Minimum wage: doing what feels good doesn’t produce good results

Government Spending Vs Jobs
Government Spending Vs Jobs

From Investors Business Daily.

Excerpt:

How amusing to watch Democrats wring their hands over what they can do to get businesses to create jobs, when one of the biggest job killers is the minimum wage they keep hiking.

Recall that it was Democrats who raised the federal wage floor a whopping $2.10 an hour in the middle of the recession. The record 41% increase has led to record unemployment among young people, especially black teens.

Congress started ratcheting up the minimum wage from $5.15 an hour in mid-2007, arguing it would help abate poverty. But retailers looking to slash costs eliminated low-skilled, entry-level jobs rather than pay the mandated increases.

Now 1.5 million fewer teens are working. Last year’s unemployment rate for workers ages 16 to 19 shot up to 26% from 2007’s 15%.

As for black teens, their joblessness soared to a record 43% after the final raise to $7.25 took effect in mid-2009. It helped put more than half of young black men out of work — a first.

The president proposes cranking the minimum wage even higher to $9.50. Then he wants to raise it every year thereafter as a “living wage” indexed to inflation.

Yes, this is the problem that happens when you elect someone who knows nothing whatsoever about economics. And when I say nothing, I mean he is in disagreement with virtually all economists across the ideological spectrum.

Moderate economist Gregory Mankiw of Harvard University lists the policies that are accepted by virtually all economists.

Here’s Greg’s list, together with the percentage of economists who agree:

  1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
  2. Tariffs and import quotas usually reduce general economic welfare. (93%)
  3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
  4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
  5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
  6. The United States should eliminate agricultural subsidies. (85%)
  7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
  8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
  9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
  10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
  11. A large federal budget deficit has an adverse effect on the economy. (83%)
  12. A minimum wage increases unemployment among young and unskilled workers. (79%)
  13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
  14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

From CNBC, we get this article showing that any increase in the minimum wage will raise the unemployment rate for young people.

Excerpt:

A quarter of teenagers were jobless in March, representing a surprising increase from February, even as the unemployment rate for the rest of the population decreased.

This figure may only get worse if budget-strapped states raise the minimum wage, and it could also be a sign of greater structural damage underlying our economy, analysts said.

The unemployment rate for 16- to 19-year olds jumped back up to 24.5 percent in March, up from 23.9 percent the prior month, according to the latest jobs data from the Labor Department.

[…]“Even when comprehending that teen employment is volatile in nature, the data that exists serves up some shock and awe,” said Brian Sozzi, a retail research analyst with Wall Street Strategies, in a note Wednesday. “If these (wage) increases do go through, the prospect for teen employment will remain grim as employers search for workers with advanced skills to fill positions.”

Twelve states, including Illinois and Pennsylvania, are considering a hike in the minimum wage. While this has been the subject of a long-running debate, many economists and analysts say raising this pay bar may cause more teen layoffs, even as it helps teens who manage to stay employed make more.

“Minimum wage increases over the past few years has definitely made it worse,” said Peter Boockvar, chief equities strategist at Miller Tabak. “In fact, there should be zero minimum wage for teenagers, or at most, something much less than the current rate.”

Teens typically are the first to be fired and the last to be hired back in a normal economic cycle, so this rate can be considered a kind of leading indicator of employment.

A new study shows that only 25% of teens will be able to find jobs this summer. And Obama thinks that this number is apparently too high. He wants to lower it by raising the price that must be paid by employers who would like to hire younger workers.

You can find out more about how raising the minimum wage increases unemployment from this comprehensive, 50-year, government study.

Excerpt:

Summary of Research on the Minimum Wage

* The minimum wage reduces employment.

Currie and Fallick (1993), Gallasch (1975), Gardner (1981), Peterson (1957), Peterson and Stewart (1969).

* The minimum wage reduces employment more among teenagers than adults.

Adie (1973); Brown, Gilroy and Kohen (1981a, 1981b); Fleisher (1981); Hammermesh (1982); Meyer and Wise (1981, 1983a); Minimum Wage Study Commission (1981); Neumark and Wascher (1992); Ragan (1977); Vandenbrink (1987); Welch (1974, 1978); Welch and Cunningham (1978).

