Book: Minimum wage lowers earnings, produces unemployment

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.