Minimum Wage Increased, Teens and Minorities Hardest Hit

4:00 pm, 2/12/10

A Ball State University study has further confirmed what a lot of us already knew: that minimum wage hikes can destroy jobs.

Ball State's study of part-time workers monitored by the Bureau of Labor Statistics showed that the wage increases prompted companies to cut back on hiring, said CBER director Michael Hicks.

"Instead of hiring a dozen teens to work a popular summer restaurant or theme park, a company would hire six or less," Hicks said. "Instead of filling positions that required no skills, companies were making do with what they had. In the long run, this hurt young, unskilled workers."

Nationally, the minimum wage increased from $5.15 an hour in 2007.

Hicks said that creating lower minimum wages for students and new hires could help preserve jobs. He also noted that a "tenure-scaled" minimum wage might prompt employers to hire unskilled workers at lower wages.

Policy brief here.

This is hardly the first study to reach that conclusion, and it's remarkable to me that some people can so casually and uncritically believe that raising the cost of unskilled, inexperienced labor does not reduce the demand for it. However, that's precisely the argument that many minimum wage advocates make, treating it as if it were some sort of free lunch for the poor, often citing the controversial work of economists David Card and Alan Krueger.

Even accepting the premise that it doesn't increase net unemployment, it ignores the elephant in the room, which is that with the pay artificially inflated, the jobs become attractive to stronger candidates who may not have been willing to consider them before, but are quite likely hired over the less qualified. Minimum wage laws, then, still fail to effectively transfer opportunity and wealth to the poor, instead transferring unemployment to the poor and denying them important opportunities to acquire skills and work experience, in turn denying them one of the best routes out of poverty.

Even assuming little or no negative impact on total employment, however, seems generous, and that's precisely what the new study addresses. Anecdotally, in the aftermath of Rod Blagojevich's 2005 minimum wage increase in Illinois, newspapers reported that food service workers immediately saw reduced hours and consumers saw increased prices. In fact, my favorite local pizzeria actually went out of business entirely as a result. Somehow, I find it preposterous to hold that this created an increase in consumption sufficient to create alternative jobs for those who lost theirs, and that's what makes arguments like those put forward by Paul Krugman so frustrating:

Here's how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.

But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?

It wouldn't. It's also a perfectly dishonest question to ask, because nobody's talking about a "general cut in wages". The "subset" is the critical issue, the concern being the wage of those who might otherwise not have a job at all and be unable to consume anything other than what they can buy with entitlements taken from everyone else's wages. For them, an increased minimum wage really provides nothing, since a ten percent raise for someone whose income is zero is, well, still zero.

The price floor created by the minimum wage is largely harmless (also, largely pointless) when it's trailing the natural market price for that type of labor, but the study raises questions about whether or not Congress has started to push it too far, doing real damage to the working poor and to the economy.