Book: Minimum wage lowers earnings, produces unemployment

posted at 10:59 am on December 15, 2008 by Ed Morrissey

For decades, lawmakers in the US have tried showing solidarity with the working class by championing the minumum wage and demanding increases in it.  In the 110th Congress, Democrats could point to the minimum-wage hike as their only real accomplishment — and even that came as an amendment to funding the war in Iraq.  Now a new book by a professor of economics at UCI and an associate director of research and statistics at the Federal Reserve Board argue that these efforts do more to hurt the working class by lowering real earnings and eliminating job opportunities:

In this book, David Neumark and William Wascher offer a comprehensive overview of the evidence on the economic effects of minimum wages. Synthesizing nearly two decades of their own research and reviewing other research that touches on the same questions, Neumark and Wascher discuss the effects of minimum wages on employment and hours, the acquisition of skills, the wage and income distributions, longer-term labor market outcomes, prices, and the aggregate economy. Arguing that the usual focus on employment effects is too limiting, they present a broader, empirically based inquiry that will better inform policymakers about the costs and benefits of the minimum wage.

Based on their comprehensive reading of the evidence, Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. They reduce employment opportunities for less-skilled workers and tend to reduce their earnings; they are not an effective means of reducing poverty; and they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital. The authors argue that policymakers should instead look for other tools to raise the wages of low-skill workers and to provide poor families with an acceptable standard of living.

The minimum-wage increases that enjoy such popularity among politicians generate much less enthusiasm among economists, and for good reason.  It artificially inflates the cost of labor, especially in low-skill markets, which pushes employers to either reduce their labor through automation or scale back on staffing.  The higher the cost of labor goes, the less competitive the lowest-skilled workers become.  Those businesses that cannot absorb the costs will pass them along to their customers, raising the cost of living and eventually eliminating whatever transient increase in actual buying power the wage increase produced — which prompts politicians to raise the floor again and start the cycle over.

We’ve repeatedly debated this issue at Hot Air and at Captain’s Quarters for years. The unemployment spike this summer among teenagers should have confirmed this. Most of the working poor make more than minimum wage, and for good reason: minimum wage positions are starter jobs. Even those positions only pay that rate at hire, not permanently, making the “they deserve a raise” argument ludicrous. Raises get determined by employers, not government, and the act of raising the floor rate actually dilutes performance-based increases and makes them less likely to occur. Most of the people making minimum wage aren’t poor anyway — they’re students and part-time workers who have to watch as opportunities to make extra money get narrowed by government-imposed rate increases.

Minimum Wages sounds like a great Christmas gift … for your Representatives and Senators. Offer that instead of the traditional lump of coal those bad boys and girls should get in ten days, as it may be a gift that eventually benefits us all. I’m adding it to my wish list for Christmas.


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Comment pages: 1 2

You’ve got the chicken and egg scenario wrong. The minimum wage hike came first, then came recession. We’ve only been in a recession for one quarter, maybe two.

Q4 07 saw negative growth before the new minimum wage. Furthermore the effect of the new minimum wage was hardly enough to turn the economy. Why did oil go to $150 / brl? Manipulation of markets caused the recession. We all know that. At least that combined with fraudulent policies from the left forcing loans for those who could not afford them.

I’m hardly liberal. Obama is an Anti-Christ Liberals fight on Satan’s side. I hate everything about liberals including the likes of McCain who cheapens the Republican brand.

But I believe in telling the truth as well. We cheapen ourselves when we tell lies to try to support an overly low minimum wage. Once upon a time Republicans supported slavery, that was wrong, just as too low a minimum wage is wrong. Is it worth losing Congress and the Presidency to keep the minimum wage low? We consistently do that. It gets too low and we lose elections. We do the same thing time and time again without learning form it.

It greatly troubles me when I see people arguing that Unions are affected by the minimum wage. Very few if any union workers earn even close to minimum wage. No one in their right mind would choose a Union when they are making near minimum wage. This is widely known and again destroys our credibility when we argue otherwise.

I feel we could make a persuasive argument for a reasonable minimum wage. One that does not ignore the plight of those on the lowest edges of society. We should realize that adults working for these wages still have basic needs. Needs that society will not ignore. The only question is who pays.

