Feb. 11, 2014 12:45 PM
One of President Obama’s policy proposals in the State of the Union address was increasing the minimum wage. He framed it within the context of his argument that no one working a full time job should have to “raise a family in poverty.” And indeed, preventing families from falling into poverty is an admirable goal. The problem is that raising the minimum wage is actually more likely to increase joblessness, making it more difficult for low-skilled workers to reach that first critical rung of the economic ladder.
On the surface, the idea of raising the minimum wage in order to put more money in the hands of struggling, low-skilled workers is a good thing. In an economic vacuum, you could simply raise the minimum wage and low-skilled workers would get higher wages while businesses would not change the rest of their business model. The problem is that no economic decision occurs in a vacuum – for every dollar spent another dollar must be earned.
Forcing businesses to raise the minimum wage increases the business’s cost of labor. To offset this cost, business owners will often cut employee hours or jobs. This is effectively what happened when Target, Trader Joes, Five Guys, Regal movie theatres, and hundreds of other employers announced cuts in their hours due to the costs of complying with ObamaCare. They found that it was easier to do business with fewer employees rather than pay the high costs of the employer mandated health insurance. Hiking the minimum wage is just a different form of increasing labor costs and thereby reducing employment opportunity for low-skill workers.
The impact of higher labor costs falls particularly hard on small businesses which have thinner margins. There’s bipartisan agreement among economists that increasing the minimum wage increases unemployment. A study from the Mercatus Center at George Mason University found that an increase in the minimum wage to $10.10 per hour would increase the unemployment rate for workers without a high school diploma by two percent.
Minimum wage jobs are typically staffed by people who are just entering the job market with few skills. It’s not the high skilled workers such as engineers and nurses who are hurt by a minimum wage hike, but the young and uneducated workers who may lose their job. It comes as no surprise that states with a minimum wage rate higher than the federal rate have an average teenage unemployment rate of 23.97% whereas states that have kept their minimum wage rate the same as the federal rate have an average teenage unemployment rate of only 20.46%.
An emphasis on increasing the minimum wage to address growing inequality and the lack of upward mobility doesn’t make sense when you understand that only 2.8% of all workers earn minimum wage today. Increasing the very bottom standard won’t help working families close the income gap.
Not only are these first-time jobs important for earning a paycheck, they also build the foundation towards higher paid, long-term employment. Minimum wage jobs are an opportunity for them to learn the basics of being a responsible employee, following directions, dealing with customers, solving problems, and reporting to a manager. Low wage jobs increase employment opportunity, making it possible for young and low-skilled workers to have a better chance at climbing up the economic mobility ladder.
The President’s economic advisors need to go back to the drawing board and find real ways to help the low-income and the long-term unemployed. They need to start focusing on actual economic outcomes, not on wishful thinking and good intentions. Creating an economic environment for job creation is how our government should create jobs. Increasing business and labor costs by hiking the minimum wage isn’t getting Americans back to work. The North Carolina General Assembly figured that out this past year by not acting to raise the minimum wage. It’s time for the White House to wake up and follow suit.