Minimum Wage Increase Hurts Low-Income Families

Original Article:

  • Author: Craig Garthwaite

  • Publication Date: May 2005

  • Newspaper: Milwaukee Journal Sentinel

  • Topics: Minimum Wage

Raising the minimum wage “destroys jobs,” and the evidence for that “is overwhelming.” The words of a business lobby? Of a self-interested corporation? No, that’s Federal Reserve Chairman Alan Greenspan speaking.

The debate over raising Wisconsin’s minimum wage has been painted as Republicans vs. Democrats, businesses vs. poor people. Politics aside, economists will tell you that a major problem with raising the minimum wage is that it has devastating consequences for the least skilled among us.

As Governor Doyle and the squabbling legislators consider the issue, they should bear in mind Chairman Greenspan’s warning that a minimum wage hike “prevents people who are at the early stages of their careers…from getting a foothold in the ladder of promotions.”

This ladder of promotions is no mere metaphor. Although wage hike proponents often argue that minimum wage employees haven’t had a raise since Congress last increased the national rate, few entering the workforce at the minimum wage stay there for long. Nearly two-thirds get a raise within 1-12 months. After improving their skills and establishing their value, these employees receive raises at a rate nearly six times larger than everyone else.

The vast majority of low-wage earners simply don’t need a mandated pay raise. They do it on their own.

That leaves us with a small group of the least skilled, who may remain at a minimum wage salary for extended periods. While mandating a wage boost for these individuals might seem like an attractive option, they are actually the people most likely to lose their jobs following a wage hike. Those most in need become the most likely to suffer.

Duke University researchers have found that after an increase in the minimum wage, the lowest skilled adults are crowded out of their jobs as better-educated teenagers (frequently from wealthier families) are drawn into the workforce. Their “need”? Simply to earn money for video games and iPods. But because they require less training, employers eagerly hire these higher-skilled teenagers to get the most out of their higher payroll costs.

Because of disparities in education, job losses often exact a crippling toll on minority communities. Cornell University researchers have determined that after a minimum wage hike, young African-Americans bear four times the employment loss of non-blacks.

In the years following World War II, the unemployment rate for young black males averaged lower than their white counterparts’. But in 1956, a 33% increase in the minimum wage precipitated an alarming turnaround. By 1960, unemployment for young black males had nearly doubled to 22.7% while increasing only slightly for young whites. By 1981, nearly annual minimum wage increases had greatly contributed to their 40.7% unemployment rate.

Artificially high wage mandates continue to price many less-educated African-Americans out of the labor market. Today, the unemployment rate for young blacks is 125% higher than for white youth. Nobel laureate economist Milton Friedman rightly notes that joblessness among so many young blacks “is both a scandal and a serious source of social unrest. Yet it is largely a result of minimum wage laws.”

Proponents of minimum wage increases typically frame their efforts as a way to rescue society’s most economically vulnerable—seniors trying to supplement their Social Security checks or single parents struggling to raise their children. But in Wisconsin, individuals earning $7 an hour or less have an average family income of nearly $58,000. Even former Clinton Labor Secretary Robert Reich observed that “most minimum wage earners aren’t poor.”

If that seems implausible, consider that just 6% of these individuals are sole earners with children. A Cornell University study found only 15% of prospective wage hike beneficiaries across the nation are in poor families. Poverty is becoming a phenomenon confined largely to nonworkers. None of them will benefit from a minimum wage increase.

But they will be hurt by a minimum wage increase. A University of Wisconsin study revealed that welfare mothers in states which raised their minimum wage remained on public assistance 44 percent longer than those in states where the minimum wage was not raised.

Moreover, businesses with many low-wage employees frequently increase their prices after a minimum wage hike. Researchers from Stanford University have found that these price increases disproportionately effect the poor. In fact, they are more regressive than the sales tax, which is notorious for imposing a greater burden on low-income families.

Those with the least skills won’t benefit from a minimum wage increase if they’re shut out of the workforce. Instead of pushing for a minimum wage hike, Wisconsin legislators should be forging policies to help the needy without costing them their jobs.