Category Archives: Minimum Wage

The minimum wage is one of the most popular policies for fighting poverty, and proposed increases to it usually poll very well. The $7.25 per hour federal minimum wage hasn’t increased since 2009, so now many states are enacting their own minimum wage hikes. Twenty states are inaugurating 2015 with new increases.

Danielle Paquette’s recent Washington Post opinion piece, “20 states just raised the minimum wage. It wasn’t enough,” rounds up many of those increases, which range from Florida’s 12-cent hourly hike to as much as $1.25 per hour. Already, the New Year increases are “fattening the wallets of about 3.1 million Americans,” Paquette argues. A similar December 31 New York Times opinion piece by Rachel Abrams carries the headline, “States’ Minimum Wages Rise, Helping Millions of Workers.”

That sounds about right, as far as it goes. Roughly 2 to 3 percent of U.S. workers earn the minimum wage. With a late 2014 labor force of 156 million people, 3.1 million fatter wallets is in the right ballpark. Yet, these minimum wage increases will not help reduce poverty. Why? The reason is tradeoffs.

Paquette and Abrams only tell half the story. Millions of workers are getting a raise, but those raises come at a cost. Other workers directly pay for those raises through reduced hours, firings, benefit cuts, and other harms. Those workers and would-be workers have few defenders. My colleague Iain Murray and I recently compiled some of the many costs to these neglected souls:

Workers are fired, hours are cut, jobs are not created, non-wage perks, including insurance, free parking, free meals, and vacation days evaporate, annual bonuses shrink, prices rise, (squeezing minimum wage earners themselves), big businesses gain an artificial competitive advantage over their smaller competitors, and crime rates rise. It is a bleak litany.

Are those tradeoffs worth it? That is a value judgment each person needs to make on his or her own. It is perfectly legitimate to argue that the benefits some workers get from a minimum wage increase are worth throwing other workers out of their jobs or denying them the on-the-job perks mentioned above. But it doesn’t seem like a very humane stance.

The point is that there is no free lunch. One cannot simply wish tradeoffs away, as so many minimum wage proponents insist on doing. Minimum wages have a reverse-Robin Hood effect. Those who benefit from minimum wage increases often do so at the direct expense of people worse off than themselves. Honesty demands that one at least acknowledge that these tradeoffs exist, and take them into account when considering the next minimum wage increase.

Many progressives strongly support minimum wage increases. This is troubling, because the effects those increases actually have on many poor people are regressive. Signaling your concern for the poor is different from actually helping the poor; feeling good about yourself is often different from actually doing good for others. At the very least, minimum wage supporters should acknowledge that the minimum wage has tradeoffs. It is not a free lunch.

A new study by UC-San Diego economists Jeffrey Clemens and Michael Wither on the minimum wage reaffirms the obvious. Some workers benefit from minimum wage increases, and this is a good thing. But it comes at a cost. Other workers lose their jobs:

Over the late 2000s, the average effective minimum wage rose by nearly 30 percent across the United States. Our best estimate is that this period’s minimum wage increases reduced working-age adults’ employment-to-population ratio by 0.7 percentage point. This accounts for 14 percent of the total decline over the relevant time period.  [p.5]

This finding is in line with what I’ve pointed out before, that the minimum wage has a reverse-Robin Hood effect. Some workers lose their entire income, which gets transferred instead to other workers fortunate enough to keep their jobs, and get raises besides. Income redistribution programs are supposed to flow from better-off people to worse-off people—not the other way around.

If the goal is to lift as many people as possible out of poverty, minimum wage increases are simply not up to the task. The tradeoffs are too severe.

Clemens and Wither also find another, less publicized effect:

In addition to reducing employment, we find that binding minimum wage increases increased the likelihood that targeted individuals work without pay (by 2 percentage points or 12 percent). [p. 4]

They call this the “internship effect.” Internships are often restricted to people well-off enough to afford working for little or no pay for a few months, or even a year, while they learn how to do a particular job. Clemens and Wither find that the internship effect “is concentrated among individuals with at least some college education [p. 4].” Lower-income workers without any college education tend to simply be disemployed altogether. Minimum wage increases hurt the poorest of the poor, intentionally or not.

Iain Murray’s and my recent Washington Examiner article lists other minimum wage tradeoffs:

Breaking out of poverty is difficult for many people, and the evidence is that a minimum wage adds to the difficulty. Workers are fired, hours are cut, jobs are not created, non-wage perks, including insurance, free parking, free meals, and vacation days evaporate, annual bonuses shrink, prices rise, (squeezing minimum wage earners themselves), big businesses gain an artificial competitive advantage over their smaller competitors, and crime rates rise. It is a bleak litany.

Clemens and Wither have put a number on just how much artificial unemployment recent minimum wage hikes have caused: an additional 0.7 percentage points in the working-age adults’ employment-to-population ratio. This translates to just a few tenths of percentage points in the traditional unemployment rate statistic. Which, more importantly, also translates to unnecessary hardship for hundreds of thousands of poor people. They have also added the internship effect to the bleak litany of minimum wage tradeoffs.

In short: like it or not, supporting a minimum wage increase means supporting throwing deserving people out of work. Good intentions do not equal good results.