* The minimum wage reduces employment most among black teenage males.

Al-Salam, Quester, and Welch (1981), Iden (1980), Mincer (1976), Moore (1971), Ragan (1977), Williams (1977a, 1977b).

* The minimum wage helped South African whites at the expense of blacks.

Bauer (1959).

* The minimum wage hurts blacks generally.

Behrman, Sickles and Taubman (1983); Linneman (1982).

* The minimum wage hurts the unskilled.

Krumm (1981).

* The minimum wage hurts low wage workers.

Brozen (1962), Cox and Oaxaca (1986), Gordon (1981).

* The minimum wage hurts low wage workers particularly during cyclical downturns.

Kosters and Welch (1972), Welch (1974).

* The minimum wage reduces average earnings of young workers.Meyer and Wise (1983b).

* The minimum wage reduces employment in low-wage industries, such as retailing.Cotterman (1981), Douty (1960), Fleisher (1981), Hammermesh (1981), Peterson (1981).

* The minimum wage causes employers to cut back on training.Hashimoto (1981, 1982), Leighton and Mincer (1981), Ragan (1981).

* The minimum wage encourages employers to install labor-saving devices.Trapani and Moroney (1981).

* The minimum wage increases the number of people on welfare.Brandon (1995), Leffler (1978).

* The minimum wage hurts the poor generally.

Stigler (1946).

* The minimum wage does little to reduce poverty.

Bonilla (1992), Brown (1988), Johnson and Browning (1983), Kohen and Gilroy (1981), Parsons (1980), Smith and Vavrichek (1987).

* The minimum wage helps unions.Linneman (1982), Cox and Oaxaca (1982).

* The minimum wage increases teenage crime rates.Hashimoto (1987), Phillips (1981).

* The minimum wage encourages employers to hire illegal aliens.

Beranek (1982).

* Few workers are permanently stuck at the minimum wage.

Brozen (1969), Smith and Vavrichek (1992).

* The minimum wage has reduced employment in foreign countries.Canada: Forrest (1982); Chile: Corbo (1981); Costa Rica: Gregory (1981); France: Rosa (1981).

This is why it is important for voters to understand economics. When you raise the price of labor, fewer employers will purchase labor. Supply and demand.

9 thoughts on “Minimum wage: doing what feels good doesn’t produce good results”

  1. Wonderful. My parents send me to the US to study believing that my job prospects will be there than at home and all of a sudden, everybody’s unemployed.

    Well, not everybody, but you get my point. And it’s not even getting better.

  2. Here’s the problem. Retailers and food service businesses cannot afford to hire full-time people, on account of Obamacare. Raising the minimum wage means they can’t even afford to hire enough part-timers to serve their customers properly.

    Employers will skimp on staff. Their existing part-timers will be overworked to the point where they won’t be able to deliver the level of service that customers expect. There will be a lot of customer complaints. If the store is selling anything other than food, more and more customers will order online. They’ll figure, “What’s the point of going to a store if I can’t get any better service than I can from a website?”

    The bottom line?

    Hardly anybody will be hired, even for part-time jobs.

    Customers won’t continue to pay the same price for poor service, and they can’t afford to pay any more than they do now to get the same level of service. As a result, many businesses will have to close their doors.

  3. I was surprised to hear Obama was proposing raising the minimum wage, so I googled it… and he isn’t. A couple liberal Democrats in Congress are, and he’s declined to support their effort.

    Am I missing something?

    1. Yes:
      http://abcnews.go.com/blogs/politics/2011/12/obama-announces-new-minimum-wage-rules-for-home-care-givers/

      Here are his 2012 campaign positions:
      http://change.gov/agenda/poverty_agenda/

      Quote:

      Raise the Minimum Wage to $9.50 an Hour by 2011: Barack Obama and Joe Biden believe that people who work full-time should not live in poverty. Even though the minimum wage will rise to $7.25 an hour by 2009, the minimum wage’s real purchasing power will still be below what it was in 1968. As president, Obama will further raise the minimum wage to $9.50 an hour by 2011, index it to inflation and increase the Earned Income Tax Credit to make sure that full-time workers can earn a living wage that allows them to raise their families and pay for basic needs such as food, transportation, and housing — things so many people take for granted.

