The Net Effect of Minimum Wage
July 29, 2008
Last week, the federal minimum wage increased from $5.85 per hour to $6.55 per hour. While some are celebrating the change as a boon for low-wage workers, the measure’s net effect will be negative. Employers will reduce employee hours and job benefits as they attempt to minimize operations costs, and workers will suffer from fewer opportunities and, ultimately, less experience. As has been the case every time the federal minimum wage increases, the low-wage workers are hit the hardest.
A higher minimum wage means fewer opportunities for those who need them most. In competitive labor markets, wages are not determined by social custom or “need.” They are determined by productivity. Every hour of labor that does not produce more than $6.55 worth of output will not be scheduled. As the legally mandated minimum wage increases, workers will want to obtain more hours but employers will want to give them fewer. The burden will fall disproportionately on the poor, particularly minorities. Difficulty in finding employment will inevitably affect a college student from an affluent suburban family in much less dire ways than it will a single, urban mother.
It means less workplace flexibility. Wages are not the only form of worker compensation. Since the government is forcing employers to pay higher wages, employers will respond by cutting back on other margins. They will be less willing to offer flexible scheduling, free meals, paid training, or free uniforms. Workers and employers who value flexibility will be worse off.
It means faster substitution of machines and computers for labor. Grocery stores have changed greatly with the advent of self-checkout lanes. Such substitutions of machines and computers for people will be accelerated as labor becomes more and more expensive to hire. Workers pay the price in the form of fewer opportunities. Employers pay the price in the form of concerns over changing from human labor to machines and computers. Shoppers pay the price in the form of increased inconvenience and less individual attention.
It means lower future earnings for today’s poor. Work experience improves future productivity and therefore future earnings. Shutting low-productivity workers out of the labor market reduces their ability to obtain the experience they need to earn more in the future. As the late, great economist Milton Friedman was well aware, the burden is disproportionately borne by minorities.
During this period of economic downturn, the actual effects of the minimum wage become obscured and support for an increase is gathered. Instead of recognizing the negative consequences for what they are, many pundits and politicians erroneously point to the struggling economy as evidence of how badly change is needed. While the minimum wage regulation is intended to be a boon for low-wage workers, economic evidence clearly indicates the opposite. If we are serious about providing opportunities for the disadvantaged, the minimum wage should be repealed altogether.