More Than the Minimum Wage

By Stran, Michael R. | AEI Paper & Studies, March 2014 | Go to article overview

More Than the Minimum Wage


Stran, Michael R., AEI Paper & Studies


Minimum-wage fever is gripping the nation--again. President Obama proposed an increase in the minimum wage from its current level, $7.25 per hour, to $9 per hour in his 2013 State of the Union address, and in his December 4 speech on economic mobility he pledged "to keep pushing until we get a higher minimum wage for hard-working Americans across the entire country."

The president supports the bill sponsored by Senator Tom Harkin of Iowa and Representative George Miller of California, Democrats both, to raise the federal minimum wage to $10.10 per hour. The day after the president's recent speech, striking fast-food workers in over 100 cities across the country protested their low wages, demanding an increase in the minimum wage to $15 per hour.

It is easy to understand the frustration of (some of) these workers. Conservatives should not be glib about the fact that $7.25 per hour may buy you the bootstraps you'll need to pull yourself up, but not much more. Average hourly wages of workers in the retail and leisure-and-hospitality industries have had a rough 5 or 10 years.

And there is a widespread feeling throughout the country that, since the Great Recession, financiers on Wall Street have done well and the top 1 percent of earners have done great while hard-working families have been left with stagnant wages, higher tuition, and more expensive health care. It's no surprise, then, that a Gallup poll conducted last month found that 76 percent of respondents would vote to increase the minimum wage to $9 per hour.

Perhaps there's wisdom in crowds, but not this time. Those 76 percent of Americans are wrong. Conservatives should definitely support government action to help the working poor, but increasing the minimum wage isn't the answer.

Research published in 2010 by economists Joseph J. Sabia and Richard V Burkhauser found that minimum-wage increases (state and federal) between 2003 and 2007 "had no effect on state poverty rates." They found that only 11 percent of workers who would gain from raising the federal minimum wage from $7.25 to $9.50 per hour live in poor households, while 42 percent live in households with incomes 3 times the poverty line or more--considerably above America's median household income. Only about 1 in 4 workers who would be affected by increasing the minimum wage to $9 per hour are in families making less than $20,000 per year, according to the left-leaning Economic Policy Institute.

How can giving a raise to minimum-wage workers help so many higher-income households? After all, if you earn the federal minimum wage and work full-time, you're bringing in less than $15,000 per year. But many minimum-wage workers are young, and they are usually not the primary breadwinner in their family. Although teenagers make up only 5.4 percent of workers who are paid hourly wages, they are 24.1 percent of minimum-wage workers. Less than 3 percent of hourly-wage earners over the age of 24 earn at or below the federal minimum.

Many on the right argue that increasing the minimum wage is bad policy because it would kill jobs by decreasing the number available to low-skill workers. It's natural to expect economists to confirm or deny this. But, in this case as in many, economists disappoint by answering: Honestly, we don't know.

The 101-level theory is clear. When a wage floor above the market wage is instituted, firms will want to hire fewer workers. In addition, more people will want to become workers because the wage they will earn from working has gone up. The combination of firms wanting fewer workers and more people wanting to work increases unemployment.

Increasing the minimum wage lowers the cost of investing in a machine relative to employing a low-skill worker. Applebee's intends to put tablet computers at every table to facilitate food and drink ordering. Customers at fast-food restaurants often serve themselves their own drinks through dispensers. …

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