Obama’s Minimum Wage Plan

Economic research has only a tenuous relationship to economic policymaking in Washington. President Obama’s new proposal to raise the federal minimum wage from $7.25 to $9.00 is a case in point. It would bad for workers and the economy, but the administration seems to be ignoring the large body of theory and evidence on the issue.

Labor economist Mark Wilson discusses the economics of the minimum wage in an essay on Downsizing Government. Here are a few highlights:

There is no free lunch when the government mandates a minimum wage. If the government requires that certain workers be paid higher wages, then businesses make adjustments to pay for the added costs, such as reducing hiring, cutting employee work hours, reducing benefits, and charging higher prices.

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The main finding of economic theory and empirical research over the past 70 years is that minimum wage increases tend to reduce employment. The higher the minimum wage relative to competitive-market wage levels, the greater the employment loss that occurs. While minimum wages ostensibly aim to improve the economic well-being of the working poor, the disemployment effects of a minimum wages have been found to fall disproportionately on the least skilled and on the most disadvantaged individuals, including the disabled, youth, lower-skilled workers, immigrants, and ethnic minorities.

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Nobel laureate economist Milton Friedman observed: ‘The real tragedy of minimum wage laws is that they are supported by well-meaning groups who want to reduce poverty. But the people who are hurt most by higher minimums are the most poverty stricken.’

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In the American economy, low wages are usually paid to entry-level workers, but those workers usually do not earn these wages for extended periods of time. Indeed, research indicates that nearly two-thirds of minimum wage workers move above that wage within one year.

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While they are often low-paid, entry-level jobs are vitally important for young and low-skill workers because they allow people to establish a track record, to learn skills, and to advance over time to a better-paying job. Thus, in trying to fix a perceived problem with minimum wage laws, policymakers cause collateral damage by reducing the number of entry-level jobs.

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As Milton Friedman noted, ‘The minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills.’

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