Hike the minimum wage. For politicians trying to show their concern for those on the lower rungs of the economic ladder, it’s a simple solution. And it’s catching on again, with several states and municipalities approving local hikes, and a proposal before Congress to hike it an unprecedented amount, from $7.25 to $10.10 per hour over the next two years.
Unfortunately, this seemingly obvious remedy is also a very bad idea, not only for the economy as a whole, but for the low-wage workers it is supposed to help.
Indeed, studies show that the latest congressional hike would likely eliminate some 300,000 jobs per year and lower our national economic output (GDP) by more than $40 billion annually. Why? Because raising the cost of labor naturally makes it more expensive to hire, leading cash-strapped employers with no choice but to slow down or freeze hiring.
Those who blithely propose large minimum-wage increases are ignoring a basic economic truth: When you raise the cost of something, you slow down the rate at which people purchase it. They buy less. So an employer who might decide to hire another worker when the cost is relatively low will forgo that expense when it gets too high.
That, in turn, can be bad news for those who already work for that employer. He may have no choice but to work his other employees harder, when he could have taken a chance on an unskilled worker and given that individual a chance to prove himself and move up.
That, incidentally, is the great truth that all too many people on both sides overlook: Relatively few people actually earn the minimum wage. Less than 3 percent of all workers earn $7.25 an hour. For the vast majority of low- or unskilled workers, that amount is simply a starting salary that gets them in the door and gives them a chance to advance.
And most workers do just that. They move up. After being hired for the minimum wage, they learn valuable skills that help them move up the economic ladder. Two-thirds of them get a raise within a year.
Many of today’s entrepreneurs and success stories began their careers in very humble employment circumstances. “Actress Patricia Richardson, star of the ABC sit-com Home Improvement, scrubbed bathroom floors and toilets in a hotel,” notes Policy Review. “Telecommunications executive John J. Sie worked on the assembly line of a stapler factory. Ivan Seidenberg, the chairman and CEO of NYNEX, was a janitor.”