When companies that higher hundreds of employees at near minimum wage do not pay for the health care of their near full time employees our taxes do. Are we really arguing for higher taxes? Seems to me we are. I guarantee America is long past the time of just letting the poor die from curable illnesses.

We are long the past the time of Americans starving to death. The only question is who pays the cost, the employer of full time workers or should the rest of us pay twice? Once for ourselves and once again for the cheapskate employers employees.

Steveangell on December 15, 2008 at 8:09 PM

Once upon a time Republicans supported slavery, that was wrong, just as too low a minimum wage is wrong.

Are you kidding me, you dumbs–t?! The Republican party was found in the latter part of the 1850′s to combat the spread of slavery! Lincoln himself found the entire establishment’s stand too moderate, at the time!

At least get your facts straight!

gryphon202 on December 15, 2008 at 9:57 PM

Your attempts to get some people a higher wage at the expense of others is doomed to failure, just as every other attempt to gin the market in favor of one group or another has failed.

MarkTheGreat on December 15, 2008 at 6:25 PM

At the expense of what others, illegal aliens? It’s amazing what some people will say in public.

You are of the belief that working people making 8 bucks an hour should voluntarily ask to have their wages cut in half for their own benefit and their nation’s benefit, aren’t you? That would make us more competitive with China and that would be good for everyone, isn’t that right?

The things people will say on blogs. Amazing.

Buddahpundit on December 15, 2008 at 11:59 PM

It greatly troubles me when I see people arguing that Unions are affected by the minimum wage. Very few if any union workers earn even close to minimum wage. No one in their right mind would choose a Union when they are making near minimum wage. This is widely known and again destroys our credibility when we argue otherwise.

The effect minimum wage has on unions is that their wages are usually tied to minimum wage, which means when minimum wage goes up so do union wages. This is why the unions are some of the biggest proponents of minimum wage increases, and one of the reasons the Dems are so eager to give them.

Gianni on December 16, 2008 at 1:03 AM

Steveangell on December 15, 2008 at 8:09 PM

I see your history is as bad as your economics.
The Democrats were the party of slavery, not Republicans.

Secondly, why is a low minimum wage bad? Why do you want to force low skill workers out of the job market?

MarkTheGreat on December 16, 2008 at 6:57 AM

At the expense of what others, illegal aliens? It’s amazing what some people will say in public.

You are of the belief that working people making 8 bucks an hour should voluntarily ask to have their wages cut in half for their own benefit and their nation’s benefit, aren’t you? That would make us more competitive with China and that would be good for everyone, isn’t that right?

The things people will say on blogs. Amazing.

Buddahpundit on December 15, 2008 at 11:59 PM

You are a one trick pony, aren’t you. You view everything in the light of the thing that scares you the most. Illegal aliens. Do you check under your bed for them everynight?

As I explained several times previously, (but you couldn’t see or understand because you insist that every thing be about illegals) is that the other loosers in this scam are the workers who have to have their wages cut, so that those making minimum can be paid more. The others are the consumers who have to pay more for products so that the minimum wage workers can be paid more.

As to workers getting their wages cut, if they are currently being paid more than their labor is worth, then they are stealing, and should have their wages cut. Life’s a bitch when you have no skills. Trying to use govt to make life fair is doomed to failure.

BTW, why do you believe that being competitive won’t help everybody?

MarkTheGreat on December 16, 2008 at 7:03 AM

At the expense of what others, illegal aliens? It’s amazing what some people will say in public.

You are of the belief that working people making 8 bucks an hour should voluntarily ask to have their wages cut in half for their own benefit and their nation’s benefit, aren’t you? That would make us more competitive with China and that would be good for everyone, isn’t that right?

The things people will say on blogs. Amazing.

Buddahpundit on December 15, 2008 at 11:59 PM

Why do you insist on making everything about illegal aliens? Are you only able to handle one concept at at time?

As I have said many times already, the others are the other workers who will have their wages cut so that employers can pay the minimum wage workers more. The others are the customers who have to pay more so that the minimum wage workers can be paid more.

As to workers at the current minimum who would get a pay cut. Good. If they are being paid more than their labor is worth, then they are stealing. Life’s a b$tch when you have no skills. The solution is to get the skills, not cry to govt to get a raise.

As to being competitive. DO you really think that being less competitive helps anyone?

MarkTheGreat on December 16, 2008 at 7:07 AM

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