In the Right corner: Minimum wage increase debated

Kevin Flohe

Recently, President Obama has been urging Congress to pass an increase in the federal minimum wage from $7.25 to $10.10 an hour.

Kevin Flohe
Kevin Flohe

Many people believe this will boost the incomes of low-wage workers and provide support for a struggling economy.

According to a recent Quinnipiac University poll, 71 percent of Americans favor increasing the minimum wage, with 51 percent favoring an increase to $10.10 or more.

However, standard economic analysis shows that increasing the minimum wage may hurt the very people it is intended to help. Here’s why.

When governments impose rules-of-the-game raising minimum wages above what economists call the “market-clearing” wage, two things will happen as a result.

One, the artificially high wage will encourage more people to enter the workforce, seeking jobs at the higher rate of pay.

Two, employers will want to hire fewer workers than before.

The result will be an increase in the unemployment rate, particularly among young people and minorities.

Additionally, the increase in labor costs could cause employers to respond in a variety of other ways.

For example, employers could cut employees’ hours, or reduce non-wage benefits like health insurance, employee discounts, or retirement savings plans.

They may require employees to work harder, getting the same amount of work done with fewer people. They may even eliminate some workers altogether by investing in machines and computers.

Perhaps the worst effect, though, is that the lowest-paid employees will be the hardest hit.

Employers will only hire and retain those workers whose hourly productivity equals or exceeds their hourly wage.

When the minimum wage is increased, those workers whose productivity is now lower than the wage mandated by law will be let go, while those workers whose productivity remains at or above the new wage will be retained.

Yet, because those workers are more productive, they tend to be making more than the minimum wage to begin with. It’s the lowest-paid employees who will be let go first.

Of course, many people think employers can just raise their prices by a few cents in order to offset these costs. However, this isn’t necessarily true.

If employers could easily raise their prices, why wait for an increase in the minimum wage to do it? Why not just raise prices now and improve the bottom line?

In reality, competitive firms will have a much harder time raising prices than the average person assumes.

It’s true that the real (adjusted for inflation) value of the minimum wage has fallen from $10.69 in 1968 to $7.25 today. But, because the real economy has grown significantly in the past 45 plus years, far fewer people depend on the minimum wage than ever before.

Today’s minimum wage worker is most likely young, unmarried and not the primary earner within the household.

A recent Congressional Budget Office report estimated that just 19 percent of any increase in incomes would accrue to families living below the poverty line, while 29 percent would accrue to families earning three times that much.

For most people, a minimum wage job is just a stepping stone on the way to bigger and better things. It’s where one learns many of the basic skills necessary to succeed in the world of work.

If we remove the bottom rungs on the ladder, however, more and more people will find it harder to move up, economically.

Though no doubt, many proponents of the minimum wage have the best of intentions, there are far better and more effective ways to help people struggling to make ends meet than by increasing the minimum wage.