The unintended consequences of a minimum-wage hike
Author: Megan McDonald
Publication Date: January 2006
Topics: Minimum Wage
Legislators understandably believe that they are in the business of solving problems. Interest groups continually bring problems to their attention and suggest changes in the law that will fix the situation. Lawmakers could be forgiven for thinking that they have a magic wand—fixing problems with a new law.
Unfortunately, most policy questions aren’t that simple. Often the new law not only doesn’t solve the problem, but sets off a chain of unintended consequences.
Such is the case with mandated hikes in the minimum wage. The Virginia Legislature is currently considering a proposal to hike the minimum wage in the Commonwealth by almost 60%—raising the entry-level wage from $5.15 to $8.15 an hour.
Lawmakers may think they are helping low-income families put more money in their pockets, but legislation can’t repeal the laws of economics. Mountains of research reveal that mandated wage hikes impose real economic costs—and those costs are largely borne by the very people lawmakers are trying to help.
Unfortunately attempts to raise the minimum wage rely more on emotion than economic reality. Supporters often portray the typical minimum wage earner as a single parent struggling to put food on the table.
But, as Clinton Labor Secretary Robert Reich observed, most minimum wage earners aren’t poor. Only a fraction of Virginia residents likely to benefit by the proposed hike are sole earners supporting children. Most are teenagers or second or third earners. In fact, the average family income of employees who would benefit from the increase is at least $60,000.
The vast majority of us started out at minimum wage job. It provided us with an entry to the job market to gain valuable skills and experience that allowed us to move up the ladder to higher paying jobs.
This is evident by the fact that over two-thirds of minimum wage employees receive a raise within the first year of employment. In fact, research has found that minimum wage employees receive raises at a rate almost six times that of everyone else.
There is, however, a small subsection of the workforce that remains at the minimum wage for extended periods. They tend to be the least skilled members of the workforce—often high school dropouts or immigrants with very poor reading skills.
But instead of putting more money into their pockets, a minimum wage hike could cost them their jobs. Duke University researchers have found that after an increase in the minimum wage, the least-skilled employees are crowded out of their jobs as better educated teenagers are drawn into the work force.
Minority employment also suffers after a minimum wage increase, largely due to disparities in education and skill levels. Researchers from Cornell University have found that young African-Americans, for example, face four times the job loss of nonblacks following a wage hike.
Without the opportunity to learn the lessons of the workplace, many low-skilled adults and minorities will find it impossible to move up in the world. The prospect of extended joblessness is especially troubling in a post-welfare reform era.
For most people, a steady paycheck is the best safety net they have. Low-income employees won’t benefit from a minimum wage increase if they’re no longer working.