      When people don’t have jobs, they depend on the government. That makes them more dependent and more “equal”. Republicans don’t like dependent. We think that it reduces your liberty and happiness to depend on others instead of earning your own success. We like equal opportunity, not equal outcomes regardless of whether you choose to work or not.

      1. “By 2011”? That’s a 2008 campaign position, not a 2012 one. So it’s another broken campaign promise, but it’s certainly not a serious policy proposal.

        I have never met anyone, liberal or conservative, who believes in equal outcomes.

        I have also never met anyone, liberal or conservative, who thinks that high unemployment and dependency on the government is a good thing.

        Please keep in mind that for the most part, people who “choose not to work” are a straw man. The vast majority of people who use food stamps or rent assistance to make ends meet are working or trying desperately to find work. Dependency is bad, but starvation is arguably worse.

  4. I shared your post with one of my friends. He wrote the following in response. He wanted me to share his response with you.

    You might pass this along to him if he wants to do a follow up. He can quote me, but without my name, please. Not sure this would be well received where I work.

    I work in higher ed, and the most consistent feedback we get from employers is that our graduates do not have the “soft skills” necessary to succeed in today’s employment environment. By soft skills, I mean things like dressing appropriately for interviews and when reporting to work; speaking appropriately to supervisors, co-workers, and customers; showing up for work consistently and on time; that kind of thing. Example: we tried to hire a student worker one time who had a resume that listed references; one of them was her boyfriend, and was listed as such on the resume! Another gave us a resume with the name of his hometown misspelled; we knew because it was a city in our home county.

    Why don’t college graduates have these skills? In part, because they didn’t have those entry-level jobs in high school where they typically learn them. And why don’t they have those jobs? In part, because the minimum wage reduces the number of entry-level jobs out there. So the minimum wage doesn’t just hurt teenagers; it hurts those who go on to work in “skilled trades” because they never developed the “soft skills” employers are looking for in addition to their education. So even college graduates in their 20s are hurt by the minimum wage. Instead of recognizing this, lowering or eliminating the minimum wage and encouraging teens to get out there and get part-time jobs and such, government policy has typically been to require high schools and colleges to change their curricula to include teaching soft skills. Setting aside the absurdity of such a mandate, how are we supposed to teach them to show up for work on time when they don’t show up on time for the classes in which we are supposed to teach them to show up for work on time?! And why don’t they show up for class on time? Yeah, it’s a vicious cycle like that.

    Of course, we know there won’t be any downward pressure on the minimum wage any time soon, because any such suggestion will be demogogued as attacking the poor. Looked at simply, it is reducing wages for the poor to the benefit of the rich (i.e. companies and CEOs). The benefits of more available entry-level jobs, learning “soft skills”, companies reducing prices because labor to make and sell goods is cheaper; etc. don’t become apparent without thought, and we all know how the general public hates to think, especially when there is a silver-tongued politician or media type giving them all the excuse they need not to in the form of a 20 second sound bite or catchy bumper sticker. Everyone knows we can’t trust big, bad CEOs to use their additional profits to hire more people, lower prices, invest in training and grooming employees for promotions, and that kind of thing. Since capitalism doesn’t work, those actions would never make them more profits and allow them to expand their businesses and hire more workers. They’ll just use those “excess profits” they make from not having to pay minimum wage to buy gold-lined toilet seats or something. That’s the way evil rich people are; it’s right there in the Evil, Rich, White Guy Handbook, which you only get access to if you are white, make $250,000 a year or more, and vote Republican.

    Other reasons the minimum wage is here to stay are included in the list quoted below, like “the minimum wage helps unions (Democratic voters), the minimum wage increases the number of people on welfare (Democratic voters), and the minimum wage encourages businesses to hire illegal aliens (Democratic voters)”.

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