About That Minimum Wage Hike

The federal minimum wage is scheduled to increase from $6.55 per hour to $7.25 on July 24. This follows an increase from $5.15 to $5.85 in July 2007, and then to $6.55 in July of last year.

The minimum wage is one of the few areas where most economists are in agreement. Both economic theory and countless studies show that a higher minimum wage reduces employment opportunities for low-skilled, inexperienced, young workers. It’s pretty simple: when government artificially raises the price of low-skilled, inexperienced labor, then businesses will reduce jobs for those workers. For businesses that have no choice but to hire such workers, those firms have to find other ways to make up for lost resources.

In the July 6 Wall Street Journal, “The Outlook” column on page two by Kris Maher focused on the impact of raising the minimum wage in the current bad economy. But there were some odd declarations in the piece.

For example, Maher wrote: “In the past, minimum-wage increases have done little to dent job creation. And pouring more money into people's pockets -- especially low-wage workers who are likely to spend the increase to meet living costs -- would normally boost the economy.”

Really? That might be Maher’s opinion, but it is not rooted in economic reality. After all, do the resources that go for a higher minimum wage just drop from the sky?

And a bit later, Maher asserts:

Still, many economists also see long-term positive effects for the economy from boosting the income of those at the bottom of the economic ladder. They note that many small businesses may benefit through higher productivity in the form of improved worker retention and less churn.

Again, really? Just who are these “many economists?” Maher continues:

The Economic Policy Institute estimates that the minimum-wage increase will add $5.5 billion to the economy, and that this money is likely to be readily spent by low-wage workers, giving a boost to local economies. Heidi Shierholz, an economist at the liberal think tank in Washington, argues that ‘it is actually a good time’ for an increase in the minimum wage.

Ah, now I understand. Maher turned to the labor-union-backed Economic Policy Institute to find economists willing to say rather silly things about the minimum wage. Indeed, only a handful of liberal, labor-union-biased economists would ever make such mistaken statements regarding the effects of the minimum wage.

The true economics are not in dispute. A government-mandated wage increase means increased labor costs – at the minimum wage level and often higher, as workers with more experience and skills look for a commensurate wage hike. Those costs are either born by workers who will have fewer job opportunities, or by employers, or both. Maher offered the following example:

Ryan Arfmann, who owns a Jamba Juice franchise in Idaho Falls, Idaho, is a case in point. He said he will have to boost pay to all of his 18 workers. The ones making less than $7.25 an hour will be raised to the new rate. But he said he will have to give raises to those currently earning more than $7.25 an hour because they have more experience. As a result, he plans to cut hours for his part-time workers. "I'll definitely have to run a tighter shift each day and watch numbers like never before," said Mr. Arfmann, who estimates his business is down between 3% and 4% this year.

That’s the reality of a government-mandated wage increase.

In the private sector, increased pay is earned due to such factors as increased productivity, enhanced skills, greater responsibilities, a shift in labor market demand and/or supply, business growth, and so on. A government-mandated wage hike has nothing to do with such factors. It’s simply political pandering overruling economics, with workers and business owners paying the price. That bad no matter what the current state of the economy, but it’s especially bad in a down economy, as is the case now.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council