The Record Is Clear: Minimum Wage Hikes Destroy Jobs
Original Article: http://www.forbes.com/fdc/welcome_mjx.shtml
Author: Michael Saltsman
Publication Date: April 2013
Topics: Minimum Wage
There’s at least one minimum wage fact that both Republicans and Democrats agree on: Opposing an increase, as Republicans typically do, is a political loser. So confident are Democrats in the effectiveness of this “wedge” issue that they’ve made it a key part of their 2014 strategy to retake control of the House of Representatives.
But as is often the case in politics, “effective” is not synonymous with “true.” The case in favor of a higher minimum wage is built on a bewildering number of misleading statistics and straight-up falsehoods, some of which were recently rehashed on the pages of the Washington Post by former Obama administration economist Betsey Stevenson.
It’s time to correct the record.
Let’s start with job loss, a defining issue of any minimum wage debate. Opponents of this policy argue that raising business’ labor costs will (absent the ability to increase prices) force them to scale back on employee hours and jobs. Stevenson argues that this consequence is a figment of the conservative imagination, citing “many” studies which show a higher minimum wage has no impact on employment.
However, “many” is not the same as “most,” and Stevenson crosses the line from professor to pundit when she classifies wage hike-related job loss as a myth.
In a comprehensive, 182-page summary of the research on this subject from the last two decades, economists David Neumark (UC-Irvine) and William Wascher (Federal Reserve Board) determined that 85 percent of the best research points to a loss of jobs following a minimum wage increase.
As in any academic discipline, there are outliers. But even the outliers are problematic: For instance, the famous (or rather, infamous) New Jersey study that associated a higher minimum with increasedemployment was later refuted in the same academic journal that originally published it. More recently, the paper that the President relied on to make his case for a higher minimum was debunked in a study published by the National Bureau of Economic Research.
Of course, the goal of minimum wage policy is not to reduce employment, but rather poverty. Indeed, Stevenson says explicitly in her commentary that a higher minimum wage will achieve this end. But empirical evidence refutes her point. Twenty-eight states raised minimum wages in the four years prior to passage of the last federal minimum wage increase. Economists from Cornell and American Universities, writing in the Southern Economic Journal, found no associated reduction in poverty rates.
One reason is poor targeting. According to the Census Bureau, roughly 60 percent of people living in poverty don’t currently work, and thus can’t benefit from a raise. Of those who do work and would be covered by the President’s $9 proposal, Census Bureau data show that the majority live in families far above the poverty line. Across all covered minimum wage earners, the average family income is $50,789.
Were there no other consequences to raising the minimum wage, imprecise targeting would be a minor drawback. But a study published in the Journal of Human Resources found that a higher minimum wage can actually increase the proportion of families living at or near the poverty line, as the resulting reduction in work hours (or a loss of employment altogether) leads to less take-home pay rather than more.
Stevenson covers other oft-cited reasons to raise the minimum wage, including the argument that, adjusted for inflation, the minimum wage would already be above $9 an hour. But inflation rates can both rise and fall, which means a minimum wage that truly kept up with inflation since its inception in 1938 would only be $4.12 today—not the current $7.25.
Stevenson’s broader point is that people are “stuck” waiting for the federal government to give them a raise. Yet research from economists at Florida State University and Miami University finds that two-thirds of minimum wage earners receive a bump in pay in their first 1-12 months on the job.
For the small number of truly-disadvantaged individuals who remain at the minimum wage for a longer period of time, Congress has put in place a significant income supplement in the form of the Earned Income Tax Credit. A single parent with two children receives an additional $5,200 in income from this credit, bumping their effective hourly wage from $7.25 to $9.76. Some states have added to the federal EITC, boosting the wage even further.
Undoubtedly, wage hike advocates will continue to be creative in their pro-minimum wage arguments—focusing on the hefty profits of restaurant corporations instead of the far-smaller profits of their affiliated franchisees, for instance, or describing $13-an-hour tipped restaurant employees as “subminimum” wage earners. But no amount of spin can erase the consequences of a wage hike for the poor and others in the entry-level job market.
Saltsman is research director at the Employment Policies Institute.