Minimum wage hike won’t help the poor

Original Article:

  • Author: Craig Garthwaite

  • Publication Date: February 2004

  • Newspaper: Wisconsin State Journal

  • Topics: Living Wage

The nation’s leisure and hospitality industry went on a hiring spree during the last half of last year: about 300,000 new jobs that have been created in every type of service outlet from fast food to four-star dining—in a sector that accounts for just 9 percent of all jobs.

The bad news: Wisconsin’s residents are being left out of this long-awaited jobs boom. Wisconsin lost 8,600 such jobs in the last six months. Despite this, the Governor’s 17-member minimum wage council—which holds a public hearing today—has been given its marching orders.

Economist Gary Becker has noted that a higher minimum “will further reduce the employment opportunities of workers with few skills”—and most economists agree. Yet activist groups, such as the out-of-touch Center on Wisconsin Strategy, are lobbying to increase the minimum wage 32 percent.

Wisconsin’s job creation problems are nothing new. The toughest markets include Racine, where the unemployment rate was 11.8 percent last year, Beloit at 10.5 percent, and Milwaukee at 9.6 percent.

The experience of other states suggest that raising the minimum wage will make Wisconsin’s job-creation problem more difficult still. It is perhaps no coincidence that the three states with the highest state minimum wages in the nation—Oregon, Washington and Alaska—are among the five states with the highest unemployment rates.

Those who want to raise Wisconsin’s minimum wage may believe that this latest increase will help those who have managed to hold on to a minimum wage job in this difficult economic climate. Hard evidence suggests otherwise. Increases in the minimum wage attract more highly skilled applicants to traditionally low-skill jobs. Employers prefer to hire talented young people over less-skilled adults to offset the increased labor costs.

Even wage hike proponents acknowledge this displacement effect. Wage mandate activist and union organizer David Reynolds says that high minimum wages cause businesses to “attract and retain the best workers”—who take the jobs of the less skilled. The union-backed Economic Policy Institute admitted that higher minimum wages “will attract good workers”—meaning less-skilled workers need not apply.

Yet while less-skilled workers do not benefit from a minimum wage increase, academic research demonstrates they can get a raise without one. Economists at Miami University of Ohio and Florida State University found 65 percent of minimum wage workers increase their wage between 1 and 12 months on the job. This refutes the out-dated notion of minimum wage workers perpetually dependent on government for a raise.

More than undermining their prospects for employment, raising the minimum wage imperils an important benefit that helps less-skilled workers escape poverty. The federal earned-income tax credit is a successful anti-poverty program that supplements the income of the working poor. But it disappears the moment employees lose their job.

If state government presses ahead with a minimum wage increase, the Governor and his advisors will only remove Wisconsin’s less-skilled employees even further from the kind of new opportunities being created around the nation.

– Garthwaite is chief economist at the Employment Policies Institute, a nonprofit, nonpartisan think tank in Washington, D.C. He is scheduled to testify at the wage council meeting 2/9/2004.