I've always thought that the minimum wage was perfect liberal economics, in the sense that it perfectly encapsulates the liberal philosophy. Liberals see a problem: workers with low wages. Their solution: pass a law requiring those wages to be increased. What could be simpler?
The problem, of course, is that someone has to pay those higher wages, and the money doesn't come from the tooth fairy. The unstated assumption of minimum wage advocates is that businesses employing low-wage workers are highly profitable. Therefore, the only effect of a higher minimum wage will be to cut back business profits.
It is further assumed that lowering business profits will have no economic effect and that business owners will not change their behavior in any way, such as by cutting hours or benefits. In short, the only economic effect of a higher minimum wage will be to make poor workers better off. How can any reasonable person oppose such a policy?
Recently, the Small Business Administration looked closely at the types of businesses employing low-wage workers. Not surprisingly, the bulk of them are small businesses, not big corporations. Among all minimum wage workers, 54 percent work in businesses with fewer than 100 employees and two-thirds work in businesses with fewer than 500 employees.
Working in a small business is precarious because they are perpetually underfinanced and just a short step away from bankruptcy. According to the SBA, in 1998, there were 590,000 new businesses established in the United States. Of these, 565,000 employed fewer than 20 workers. But there were also 541,000 firms that went out of business that year, and 512,000 had 20 workers or less.
In other words, although small businesses may create 75 percent of new jobs, they are also responsible for the vast bulk of job losses. That is why we must be especially careful when contemplating new burdens on small businesses. With so many of them close to the edge to begin with, it often doesn't take much to push them over, destroying many jobs in the process.
The minimum wage is like a tax on small businesses that reduces their ability to hire and raise wages. According to the SBA, there was slower wage growth among low-wage workers in small firms during times when the minimum wage was rising. Even among large firms, the probability of a low-wage worker being unemployed doubled after the minimum wage was increased.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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