Money Matters - March 21. 2016

Minimum Wage Hikes: the Case for Caution

Across the nation, demands for a dramatically higher federal and local minimum wages continue. Forty hours per week at just $7.25 comes out to under $1,300 monthly before tax. The difficulty of getting by on such minimal income has inspired many to call for either an increase in the federal minimum or a living wage based on locality. After all, even $10 per hour in an urban area such as Chicago or New York City might barely cover essentials such as food and shelter.

Although the federal wage has remained at $7.25 per hour since July 2009, some municipalities have enacted local minimum wages far in excess. For instance, Chicago passed an ordinance in December 2014 hiking the minimum wage to $14 per hour by 2019.

This represents a nearly 40 percent increase from the current $10.50 per hour. And on March 2, Oregon enacted legislation dramatically hiking the state’s minimum wage in increments through 2022. The wage varies based on the degree of urbanization, but Portland will top out at $14.75 per hour. Perhaps most notably, Seattle enacted a $15 per hour minimum wage in April of last year.

Before jumping to such government-directed solutions to the plight of those struggling near the bottom of the economic ladder, possible unintended consequences should be considered.

Let’s first take a look at the extent of the population impacted by minimum wages.

It’s a misconception to conclude that a significant portion of the population is working for minimum wages. In fact, according to an April 2015 study by Bureau of Labor Statistics (BLS), 3.9 percent of hourly paid workers earned at or below the federal minimum wage in 2014. Considering that more than 60 percent of workers are salaried rather than hourly, the actual percentage of all workers earning at or below the wage is under 2 percent.

In addition, a 2013 analysis of data from BLS and the Census Bureau conducted by labor economist James Sherk shows that the average family income of those earning minimum wage jobs is over $53,000 per year. As it turns out, many minimum-wage workers are merely supplementing their family’s existing income. In fact, according to the latest BLS data, although 9.5 percent of hourly part-time workers earn at or below the federal minimum wage, only 1.8 percent of full-time workers do so.

Within this segment of minimum-wage workers, it should be noted that those most dramatically impacted include the young and the under-educated:

• A teenage worker is five times more likely to be in a minimum-wage job than someone 25 or older (15 percent vs. 3 percent). Additionally, only about one in five workers is under the age of 25; yet nearly one in two minimum-wage workers have yet to reach this milestone.
• Those without a high school diploma are more than three times as likely to earn the federal minimum wage or less (7 percent vs. 2 percent).

Of course, that only a small percentage of the population is earning just the minimum wage is small consolation to those actually employed in those jobs. For them, a raise of 30, 40 or 50 percent would surely be welcomed. However, the unintended consequences of a legislatively mandated raise should be considered.

What could go wrong?

In short, an employer hopes that the value generated by a worker exceeds the costs of employing him. Correspondingly, as the cost of a unit of labor increases, the profit to the employer declines. Increasing the minimum wage artificially increases this cost for labor.

Some employees earning the minimum may possess the capacity to remain profitable even with the higher wage mandate; these employees may benefit personally from a minimum-wage increase. However, those unable to provide sufficient value commensurate with the higher wages will find themselves inadvertently priced out of a job.

Ironically, the very people intended to be helped by increases in the minimum wage are the ones most prone to be negatively impacted — the young, the less-educated and the less-experienced. It’s these individuals who are most in need of the income and the experience that a low-paying job can provide. After all, a work ethic developed as a young adult in a minimum-wage job can prove vital towards obtaining more income and responsibility later. Unfortunately, the number of teenagers, in particular, participating in the workforce remains stuck at near a historically low one in three.

To further exacerbate the problem, economists David Neumark, University of California, and William Wascher, Federal Reserve Board, concluded in their well-known 1995 paper that “such increases raise the probability that more-skilled teenagers leave school and displace lower-skilled workers from their jobs. We find that the displaced lower-skilled workers are more likely to end up non-enrolled and non-employed.”

In their book published by MIT 13 years later, they similarly concluded, “Our conclusions imply that a higher minimum wage will impose costs on low-skill workers and low-income families without delivering benefits that offset those costs. Conversely, of course, our results indicate that reductions in minimum wages would yield net benefits.”

Commendably, community leaders and politicians often seek to improve the lives of others. However, good intentions must be based in sound economics; otherwise, the proverbial cure may prove to be worse than the disease.

The view reflected here does not represent NACo policy. If you have an alternative viewpoint on increasing the minimum wage, County News invites your opinion. Please email your submission to bschlott@naco.org: Subject Line: Money Matters. Note: County News will publish the case for raising the minimum wage in a future edition.