* Minimum Wage & Its Effects

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Overview

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Minimum-wage jobs serve chiefly as a vital bottom rung on the economic ladder for many young people who have little or no prior work experience and lack the types of job skills that would command higher wages. Notwithstanding the limitations of such individuals, many an employer is happy to hire and train them to perform certain tasks, so long as he is not required by law to pay them more than they are worth to the business. Whenever the government raises the minimum wage by decree, however, every employer is forced to evaluate whether the extra expenditures on inexperienced and relatively unskilled workers can be justified from an economic perspective. In some instances, employers simply may not be able to afford the higher pay rate and thus will either trim their work force or scale back the number of hours worked by one or more of their employees. In other cases, employers may decide to hire more seasoned workers in order to increase the likelihood of getting an adequate amount of productivity in exchange for their financial outlay. Consequently, a multitude of unskilled-labor positions and starter jobs for young people are placed in jeopardy. According to the Heritage Foundation, the minimum wage increase which was enacted in three stages beginning in 2007, eliminated approximately 300,000 jobs.

In 2011, labor economists William Even and David Macpherson released a study for the Washington, D.C.-based Employment Policies Institute, titled “Unequal Harm: Racial Disparities in the Employment Consequences of Minimum Wage Increases.” They found that because minimum-wage hikes remove the incentive for employers to hire workers with low skills and little experience, 16-to-24-year-old males are affected more than anyone else by such policies. Indeed, the authors report that historically, each 10% increase in a state or federal minimum wage has decreased employment by 2.5% for males in this age group as a whole, and by 6.5% for young black males in particular. Also, each 10% minimum-wage hike has resulted in a 3% reduction in hours worked by young white males, and a 6.6% reduction for their black male counterparts.

According to the Cato Institute, “Decades of research have shown that the minimum wage harms the least-skilled workers from poor families.” Hoover Institution economist Thomas Sowell concurs, “[T]he cold fact is that minimum-wage laws create massive unemployment among black teenagers,” regardless of economic conditions in the nation as a whole. The 1940s, for instance, were a decade that saw some of the lowest rates of unemployment ever recorded among black teenagers—not because racism had been eradicated, but because inflation took the teeth out of a 1938 minimum-wage law. That is, everyone—including unskilled laborers—earned higher hourly rates (in inflated dollars) than the minimum-wage law required employers to pay. Even in 1949, when the U.S. economy was in recession, black teenage unemployment was far lower than it would be in the most prosperous years thereafter, when the minimum-wage rate was repeatedly hiked to keep pace with inflation.

These laws of economic physics are by no means restricted to the United States. Most studies of minimum-wage hikes in countries all over the world demonstrate that when governments impose artificially high wage rates on businesses, not only do overall employment rates drop, but young, inexperienced, and low-skilled workers are affected far more than anyone else. An American Enterprise Institute analysis puts it this way:

“Artificially raising wages for unskilled workers reduces the demand for those workers at the same time that it increases the number of unskilled workers looking for work, which results in an excess supply of unskilled workers. Period. And another term for an ‘excess supply of unskilled workers’ is an ‘increase in the teenage jobless rate.’”


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