We heard many bad and tired ideas during last night’s State of the Union address, and one of them was the promise to raise the minimum wage, to $9 dollar an hour. While on the surface it may seem like a way to increase the standard of living for lower-income Americans, in reality the policy is likely to backfire. For instance,research by economists David Neumark of the University of California, Irvine, William Wascher of the Federal Reserve Board, and Mark Schweitzer of the Cleveland Fed shows that that minimum wages increase poverty and hence poverty reduction certainly shouldn’t be expected as a benefit of raising the minimum wage.
That’s because, contrary to common belief, the relationship between low wages and poverty is extremely weak. In fact, as Neumark writes in a 2009 piece in the Wall Street Journal, “The principal sources of an individual’s higher earnings are more schooling and the accumulation of experience and skills in the labor market,” both of which are discouraged by increases in the minimum wage.
Neumark, who has done extensive research on the issue, summarizes his results the following way: “Based on 20 years of research, I doubt there is ever a good time to raise the minimum wage.” And the negative consequences are worse when unemployment is high. He adds that, with a few exceptions, “The bulk of the evidence — from scores of studies, using data mainly from the U.S. but also from many other countries — clearly shows that minimum wages reduce employment of young, low-skilled people.”
If you are interested, Neumark and Washer have a book worth reading on the minimum wage.
Mark Wilson has a Cato Institute study about the impact of minimum wage that is also a great read. The study lists other consequences of raising the minimum wage:
- Increasing the likelihood and duration of unemployment for low-wage workers, particularly during economic downturns;
- Encouraging employers to cut worker training;
- Increasing job turnover;
- Discouraging part-time work and reducing school attendance;
- Driving workers into uncovered jobs, thus reducing wages in those sectors;
- Encouraging employers to cut back on fringe benefits (that’s the substitution of capital for labor)
EXPERT COMMENTARY
Raising the Minimum Wage: A Tired, Bad Proposal
We heard many bad and tired ideas during last night’s State of the Union address, and one of them was the promise to raise the minimum wage, to $9 dollar an hour. While on the surface it may seem like a way to increase the standard of living for lower-income Americans, in reality the policy is likely to backfire. For instance,research by economists David Neumark of the University of California, Irvine, William Wascher of the Federal Reserve Board, and Mark Schweitzer of the Cleveland Fed shows that that minimum wages increase poverty and hence poverty reduction certainly shouldn’t be expected as a benefit of raising the minimum wage.
That’s because, contrary to common belief, the relationship between low wages and poverty is extremely weak. In fact, as Neumark writes in a 2009 piece in the Wall Street Journal, “The principal sources of an individual’s higher earnings are more schooling and the accumulation of experience and skills in the labor market,” both of which are discouraged by increases in the minimum wage.
Neumark, who has done extensive research on the issue, summarizes his results the following way: “Based on 20 years of research, I doubt there is ever a good time to raise the minimum wage.” And the negative consequences are worse when unemployment is high. He adds that, with a few exceptions, “The bulk of the evidence — from scores of studies, using data mainly from the U.S. but also from many other countries — clearly shows that minimum wages reduce employment of young, low-skilled people.”
If you are interested, Neumark and Washer have a book worth reading on the minimum wage.
Mark Wilson has a Cato Institute study about the impact of minimum wage that is also a great read. The study lists other consequences of raising the minimum wage: