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The public policy blog of the American Enterprise Institute
Natural economic experiments are great things — well, for some people. North Korea and South Korea provide a natural experiment for comparing totalitarian central planning to democratic capitalism. The US and the euro zone provide a natural experiment for comparing how economies undergoing fiscal austerity react to different monetary policies. Unfortunately, these experiments create real-life losers: impoverished slaves North Korea, the unemployed in Europe.
That being said, it would be a fascinating natural economic experiment if SeaTac, the small city south of Seattle, ends up raising the minimum wage of Sea-Tac airport’s transportation and hospitality workers to $15 an hour. How will employers react? Adding to the stakes, this is happening at a time when, as The Wall Street Journal puts it today, “the young, the less educated and particularly the unemployed—are experiencing hardly any recovery at all.” In other words, the exact kind of people a minimum wage hike is most likely to hurt. Some facts:
— Only 3% of workers age 25 and over earn the minimum wage or less. About half of all minimum wage (or less) workers are age 24 or younger, many of whom presumably live at home with their parents.
— The 2010 study “Will a $9.50 Federal Minimum Wage Really Help the Working Poor?” by researchers Joseph Sabia and Richard Burkhauser found that a federal minimum wage increase from $7.25 to $9.50 per hour — higher than the $9 that President Obama has proposed — would raise incomes of only 11% of workers who live in poor households.
— In a 2012 study, Sabia and Robert Nielsen found ”no statistically significant evidence that a higher minimum wage has helped reduce financial, housing, health, or food insecurity among the poor.” Why? You have to earn a wage to benefit and 55% of poor, less-educated individuals between ages 16 and 64 don’t work. Indeed, nearly 90% of the wage earners who benefited from the 40% increase in the federal minimum wage between 2007 and 2009 were not poor. They lived in households with an income two or three times the poverty level.
— A 2013 literature review by David Neumark, J.M. Ian Salas, and William Wascher concluded “that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.”
— Research Texas A&M economists Jonathan Meer and Jeremy West find raising minimum wage levels may discourage firms over the long-term from hiring new workers. And that may be particularly true thanks to continuing — even accelerating — advances in automation.
Bottom line: raising the minimum wage, as AEI’s Kevin Hassett and Michael Strain conclude, “will make it more expensive for businesses to hire young and low-skill workers at a time of crisis-level unemployment.” If anything, better to lower the minimum wage for the long-term unemployed and for inexperienced workers to boost labor force participation. Then combine that with policies to promote work and reduce poverty such as relocation subsidies for the long-term unemployed and wage subsidies for low-wage, low-skill workers who aren’t parents.
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