“So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment.” - Paul Krugman (1998)
During the State of the Union address, President Barack Obama called on Congress to pass an increase in the minimum wage to $9 an hour. This policy is one that is frequently pushed by the political left.
Because Democrats, who had complete control of Congress, were hesistant to continue funding military operations in Afghanistan and Iraq, President George W. Bush agreed to an increase in the minimum wage to attract their votes. For Democrats, the minimum wage is a path to their ultimate goal of a so-called “living wage.” Labor unions, however, push the issue because many of their contracts are indexed to the minimum wage.
President Obama’s latest gimmick may sound good, but ultimately raising the minimum wage has the opposite of the intended effect. Looking at the most recent data from the Bureau of Labor Statistics (BLS), 5.2% of workers make at or below the minimum wage. That number is up some from recent years, which is due to lingering economic stagnation. Of that 5.2% of workers, 49.5% are between the ages of 16 and 24 — nearly one in four are between 16 and 19.
The Wall Street Journal editorial board recently explained the likely impact of raising the minimum wage on unskilled workers — such as young people, who have helped propel President Obama to White House:
In the real world, setting a floor under the price of labor creates winners and losers. Some workers will get a $1.75 raise. Great. But others—typically the least educated and skilled—will be priced out of the job market and their pay won’t rise to $9. It will be zero.
University of California at Irvine economist David Neumark has looked at more than 100 major academic studies on the minimum wage, and he says the White House claim of de minimis job losses “grossly misstates the weight of the evidence.” About 85% of the studies “find a negative employment effect on low-skilled workers.”
The minimum wage is also an ineffective way to reduce poverty. Most families in poverty don’t have someone who works, so making it more difficult to get a job exacerbates poverty. Mr. Obama says that a “family with two kids that earns the minimum wage still lives below the poverty level. That is wrong.”
He left out that most minimum-wage earners are not the primary bread winner. Nearly 40% live with a parent or relative. The average family income of a household with a minimum-wage worker is about $47,023—which is far above the poverty line of $23,550 for a family of four.
This is basic economics, folks. Each employer budgets out hours for his employees with his bottomline in mind. If the cost of paying his employees goes up, that employer will react by reducing hours, laying off employees, and/or raising prices. Even Wal-Mart moms have figured out that raising the minimum wage means bad things for their family budgets and it will almost certainly lead to higher unemployment, especially for teenagers and entry-level workers, those who need the experience the most.