High Minimum Wage Equals High Unemployment
Author: Craig Garthwaite
Publication Date: December 2003
Newspaper: Seattle Post-Intelligencer
Topics: Minimum Wage
Why is it that Washington state’s entry-level job applicants faced one of the highest rates of unemployment in the nation this year? The state’s unemployment rate is 15 percent higher than the national average and 42 percent higher than it was five years ago when the state introduced a minimum wage higher than the federal minimum.
Washington state is not alone in experiencing this perpetual high state unemployment. Oregon, Washington and Alaska are among the five states with the highest unemployment rates. It is perhaps no coincidence that these three states have the highest state minimum wages in the nation. Decades of research confirm Nobel Prize-winning economist Gary Becker’s observation: “A higher minimum will further reduce the employment opportunities of workers with few skills.”
Despite Washington state’s relentless high unemployment, the state’s minimum wage is set to rise for the fifth time in as many years on Jan.1, making it 39 percent higher than the federal minimum – the highest minimum wage in the nation. This job-killing increase is built into the system, thanks to a ballot initiative that increases the state’s minimum wage regardless of job market conditions.
In many parts of the state, the jobs situation is worse than the headline statewide rate would have you believe. No fewer than 16 Washington cities and counties with a population of at least 10,000 posted an unemployment rate of between 9 percent and more than 14 percent last year. These areas include Lakewood city, where the unemployment rate was 10.9 percent; Longview city, where it was 11.3 percent, and Klickitat County, which had an unemployment rate of 14.3 percent.
More than 1.2 million people now live in these high unemployment areas with unemployment rates that have not been experienced nationwide since the recession of the early ’80s.
Those who initiated this ill-advised indexing proposal may believe that the latest minimum wage increase will help those workers who have managed to hold on to a minimum-wage job in difficult economic times. Hard evidence suggests a reality where the increase will deprive many vulnerable employees of the only opportunity they have to earn a living and increase their wages.
Research at Michigan State University found that increases in the minimum wage attract more highly skilled applicants to traditionally low-skill jobs. The study’s author, David Neumark, concluded: “Increases in the minimum wage raise the probability that more-skilled teenagers leave school and displace lower-skilled workers from their jobs.” Employers prefer to hire talented young people over less-skilled adults to offset the increased labor costs brought on by a minimum wage increase.
Another study, from the University of Wisconsin, revealed that this displacement of adults by teenagers following a minimum-wage increase was especially pronounced among women on welfare. “Mothers on welfare in states that raised their minimum wage left welfare for work 20 percent less than welfare recipients in states where the minimum wage was not raised,” the study’s author, Peter Brandon, found. The teenagers who are competing with these women usually live with working parents and their need for employment is arguably not as great.
Even wage-increase 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 has 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 one and 12 months on the job. This refutes the outdated notion of minimum-wage workers perpetually dependent on government to get 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, forcing the least skilled among us to depend on welfare for as long as those benefits last.
Exchanging the ability to provide for oneself with welfare checks has unfortunate consequences that reach far beyond the newly unemployed person’s pocketbook. Research by Casey Mulligan of the University of Chicago found that for every extra year a mother spent on welfare, her child spent an additional 274 days on welfare as an adult. Sad to say, raising the minimum wage not only harms the job prospects of those whose alternative is welfare but also their ability to pass a strong work ethic onto their children.
For Washington state’s most vulnerable workers, many of whom have remained in depressed localities after business and industry have left the area, raising the minimum wage will deprive them of the jobs, training and increased earnings they so obviously need. This is surely not what supporters of indexing the state minimum wage intended.
Craig Garthwaite is chief economist at the Employment Policies Institute, a non-profit research organization that studies issues relating to entry-level employment; www.EPIonline.org