Soaring minimum wages drive out R.I. jobs

Original Article:

  • Author: Adam Schaeffer

  • Publication Date: April 2008

  • Newspaper: Providence Journal

WITH RHODE ISLAND facing its largest state budget deficit in almost two decades — an estimated $384 million for the next fiscal year — it’s no wonder a wave of protesters washed over the State House last month with their demands.

While the protesters want different things — some to stop new taxes, others cuts in government services — all should ask their representatives to answer for how they got into this mess in the first place.
Here’s a good puzzler for the protesters to start off with: What do Rhode Island, Michigan and Ohio have in common? Answer: They all have a higher percentage of unionized workers than the national average, have increased the minimum wage between 2005 and 2008, and are in the top ten for unemployment in 2008.

That’s no coincidence. There’s a twisted logic to unions’ pushing regulations, like the minimum wage, that strangle businesses and kill jobs.
Unions promote policies such as minimum-wage increases because they limit the alternatives to high-priced union labor. Of course, anti-growth policies eventually kill union jobs too, but politics is a short-sighted game. In states with unionization rates well above the national average, unions have been getting their way for decades.

States raised their minimum-wage rates about 19 percent on average from 2005 to 2008. In Rhode Island, however, the minimum wage went up a stunning 20.3 percent in that time period. Michigan increased its minimum wage almost 40 percent, and Ohio increased it 36 percent.

Far from helping the poor, these regulations are hurting those most in need of work. The national unemployment rate is 4.8 percent, but Rhode Island’s is 5.7 percent. Michigan and Ohio are doing even worse, hitting a 7.1 and 5.5 percent unemployment rate respectively this year.

Studies consistently show that minimum-wage increases lead to job losses, hitting those in need the hardest. A 2007 study from the University of California at Irvine showed that for every 10 percent increase in the minimum wage, employment drops 8 percent for high-school dropouts and 8.4 percent for African-American teens.

It’s easy to see why. A full-time employee works around 2,000 hours a year. Let’s say an employee being paid $6.00 an hour generates $7.00 of revenue an hour; that means the business makes $1.00 per hour. Then the government says he has to be paid $8.00 an hour. If the business doesn’t lay him off, it will lose $1.00 every hour instead of making $1.00 per hour; that’s a $2,000 loss on every employee every year. If the business employed 20 people, that would mean a loss of $40,000 a year. With losses like that, a business won’t be in business very long. And if you think that price hikes are the answer you haven’t been reading or watching the news.

Instead, a business has to hire fewer, more productive workers at a higher wage, and that means low-skilled and new workers get pushed out of the workforce. The minimum wage, in other words, puts the people it’s supposed to help out of work.
Decades of economic research show that mandated wage hikes eliminate entry-level jobs, putting particular pressure on young minorities and the least educated. A Cornell University study found that black young adults typically bear almost four times the employment loss of their non-black counterparts after a minimum wage increase. Specifically, they found that a 10 percent increase in the minimum wage will result in an 8.5 percent decrease in employment for black young adults and teenagers. Meanwhile, a National Bureau of Economic Research study in 2006 concluded that minimum-wage increases hurt the least-skilled the most, and a 2007 survey of labor economists showed the vast majority agree that big increases kill jobs.

Rhode Island can’t afford the costs imposed by labor unions. With the housing market in a slump, the economy hitting the skids, a credit crisis and the dollar in decline, the last thing Rhode Island needs is to be weighed down by anti-growth union policies that handcuff businesses and hurt the poor.

No one wants tax hikes or program cuts, but job losses are what lead to budget problems in the first place. Policy approaches like the federal Earned Income Tax Credit reward work, help low-income workers, and don’t destroy jobs or businesses. So where are the protests against years of senseless job-killing by the state government?