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Gary M. Galles - Contributor

Mr. Galles is a professor of econmics at Pepperdine University. [go to Galles index]

Thanks for Nothing
Hiking the minimum wage for low-skill jobs actually hurts the poor. Here's why.
[Gary M. Galles] 3/9/04

By increasing its minimum wage from $6.75 to $8.50, San Francisco has implemented its latest attempt to legislate help for the poor through price controls. Unfortunately, minimum wages hurt the poor and other disfavored groups rather than helping them.

Support for a higher minimum wage comes from the idea that the poor will gain because it will make low-skilled workers more willing to work and increase their earnings. However, while a higher minimum wage increases how much workers are willing to work, it reduces how many workers employers are willing to hire. With fewer job openings, the increased willingness to seek work becomes irrelevant, and there are fewer workers rather than more workers hired. And those who lose their jobs because of a higher minimum wage have their incomes decimated, which is an unusual way to help them. That was clearly illustrated long ago when a South African minimum-wage law portrayed as intended to help blacks led to widespread increases in black unemployment as employers hired whites instead at the same wage. It is also why the other Pacific Rim states, with the three highest minimum wages in the nation, are all among the five worst in unemployment rates.

Hiking the minimum wage also increases discrimination against the least skilled and other disfavored groups by reducing the cost to employers of doing so. That is why the generally accepted rule of thumb is that each 10 percent increase in the minimum wage reduces teen-age unemployment by 1 percent to 3 percent. At a higher minimum wage, any prospective worker whose qualifications are insufficient to be worth the new higher minimum (plus the employer half of Social Security costs, unemployment insurance, workers' compensation payments, etc.) to employers will not find jobs. And if there are members of any group employers dislike for any reason among those willing to work for them, the cost of not hiring them (which formerly was the sacrificed gain from a worker whose productivity was worth more than an employer had to pay) falls to virtually zero, because others are also in line for the same jobs.

Raising the compensation of low-skill workers by law means employers can pick and choose among more potential workers, resulting in the least skilled getting competed out of jobs. This is why inner-city minority teens and other low-skilled groups are so hard-hit by minimum wage laws (In 1948, before the minimum wage was so broadly applied across industries, the unemployment rate for black 16- and 17-year-olds was 9.4 percent vs. 10.2 percent for the general population of that age group; by 1995, their unemployment rate had risen to 37.1 percent vs. 15.6 percent overall). It is also why David Neumark, a leading empirical researcher of minimum and "living wage" laws, found that raising the minimum wage actually increases the chances of a family being below the poverty line - not only are there fewer jobs and shorter work hours, but the least skilled among the poorest households suffer the most. As far as lifting people out of poverty, the adverse consequences totally undermine the intent of the policy, despite some gains for some workers.

Compounding the damage to low-skill workers is the fact that minimum wages make it far more difficult for them to earn their way out of poverty by using the experience and on-the-job training from their low-wage jobs to get better-paying positions. Formerly, San Francisco workers worth $8.50 per hour to an employer were able to accept up to $1.75 per hour in reduced wages to compensate employers for the cost of training. Now, because they must be paid the full $8.50 in wages, they cannot "pay" the cost of on-the-job training, so employers stop providing it. That takes away the primary means of advancement for low-income workers with little in the way of savings. And given that the typical minimum-wage worker stays at that level for six months or less, it makes many higher minimum-wage "winners" who keep their jobs losers over time, as their earnings grow much more slowly as a result.

Whether because they are denied entry-level jobs or because the training offered them in those jobs is eroded as a result, a higher minimum wage undermines the most important way the poor acquire the skills to earn their way out of poverty. They do so by taking away the primary mechanism low-skill workers have for "paying" for that training - accepting lower wages to compensate employers for the costs of providing it.

Many support higher minimum wages and a variety of other price controls because they believe the poor will benefit. However, such good intentions are not just insufficient to generate adequate policy; they are, in fact, inherently counterproductive. Attempting to help the poor by forcing their wages up reduces the number of workers whom employers can profitably utilize, provides incentives to discriminate against the least skilled, and undermines people's ability to earn their way up the economic ladder.

The bottom line: A higher minimum wage is not even minimally helpful for low-wage workers. CRO

This piece first appeared in the Orange County Register

copyright 2004 Gary M. Galles

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