At Work & Economics 101 & Public Square

Does the Minimum Wage Hurt the People It’s Trying to Help?

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What was your first job in high school?

Was it working for a local business scooping ice cream or lifeguarding at the neighborhood pool? I had two first jobs, babysitting excluded.

I worked at a Baskin Robbins ice cream shop, and also at the gift shop at Mount Vernon, home of George Washington. Many of us can recall with fondness – and perhaps a bit of residual angst – some stories of those early working days.

As for me, I was full of youthful exuberance, but I was largely unskilled and uneducated. I had no idea how to work the cash register. Really, I was somewhat of a risky hire.

These jobs were entry points for important work down the road, as well as for professional development. My career would never have started if I had not been given a chance. For many of us, these first jobs were the basis upon which our future career rested.

Many teens today aren’t working during high school. A 2012 Washington Times article reported that the number of employed high school students has hit a twenty year low. While in 1990 32 percent of high school students held jobs, now only 16 percent are working:

Sectors that traditionally have offered teens their first paying gig — fast-food chains, movie theaters, malls and big-box retailers — have now become the last resorts for out-of-work college graduates or older Americans forced back into the labor force out of sheer financial necessity. The resulting squeeze has left students on the outside looking in.

While this article cited the recession as the main culprit for this shift, there’s another suspect: the minimum wage.

Many of you commented on my last post about the minimum wage, asking for examples illustrating the impacts of the minimum wage on people’s livelihoods.

I love that you all jumped in with your comments and questions, and I hope to answer some of them in this post.

There are more than a few examples throughout history illustrating the harmful effects of the minimum wage.

Ultimately, minimum wage laws disrupt the natural market process. They choose winners and losers, and the losers face increasingly restricted choices and higher prices.

Often the people losing out are the very ones we’re trying to help.

The History behind the Minimum Wage

As Mark Wilson outlines in his report for the Cato Institute, the first minimum wage law was legislated as part of the Fair Labor Standards Act (FLSA) in 1938.

At the time, the rate was set at $0.25, roughly the equivalent to $4.04 in today’s dollars.

Even in 1938, the idea of setting minimum wage standards was not a new one.

As I discussed in a recent blog post, the policy was a popular one among proponents of eugenics before and after the turn of the century.

As described in by Thomas Leonard in the Journal of Economic Perspectives,

The progressive economists also believed that the job loss induced by minimum wages was a social benefit, as it performed the eugenic service ridding the labor force of the “unemployable.”

Even then, economists were aware of the likely job losses resulting from the policy.

Where many modern advocates of minimum wage policies seek the best for those in the lower income brackets, these original advocates sought their harm.

Minimum wage laws act as a price floor. Employers are required to set their entry level wage as equal to or higher than the federal minimum, or to the state minimum if it’s higher.

Unfortunately, these new costs must be absorbed somehow, and they often take place in non-wage adjustments, like letting people go or raising menu prices.

Those who are hit hardest by the higher prices are those who would have been laid off, because now they not only don’t have a job, but businesses may raise prices or even close shop.

These effects hit the lowest-skilled, lowest-educated part of the population hardest.

The Minimum Wage Hurts the People We’re Trying to Help

A recent report indicates that very few of the truly poor are helped by minimum wage laws – 10.5 percent, to be exact.

Most workers “earning the minimum wage are young workers, part-time workers, or workers from non-poor families.”

Often, the families of these workers are earning significantly more than the federal poverty line.

It is very difficult to target specific demographics with minimum wage policies.

When the earliest $0.25 minimum wage was instated in 1938, the U.S. Department of Labor found that,

It resulted in job losses for 30,000 to 50,000 workers, or 10 to 13 percent of the 300,000 covered workers who previously earned below the new wage floor.

At the same time, an estimated 120,000 workers lost their jobs in the U.S. territory of Puerto Rico within the first year of implementation of the new $0.25 minimum wage.

These unemployed workers were the very individuals the law was supposed to help.

Currently, Seattle is preparing to enact a $15 minimum wage, and businesses are already making the decision to close.

The Washington Policy Center points out that if restaurant owners made no other changes in the face of the minimum wage hike, the labor cost would rise 42-47 percent in restaurants.

Restricting Freedom, Fulfillment, and Flourishing

Regardless of how an employer chooses to handle the new costs, minimum wage policies restrict the choices of both the employer and the employee.

Many who desire to gain the skills necessary to work at higher income levels cannot get over the first barrier of getting a low-paying job because no employer can afford to pay them.

This is why teens are getting jobs later and later.

It’s also why less educated individuals struggle to support themselves and their families.

In the free market, an organization can do whatever it chooses. There is no coercion to raise or lower wages. Reputation determines whether customers will return and if employees will remain.

Walmart has received a lot of attention recently after its decision to raise its wages independent of any minimum wage law. In an ideal world, companies should be able to choose what rate they want to pay their employees. In some areas, the market rate may be relatively low. There shouldn’t be a penalty for offering what employees are willing to receive.

It’s true that some do benefit from minimum wage laws. Those who are more skilled may retain their jobs and receive a pay increase, if their employer can remain open.

If not, they now have fewer employment alternatives.

This is our reality in a world of scarcity.

If we want higher wages and more jobs, we need to seek and foster value-creation. The minimum wage destroys value and jobs.

The danger occurs when we restrict peoples’ ability to make choices. This limits their ability to do what God has called them to do, ultimately preventing flourishing.

While minimum wage policies may benefit some, in the long run, it will cause greater harm to all.

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  • Sid in Missouri

    Nice article and one that many should read and consider carefully before taking a side on the issue. The issue is much more complex than most people realize, and it takes thoughtful discussion to realize what ought to be done.

