Raising minimum wage would lead to more job cuts
Author: Mike Flynn
Publication Date: August 2006
Newspaper: Chicago Sun-Times
Topics: Minimum Wage
The federal government’s recently released June jobs report paints a disturbing picture of the labor market, suggesting that despite strong economic growth overall, the skills divide — and therefore the wage gap — is widening.
For the second month in a row, the overall unemployment rate remained at 4.6 percent — from an economic standpoint, close to full national employment. But there were significant signs pointing to weakness in the entry-level labor market. While health care, business and professional services, and manufacturing (all comprising relatively high-skilled employees) continued to post solid or strong job gains, the retail trade — which provides many low-skilled employees their entry to the job market — continued to shed jobs.
The modest dip in June comes on the heels of steep declines in April and May. Since March, the retail industry has shed 86,000 jobs, despite strong sales and consumer demand. One of the biggest job declines in June was felt in the general merchandise sector, which alone eliminated more than 14,000 jobs for the month.
Concurrently, the unemployment rates for high school dropouts, teens and African-American teens, which had been declining recently, reversed course and increased.
Despite the onset of the traditional summer job season, overall teen unemployment increased to 15.4 percent, with African-American teen unemployment jumping to 27.8 percent — more than six times the national rate. Unemployment among adult high school dropouts increased to 7 percent, or almost a million people.
These figures stand in sharp contrast to the results for more skilled employees. The unemployment rate for high school and college graduates held steady or improved for the month.
In a neat example of poetic coincidence, the U.S. Senate, in the same month, heard a debate over raising the federal minimum wage to $7.25 an hour. The problem? Such a policy would only exacerbate the national unemployment problem.
Legislators in at least six states this year have succumbed to political pressure and enacted increases. Half a dozen states are considering ballot initiatives, and campaigning politicians around the country are promising to raise minimum wages wherever their jurisdiction extends.
In order for wages to be raised, someone has to pay out more money. But employers need to maintain a profit margin to stay in business. Wherever wages are raised, employers tend to compensate by cutting jobs — usually entry-level positions.
Research from Miami University of Ohio and Florida State University shows that nearly two-thirds of minimum wage employees receive raises within 1-1/2 months of employment — a result of their tenure and increased skill. They can only advance, however, if they are employed.
By contrast, research from Cornell University shows that African-American teens and high school dropouts experience about four times the job loss following a minimum wage increase.
The cutting of entry-level jobs is particularly devastating to a crucial small minority of employees who for various reasons are unable to advance, as these jobs are their only employment opportunity. To ensure that these jobs are not cut, this subgroup would be better assisted by an expansion of the Earned Income Tax Credit, which provides tax breaks to low-income earners and their families, granting them the equivalent of a wage increase.
In making public policy, two questions are (or should be) paramount: Who is this designed to benefit, and can we be sure that we won’t cause undue harm rather than good?
The minimum wage debate is a good example of how these two questions can be thrown right out the window in favor of political grandstanding.
Mike Flynn is director of legislative affairs at the Employment Policies Institute.