Good intentions don’t make good policy
Author: Rick Berman
Publication Date: July 2008
Newspaper: San Antonio Express News
Today the national minimum wage will jump from $5.85 to $6.55 per hour. Set to increase 14 months ago, this autopilot law change wields tremendous power and far-reaching effects.
Such a policy should be reviewed dispassionately and scientifically. Otherwise, the country could face devastating results.
Raising the minimum wage seems like an easy sell: If you pay people more, you reduce poverty. Right?
Those good intentions aren’t in sync with reality. Study after study proves the minimum wage hurts the most vulnerable members of the workforce — those who don’t have the skills to compete with more experienced workers. And raising it only increases the damage.
When an artificial premium is placed on entry-level labor, companies respond by cutting low-wage jobs, automating tasks, switching to self-service, asking customers to wait in longer lines, reducing hours of work, etc.
Instead of improving the economy, a minimum wage mandate makes it worse.
And at a time when many families are struggling to stay afloat, a new wave of minimum wage hikes is the last thing we need. Unfortunately, that’s exactly what we’re getting.
Earlier this summer Illinois, Kentucky, Michigan and South Dakota all raised their mandatory starting wages. The Connecticut legislature overrode the governor’s veto and approved a wage increase to $8.25 an hour. Think that’s going to the disadvantaged? Think again.
The average household income of a minimum wage earner in Connecticut is nearly $75,000 — a far cry from the poverty line. Why? Because business owners who are forced to pay high wages for entry-level work don’t hire low-skilled and less-educated employees.
The 12 percent federal minimum wage hike will make this mistake a national trend.
Consider this: For every 10 percent increase in the minimum wage, employment for high school dropouts and young black adults and teenagers falls by 8.5 percent, according to economist David Neumark of the University of California at Irvine. If that research model holds true, this week’s federal wage jump will ensure that an additional 10 percent of the most vulnerable employees will be left without a job.
Many people don’t believe that increasing the wage by “just 12 percent” could severely impact American business. But “just 12 percent” means that employers with just 20 entry-level workers will be absorbing about $25,000 per year in extra labor costs.
So many companies will find themselves facing a lose-lose proposition this week: cut staff hours or raise prices. And it’s all because lawmakers approved a politically popular piece of legislation without considering its real-world impact.
There is no magic bullet for the economy’s woes. But it’s vital that lawmakers and voters understand the actual consequences of these monetary policies. If we want economic policy that makes sense, voters and politicians alike need to realize that good-sounding solutions oftentimes have unintended consequences that far outweigh any small benefit they seem to have.
After this week’s minimum wage increase, many entry-level employees across the country are going to experience those unintended consequences first-hand — when they receive their pink slip.
Richard Berman is executive director of the Employment Policies Institute.