Now is not the time to raise the minimum wage

Reuters

Job seekers stand in line to meet with prospective employers at a career fair in New York City, October 24, 2012.

Article Highlights

  • President Obama’s call to increase the federal minimum wage by over 24% will make it harder for firms to hire workers.

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  • The US has a fiscal problem, but it has an immediate labor market crisis.

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  • President Obama was wrong to call for a minimum wage increase, most especially in a labor market crisis.

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In diagnosing the state of our union, President Obama correctly observed that "our economy is adding jobs -- but too many people still can't find full-time employment." But the president's call to increase the federal minimum wage by over 24 percent will make it harder for firms to hire workers because it will make workers more expensive. The minimum wage should not be increased, especially given the dismal state of the labor market.

The past several months have seen much attention paid to our fiscal imbalance. This attention is appropriate - our debt and structural deficit are important problems that require difficult solutions. But even informed citizens would think that the deficit is the biggest problem facing the United States today. It isn't. We have a fiscal problem, but we have an immediate labor market crisis.

Unemployment Is Still High

The headline unemployment rate has dropped from its high of around ten percent to its current value of 7.9 percent. This decrease is welcome. But 7.9 percent is still unacceptably high.

And the full reality is worse than the headline rate suggests. A different measure, sometimes referred to as the "real" unemployment rate, includes persons marginally attached to the labor force and workers who had to settle for a part-time job when they want full-time employment. By this measure, the unemployment rate is a staggering 14.4 percent.

Perhaps most troubling is the extremely large number of long-term unemployed workers. There are currently around five million people who have been out of work for 27 weeks or longer. That number is a record high since the Great Depression. The previous high saw a comparatively-few three million long-term unemployed back in the 1980s.

You also have to go back to the 1980s to find the labor market employing today's share of the working age population. Currently, only 58.6 percent of the population is employed. Decades of important progress on this front have been lost - years of gains, wiped away.

Far Reaching Consequences

The consequences of the labor market crisis are vast. Divorce rates increase when the unemployment rate is high, as does the probability of suicide. Workers are losing valuable skills every day that they are unemployed. If they do return to work they will be less productive. But many may not return to work. Some economists believe that a worker who endures a long spell of unemployment will have a hard time finding a job because prospective employers may wonder why so many other firms have passed on the worker. The longer a worker is unemployed the more his professional network will deteriorate, making it even harder for her to find a job.

What happens to workers who can't find a job? The sad fact is that many will go on disability insurance, making it even less likely that they will ever again earn a living in the labor market - significantly reducing the chance that they will be able to live a full life, earn their own success, provide for their families, and realize their full human potential.

The labor market is more than an economic crisis. It is a human crisis.

Increase Minimum Wage, Decrease Employment

Getting the millions of currently-unemployed workers into productive employment should be a major focus of government. I had hoped that the president would address the labor market crisis, directing the energy of government in an effort to help the suffering unemployed. Unfortunately, there was precious little attention and no urgency regarding this crisis in the State of the Union address.

Instead, the president called to increase the minimum wage.

The economic effects of minimum wage increases have been studied dozens and dozens of times in the past few decades. Different studies come to different conclusions, of course. But economists David Neumark and William Wascher, after conducting an exhaustive literature review, conclude that "among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries."

They continue: "The studies that focus on the least-skilled groups that are likely most directly affected by minimum wage increases provide relatively overwhelming evidence of stronger disemployment effects for these groups."

The weight of the evidence suggests that increasing the minimum wage decreases employment, especially for lower-skilled workers.

Will a minimum wage increase help to alleviate poverty, as the president suggested in his speech? The evidence suggests that it will not. Economists Joseph Sabia and Richard Burkhauser find that a small minority of workers who would benefit from a minimum wage increase - around ten percent - live in poor households. The White House itself states that workers who would benefit from a minimum wage increase bring home less than half of their household's total wage and salary income.

In other words, the workers who will benefit from an increase are secondary and tertiary earners - think more of teenagers with summer jobs, of spouses earning some income on the side, or of elderly grandparents earning some retirement income, and less of primary breadwinners. In fact, Professors Sabia and Burkhauser find that around two-thirds of minimum wage workers live in households with incomes more than twice the poverty line.

Speaking of teenagers: The unemployment rate for 16-to-19 year old African Americans is a massive 37.8 percent. For white teenagers, the rate is 20.8 percent. This crushing unemployment will ripple through the rest of their lives, affecting their labor market outcomes for years to come. Why does it make sense to increase the cost of hiring these unemployed teenagers by increasing the minimum wage?

Raising the minimum wage is unlikely to affect the poverty rate. And raising the minimum wage certainly won't increase the number of workers who are employed. Quite the opposite - the weight of the evidence suggests that it may decrease the number of employed workers.

Our labor market crisis is a national emergency. Ideally our government would be implementing policies to help workers get jobs. But surely the government should not actively increase the cost of hiring workers. An increase in the minimum wage would do exactly that - by design. The president was wrong to call for a minimum wage increase, most especially in a labor market in crisis.

Michael R. Strain is a research fellow at the American Enterprise Institute. Follow him on Twitter at https://twitter.com/michaelrstrain.

 

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