Friend or foe: Does the minimum wage hurt the workers it's intended to help?

November 10, 2009

Professor William Boyes understands why his students feel the way they do about the federal minimum wage -- why they seem to universally believe that the minimum wage is a good thing. It's a good thing for them; a good thing for workers across the country; a good thing for the economy as a whole.

There's just one problem, Boyes says. He thinks they're wrong. Convincing them, he admits, is no easy task.

"They're always surprised when I tell them that the minimum wage hurts them," says Boyes, a W. P. Carey professor of economics who explores the minimum wage in class. "They always say something like, 'Oh thank God for the minimum wage -- I just wish it was $20-an-hour so I could get more money.' And I have to tell them, 'No, if it was $20-an-hour, you wouldn't have more money. Because you wouldn't have a job.'"

Students, and probably many other Americans, may find Boyes' stance that the minimum wage actually hurts the very workers it is intended to help counterintuitive. But Boyes insists the facts are clear: Almost every respected study ever conducted on the effects on the minimum wage has come to the same conclusion -- that federal floors on wages are not a boon for the U.S. economy, but rather a burden.

Economists rarely agree on anything, Boyes said, but when it comes to the federal minimum wage, there is near-unanimous agreement that these wage floors stunt growth, hamper businesses' ability to compete and, maybe most importantly, make it more difficult for low-wage, low-skilled workers (most especially teenagers) to find entry-level jobs.

Yet despite the fact that nearly all the evidence suggests that it is a drag on the economy and a burden on American workers, the minimum wage has survived in this country (and many other Western nations) for decades. According to Boyes and others, there's almost no chance that it will ever be abolished.

The reason is simple, says Boyes: Politics.

"It's not going anywhere," says Boyes. "The reason for that is that young people -- who are the people most directly impacted by it -- don't vote much, and also because the labor unions, who are very well organized and give money to candidates -- well, they're the ones who actually want the minimum wage."

New life for an old debate

The first minimum wage laws were created in the late 19th century and early 20th century in New Zealand, Australia and the United Kingdom. The United States followed suit in 1938, enacting its minimum wage legislation as the nation struggled to recover from the Great Depression.

The original federal minimum wage was set at 25 cents per hour, and it increased steadily throughout the remainder of the 20th century. It remained at $3.35 between 1981 and 1989, and again between 1997 and 2006, when it stagnated at $5.15. Adjusted for inflation, the minimum wage in 2006 was worth just $5.44, compared to $8.71 in 1968 (when the nominal wage was just $1.60).

In 2007, labor-friendly Congressional Democrats, empowered by their newfound majority, pushed forward the Fair Minimum Wage Act, under which the federal minimum wage would jump from $5.15 per hour to $7.25 per hour over a period of the three years. Possibly because of the wage hadn't been changed for long, and possibly because of shifting political currents, the bill passed the House without much opposition. It won support from all 233 House Democrats as well as 82 Republicans. The Senate amended the bill to include tax cuts for small business, and that version passed that chamber by the vote of 97-3.

The final wage increase of the FMWA took effect in July of 2009, and the three years of increases have re-energized the long-standing debate over the real-world impact -- both good and bad -- of a mandated minimum.

Though Boyes is correct to say that most economists still believe the wage to be an economic hindrance, wage floors do have supporters, and not just among labor groups.

After New Jersey raised its minimum wage in the early 1990s, economists David Card and Alan Krueger set out to find out whether employment in that state would suffer, given the fact that neighboring Pennsylvania's minimum wage was 80 cents lower. In findings that challenged longstanding economic theory, Card and Krueger famously concluded that increases in the minimum do not necessarily discourage job growth. Further, the economists argued that such increases can actually encourage job growth.

The study has been challenged numerous times over the years, but it has served as a rallying point for those in favor of the minimum wage, most recently during the debate over the FMWA.

When the final FMWA wage increase took effect this past summer, the Economic Policy Institute (EPI) claimed that the legislation would deliver a raise to roughly 4.5 million American workers. The Institute pointed out that, when adjusted for inflation, the current minimum wage remains lower today than it was for the 20-year period between 1961 and 1981. But, it also maintained that the increase was a good thing for American workers and the economy as whole.

Echoing Card and Krueger's arguments, EPI analysts say increasing the minimum wage: helps working families, benefits disadvantaged workers and aids in the battle against poverty -- all the while not dampening job growth.

"New economic models that look specifically at low-wage labor markets help explain why there is little evidence of job loss associated with minimum wage increases," the EPI contended earlier this year. "These models recognize that employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale."

The Washington, D.C.-based Employment Policies Institute, among many others, didn't exactly agree with the sentiment. In a series of position papers also released this summer, the institute argued that "decades of research have shown that minimum wage hikes take a sledgehammer to the entry-level job market."

For every 10 percent increase in the minimum wage, the institute claimed, teenage employment at small businesses would fall by as much as 9 percent.

A Burden on the Worker?

The institute also offered up another key point: It noted that 83.5 percent of those receiving the minimum wage were teenagers -- not adults trying to raise families.

And this, says Boyes, is the point most often overlooked in the debate over the minimum wage. It is simply wrong to assume that the minimum wage needs to be high enough to support a family. Instead, Boyes suggests, the wage needs to be low enough so that businesses can afford to hire the kind of unskilled, young labor that might not actually be worth $7.25 an hour. Push the minimum wage too high, he says, and those entry-level jobs simply won't be there.

"The minimum wage is bad for the unskilled workers, the young workers, the workers without experience," he says.

Adds W. P. Carey economist Arthur Blakemore: "Almost all of the studies I've seen about the impact of the minimum wage find that it adversely affects employment among low-wage, low-skilled workers. And this impact is most heavily concentrated on teenagers."

The negatives don't end there, though.

Blakemore suggests there is both a short-term and long-term risk associated with the minimum wage, should that wage become too burdensome for business. If and when companies begin to feel too constricted by labor costs, Blakemore says, workers may end up with even bigger problems and fewer opportunities. Indeed, it is precisely some of the things the Economic  Policy Institute mentions as mitigating employment losses that can cause unintended consequences in the long run that harm low-skilled workers.

"The other thing you might expect to happen is that if firms have to pay higher wages, then they might actually reduce the amount of on-the-job training that workers get," Blakemore says. "And then the third thing that may happen -- though this would not happen instantly -- [is that] firms faced with higher and higher minimum wages would replace actual workers with technology, things like smart cash registers and devices like that."

He adds: "The benefit [of the minimum wage] is, if you are among the ones who remain employed, you earn higher current wages. If you lose [training] opportunities, however, the gain is temporary and your permanent earnings will grow slower."

It's an ugly prospect, but a real one. That's why Boyes is so staunch in his opposition to the minimum wage in the first place -- no matter what his students say.

"I see no benefit to it," says Boyes. "The problem, really, is the effect it has on young, unskilled workers. Because of the minimum wage, they don't get the chance to get those jobs that would otherwise be there."

Bottom Line:

  • The federal minimum wage was created in 1938 and was originally set at 25 cents per hour. Adjusted for inflation, the minimum wage that year was worth nearly $4.
  • In 2007, Congress passed the Fair Minimum Wage Act, which mandated that the minimum wage increase from $5.15 to $7.25 over a period of three years. The final increase went into effect in July of 2009.
  • Proponents of the minimum wage say it provides financial stability for working families and does not adversely affect job growth.
  • Most economists, however, believe that the minimum wage is problematic because, by fixing wage costs at a certain rate, it limits business' ability to create new jobs, train workers and pass savings on to consumers. Opponents of the minimum wage say that the workers most adversely impacted are unskilled, young workers, such as teenagers.