By Matthew Lau
Earlier this year, Gov. Tom Wolf proposed to sharply increase the minimum wage from $7.25 per hour to $12 by July. Raising the wage floor, claimed Wolf, would improve the lives of disadvantaged low-wage workers in Pennsylvania. It is a claim that is contradicted both by economic evidence and by the observed effects of historical minimum wage increases in the United States.
Indeed, the country’s first minimum wage law, as economist Walter Williams has noted, was passed in 1931 with the stated intention of preventing black workers from competing for jobs by working at lower wages than those demanded by their white counterparts. According to Williams, the wage law “virtually eliminated blacks from federally financed construction projects when it was passed.” Since then, the intentions of those advocating for minimum wage hikes have improved, but the effects of the policy have not.
The intentions of those advocating for minimum wage hikes have improved, but the effects of the policy have not.
Notably, before 1956 the unemployment rate among teenage boys in the United States was around 8 to 11 percent. Then came a minimum wage hike and within two years, unemployment shot up to 14 percent for white teenage boys and to 24 percent for black teenage boys – a disparity that has persisted through the decades and that has become a widely noted consequence of raising the minimum wage.
When Congress was debating a minimum wage hike in 1996, for instance, the late Harvard economist Martin Feldstein argued against it, observing that an “increase in the minimum wage would undoubtedly reduce employment and total working hours.” Those most affected, Feldstein noted, “would be concentrated among the least skilled and least educated. Minority youth would be the most seriously affected group.”
Another influential Harvard economist, Robert Barro, similarly noted that “the overall consequences for income distribution” from raising the minimum wage “are adverse because the increased joblessness tends to be concentrated among the least advantaged persons, notably minority teenagers.” Because it prevented disadvantaged workers from getting jobs, Barro concluded, the minimum wage law “ought to be abolished.”
Importantly, it is not just the American evidence that shows these harmful effects of minimum wages. In Canada, where significant variations in the minimum wage across provinces and over time have allowed researchers to better identify the effects of minimum wages, the evidence of job losses is even stronger.
As Canadian economist Morley Gunderson wrote in a report in 2014, the “Canadian evidence is more in agreement, with the recent evidence… finding that a 10 percent increase in the minimum wage reduces employment by about 3 to 6 percent for teens and slightly less for young adults.”
Proponents of raising the minimum wage point out that some studies do not find negative employment effects. One particularly influential study, by David Card and Alan Krueger, concluded that after New Jersey raised the minimum wage in 1992, employment in fast food restaurants actually rose relative to fast food restaurants in Pennsylvania, where there was no minimum wage hike.
Contrary to what minimum wage activists might like to believe, a higher wage floor does not increase the value of a worker’s labor.
But as Linda Gorman documented in the Concise Encyclopedia of Economics, when the same analysis was produced with payroll data (more reliable than the telephone survey method used in the original study), researchers David Neumark and William Wascher concluded the opposite: that the minimum wage hike did indeed cut employment in fast food restaurants in New Jersey relative to Pennsylvania.
Locally, low-wage employees in New Jersey lost out versus those in Pennsylvania after the 1992 minimum wage hike there.
While there exist other minimum wage studies that do not find job losses after a minimum wage hike, a comprehensive review on the subject published in 2007 by Neumark and Wascher found that the vast majority of the 102 studies surveyed provided evidence of job losses, and among the most credible papers, “almost all point to negative employment effects, both for the United States as well as for many other countries” – especially when the studies focused on the lowest-skilled workers who are most likely to be priced out of a job.
The conclusion of most studies that raising the minimum wage cuts jobs for the lowest-skilled workers is no surprise. If the minimum wage is raised to $12 per hour, as Gov. Wolf has proposed, low-skilled workers whose maximum productive output is less than $12 hourly will find it very difficult to find jobs. Employers would lose money by hiring them. Contrary to what minimum wage activists might like to believe, a higher wage floor does not increase the value of a worker’s labor. It just prevents the worker from selling his or her labor if its value falls short of the stated minimum price.
Raising the minimum wage effectively cuts the bottom rung off the economic ladder and, by impeding the lowest-skilled workers from gaining the job experience needed to move upwards, increases poverty in the long run and hurts those workers the policy purports to help. The best way to actually help disadvantaged workers is for the Pennsylvania legislature to reject Gov. Wolf’s call for an increased minimum wage.
Matthew Lau is an economics writer in Toronto, Canada. @matlau10
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