring. When the minimum wage rises, so does this cutoff wage. Raising the minimum wage does not cause companies to fire every unskilled worker in their employ, but it will cause most companies that hire unskilled workers to fire some of them.

This is not a particularly controversial belief among economists. Ettlinger is right when he says that some economists, including five Nobel Prize winners, support increasing the minimum wage. But that number represents but a small fraction of the thirty-five living Nobel Prize–winning economists, all of whom were asked to sign the petition. Similarly, a University of New Hampshire survey found that 77 percent of labor economists believe that raising the minimum wage costs jobs.[10]

These economists’ beliefs are not founded solely in theoretical arguments, sound as they are. They are well-grounded in empirical research. Again, all but one of the most reliable studies on the minimum wage, and two-thirds of all recent studies, show that raising the minimum wage reduces jobs.[11]

To be sure, there are some studies, like Card and Krueger’s, that find that higher minimum wages did not raise unemployment. However, there are many more studies that show the opposite. And most of the studies that show no job loss only look at the short-term effects and ignore the long-term consequences of higher minimum wages.

Serious Consequences

Many supporters of the minimum wage will acknowledge these facts but then argue that the job losses are so small as to not matter. Ettlinger gives the example of estimates that would say that if the minimum wage goes up 40 percent, that leaves 94 percent of workers with a hefty raise and 6 percent without a job (or the average worker waiting 6 percent longer to find a job). That appears to be a good tradeoff that policymakers should accept.

However, these numbers are highly misleading. In these studies the “affected workers” are ones who are especially likely to work for the minimum wage, but most of these workers do not actually work at that rate. For example, a fairly typical study would examine what happens to teenage employment when the minimum wage rises and conclude that each 10 percent raise in the minimum wage reduces teen employment by 2 percent. But less than 9 percent of teenagers actually work for the federal minimum wage.[12] Since the average teenager in the United States earns $7.59 an hour, most teenagers would get no raise from hiking the minimum wage to $7.25.

Companies Hire Different People

Companies respond to higher minimum wages in another way: They change who they hire. Since they will not pay workers more than they produce, and they are required to pay workers more, companies start hiring more skilled and more productive workers, destroying job opportunities for lower-skilled workers.

Given the choice between hiring an unskilled worker for $7.25 an hour and a worker with more experience for the same rate, companies will always choose the more productive worker. This is not just a theoretical argument. Research consistently demonstrates that higher minimum wages lead businesses to hire skilled workers at the expense of unskilled workers.[13] Even studies that Ettlinger would point to saying that raising the minimum wage does not cost jobs overall show that the minimum wage costs the least skilled and most vulnerable workers their jobs. Welfare recipients trying to end their dependency on the government lose out when companies are not willing to hire unskilled workers.[14]

The Minimum Wage Is Ineffective

There is another way to look at this debate: Supporters want to raise the minimum wage to reduce poverty in this country, so let’s look at whether poverty rates go down when the minimum wage goes up.

Many economists have examined the evidence and concluded that it does not. Ohio University economists examined the effect that increases in the minimum wage had on the overall poverty rate in the United States and on the poverty rates for groups like minorities and teenagers that might especially benefit from higher minimum wages.[15] They found that the minimum wage had no statistically detectable effect on poverty rates.

Other researchers have approached the evidence in different ways and reached the same conclusion. Researchers with the Federal Reserve Board and the University of California at Irvine examined how the minimum wage affects the incomes of families living near the poverty line. In a series of papers, they repeatedly reached the same conclusion: A higher minimum wage does not lift low-income families out of poverty.[16]

Conclusion

Raising the minimum wage has nothing to do with “fairness.” Companies pay workers on the basis of what they produce, and they will never pay workers more than the value of what they contribute. Minimum wage workers have low wages because their skills are limited. That is why so many minimum wage workers earn raises within a year of starting: They become more skilled and more productive with experience and time on the job.

Arguing that it is “unfair” for workers to earn only $5.15 an hour misses the point. There is no way to decide what makes a fair or an unfair wage. What makes earning $10,000 a year unfair but $16,000 fair? There is no standard anyone can point to. We would all like every American to earn more, but the only way for that to happen is for workers to become more productive. When the government intervenes, it does not work—the minimum wage does not reduce poverty—and it causes employers to stop hiring the very workers who need help most. It is neither compassionate nor fair to reduce access to entry-level jobs for unskilled workers.


Notes

[1] Author’s calculations based on U.S. Department of Labor, Bureau of Labor Statistics, “Employer Costs for Employee Compensation Survey—June 2006” (December 13, 2006), Table 1. Note that annual figures refer to the first quarter of each year because data were collected only in the first quarter of each year until 2002. Inflation-adjusted using the CPI-U-RS.

[2] Ibid.

[3] Ibid., see chart 9.

[4] Heritage Foundation calculations based on Bureau of Labor Statistics, “Employment Situation News Release,” January 5, 2006, Table B-3.

[5] David Macpherson and William Even, “Wage Growth among Minimum Wage Workers,” Employment Policies Institute, June 2004, p. 3.

[6] Rea Hederman and James Sherk, “Who Earns the Minimum Wage: Single Parents or Suburban Teenagers,” Table 1. Heritage Foundation WebMemo #1186, August 3, 2006.

[7] Ibid.

[8] Ibid.

[9] Ibid.

[10] Employment Policies Institute, “650 Economists May Support a Minimum Wage Hike, but Over 13,000 Believe it Will Destroy Jobs.”

[11] David Neumark and William Wascher, “Minimum Wage and Employment: A Review of Evidence from the New Minimum Wage Research,” NBER Working Paper #12663, p. 115. November 2006 (NBER subscription required).

[12] Department of Labor, Bureau of Labor Statistics, “Characteristics of Minimum Wage Workers: 2005,” Table 1.

[13] See David Neumark and William Wascher, “The Effects of Minimum Wages on Teenage Employment and Enrollment: Evidence from Matched CPS Surveys,” in Research in Labor Economics, vol. 15 (Greenwich, Conn.: JAI Press, 1996); David Fairris and Leon Bujanda, “The Dissipation of Minimum Wage Gains for Workers Through Labor-Labor Substitution” (April 2006).

[14] See for example Kevin Lang and Shulamit Kahn, “The Effect of Minimum-Wage Laws on the Distribution of Employment: Theory and Evidence,” Journal of Public Economics 69, no. 1 (July 1998): 67–82; D. Card and A. B. Krueger, “Minimum wages and employment: A case study of the fast food industry in New Jersey and Pennsylvania,” American Economic Review 84, 789–90 and footnote 31. Card and Krueger found that raising the minimum wage in New Jersey increased teen employment by 2 percentage points but reduced adult employment by 2.9 percentage points.

[15] See Richard K. Vedder and Lowell E. Gallaway, “Does the Minimum Wage Reduce Poverty?” (Employment Policies Institute, June 2001).

[16] David Neumark, Mark Schweitzer, and William Wascher, “The Effects of Minimum Wages Throughout the Wage Distribution,” Journal of Human Resources, Spring 2004, pp. 425–450; David Neumark, Mark Schweitzer, and William Wascher, “The Effects of Minimum Wages on the Distribution of Family Incomes: A Non-Parametric Analysis” (forthcoming in Journal of Human Resources); David Neumark and William Wascher, "Do Minimum Wages Fight Poverty?" Economic Inquiry, July 2002, pp. 315–333.