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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