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Aggregated Data Hides the Damage Done by Minimum Wage Hikes

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Tags Bureaucracy and Regulation

03/05/2021

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Democrats are again pushing to increase the federal minimum wage, this time roughly doubling it to $15 per hour. And as with every such push, that has involved invoking “rosy scenario” sales pitches about how low-wage workers will be big winners.

However, such “help the poor” claims must confront the fact that, as labor economist Mark Wilson put it, “evidence from a large number of academic studies suggests that minimum wage increases don’t reduce poverty levels.” If higher minimum wages are supposed to help the poor, why don’t poverty rates fall?

One of the reasons is that minimum wage advocates ignore major harms they would impose on the poor, which is hard to justify by the desire to help the poor.

Much of the harm is disguised by focusing on forecasts of higher aggregate income for the poor. 

Even if low-income households gain current income as a group in statistical projections, only individuals bear benefits or costs. And minimum wage increases redistribute wealth away from many low-income individuals, so that supposed help for the poor comes in large part at the expense of others who are poor.

How does a requirement to pay low-skilled workers more harm low-income individuals?

Some lose jobs. With a higher minimum wage, some of those low-income workers lucky enough to already have job experience and a work history will keep their jobs, but many others will simply find themselves unemployable after a large wage hike. And that punishment may well persist into the future (an effect left out of pro–wage hike forecasts), particularly if they are never able to reach the first rung on their employment ladder. For them, asserting that “the poor gain” is little more than a cruel joke.

Of those who don’t lose their jobs, some will lose work hours. Further, for those who keep their jobs and hours, on-the-job training and fringe benefits will fall, and required effort will rise, to offset hiked wages. That is why higher minimum wages in the past have led to reduced labor force participation rates and increased quit rates among low-skill workers, which is the reverse of what would happen if all low-skill workers who kept their jobs actually benefited from higher mandated wages.

Higher minimum wages will not only disadvantage the least skilled compared to automation and outsourcing possibilities, but they will also force them to compete with more skilled labor by undermining their greatest competitive advantage in the labor market—a lower price. And those with the fewest skills, least education, and least job experience will face the greatest reduction in demand for their services.

Further, higher current wages are often less valuable than what is given up, that is, they are particularly damaging in the case of reduced on-the-job training, which would have enabled people to more effectively learn, and therefore earn, their way out of poverty. It slows growth up the ladder of skills, experience, and responsibility, which reduces productivity and income growth over time. But wage hike advocates never include those future losses in their forecasts, either.

We must also remember that the effects will worsen over time as new low-skill workers enter the labor market at the bottom of the experience and training barrel, facing a much higher standard of employability for their entire lives. I haven’t heard any mention of that group by wage hike promoters, either.

Of course, none of this even incorporates the fact that the minimum wage is not really the minimum cost facing employers. That would also have to include the employer half of Social Security and Medicare taxes, which would also rise (by about $1,000), unemployment insurance taxes, worker’s compensation premiums, etc.

The rosy scenario used to promote a higher minimum wage vastly underplays the huge harm to those individuals who will lose their jobs. Advocates of the wage hike go further to ignore the future harm that will also be visited upon them. They go still further to ignore the harm to the “winners,” who keep their jobs but whose future earnings growth will be retarded. And even with those “cheats,” it is not clear that low-skill winners will really gain more in total than low-skill losers will lose. And the results will get worse over time as new generations face the far higher hurdles for their entire lives. If advocates traded in their self-imposed blinders that ensure they don’t see such harms for an “honesty is the best policy” approach, they would face these issues. But then how convincing would their case be?

Author:

Gary Galles

Gary M. Galles is a Professor of Economics at Pepperdine University and an adjunct scholar at the Ludwig von Mises Institute. His research focuses on public finance, public choice, economic education, organization of firms, antitrust, urban economics, liberty, and the problems that undermine effective public policy. In addition to his most recent book, Pathways to Policy Failures (2020), his books include Lines of Liberty (2016), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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