    To start out, here’s a real life, major example of how minimum wage hurts the entry-level worker that I have personally witnessed.

    I don’t go to Wal-Mart often, but over the past 5 years I’ve noticed an increase in the number of self-checkout stations. In my local Super Center, there are now 10 stations handled by one employee who can reset them or assist customers who have problems. That means there are 9 fewer checkers needed today than prior to the machines. My guess is Wal-Mart realized that a cheap alternative to paying minimum wage existed and they took it. The same has occured with the parking lot shopping cart return crews. I used to see two people pushing a long line of carts–one at the front and one at the back. Now I see one person at the front of the cart-line with a long rope connected to a machine at the back that provides the extra “push” power. From management’s perspective, this significantly reduces the number of job related injuries / workman’s comp complaints and expenses. Plus, the machine pays for itself eventually as the costs and wages of one employee are eliminated, and after that point it is a net gain for the store.

    For minimum wage to actually improve the purchasing power of low-skill and/or entry-level workers, I think we’d need (at least) 5 components:

    1) the minimum wage increase – often the only factor discussed
    2) price controls to dampen or eliminate inflation so that purchasing power remains constant OR you’d have to index the minimum wage yearly to the rate of inflation from the previous year, which still keeps wages a year behind the curve
    3) restrictions on use of technology to replace higher-cost human labor – basically, outlaw the use of tech innovation where it destroys jobs
    4) restrictions on outsourcing because in a global economy there will always be someone else in a less restrictive environment (i.e. not as many regulations to comply with) who will do the same work for less. Not always applicable to Wal-Mart, but very often seen in manufacturing and in media / telephone / Internet scenarios.
    5) caps on wages currently ABOVE minimum wage to prevent a “trickle up” demand for higher wages across the board. Charlie who has been on the job 5 years and started at $7.25 but now is faster, more skilled, and has more responsibility and so earns $10/hour isn’t going to be happy when Bob shows up today and is making the same as he is, yet he still has to train Bob how to do everything.

    I have not seen any resource from minimum wage advocates that address all 5 of these issues comprehensively. If anyone has one, I’d be interested in seeing it.

  • Scott

    Of course when we learned these Economic truths like “rational man” and economic worth, we postulated them in a laboratory without original sin, and without the powerful marginalizing the less powerful. This is a great line for business owners (of which I am one) but the need for a minimum wage, a living wage among the increasingly urbanized poor is fairly self-evident. The restrictions on hiring teens are many times what they were when I was a kid working for $1.50 an hour on a Maryland golf course.

    • Sid in Missouri

      Scott, so what are you trying to say? “a living wage among the increasingly urbanized poor is fairly self-evident” is pretty vague…any specific recommendations?

      Another problem we’re going to run into with a Federal minimum wage is since markets vary nationally (and even to some degree in large communities), a living wage would have to vary nationally. Seattle’s $15 an hour would be pretty decent in my Mid-Western home town, but it will squeeze employer to the point they’ll have to let people go. By contrast, in most major metro markets in California and the East Coast that $15 wage would still be heavily supplemented by Govt run programs. Federal minimum wage forces Mid-Western, small-town employers to pay “living wages” equal to those higher cost markets. Does that even make sense?

      Also, I’d like to hear a solid definition of what “living wage” means. I always have adjusted my lifestyle to fit my wage: therefore I have ALWAYS earned a living wage. The alternative “living wage” argument appears to say that WAGES must be adapted to someone’s desired lifestyle. Seems backwards to me. Back when I started out making minimum wage, I worked 50-55 hours a week. Who says 40 hours / week is some magical number that no one should be expected to work more? I think part of the reason I’m so much higher up now is that I DID bust my tail back in the early days: got the training, got the experience, proved I was a go-getter, so my supervisors rewarded me with better than average raises, more duties and responsibilities, and I was able to move to better paying jobs.

      Today I still work 50-55 a week, average. Enjoy lots of quality time with my wife and kids because I don’t have a clue what the latest viral YouTube videos are, who got kicked off “America Can’t Sing”, and I don’t have a Facebook page or Twitter account. But I do have what many that lament the minimum wage don’t: a drive to excel, hope for the future and confidence in my God-given abilities to prosper. He prospered me when I made $3.35 / hour in 1991. He continues to prosper me today.

  • It’s important to remember that the real minimum wage is $0. The gov’t can control prices but it can’t control costs.

    I think it’s important that we stand back and take a look at the big picture. We know that improved quality of life comes from higher incomes, which comes from increased productivity, which comes from acquired skills and experience. No one is going to get rich on a minimum wage job and no one should expect to be happy in a minimum wage job. It should be clear that this will solve no problems that plague us.

  • Nuke Fishin

    I had a Finance Prof from a local university tell me that the #1 employer of minimum wage workers nation wide is colleges and universities.

    If that’s true, it would seem the beneficiaries would be primarily kids who are getting college educations, and the taxpayer eating the unpaid student loans who pays for it. At the same time, college gets more expensive and excludes more and more lower income people. Crazy.

    Until the government makes it “free”, of course…

  • Amarah

    We have to think about the long-run, not just temporary ailments to the present. More possible culprits to highschoolers not working is the following: 1. Parents are paying every extra cost for them, for example, car insurance or buying surplus clothing. Therefore they have no incentive to work and they want to stay childlike as long as possible. 2. “Education” now takes up so much of a kid’s life that there is little time or energy for work.

    I am not sure what to think of the minimum wage. Those who set it are originally trying to help people. Leaders don’t want employees being cheated or taken advantage of. But I do believe minimum wage can be damaging to small businesses.

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