The minimum wage once again is in the news, here in Indiana and in many places around the nation. Much of the rhetoric about the costs and benefits of the minimum wage is pure bunk, so policymakers, business leaders and residents have use for some honest discussion of the matter. There are four major points to be made.
First, life as an adult minimum wage worker is tough, but not because of salaries. About one in 100 adults aged 25 or older in the labor force is a true minimum wage worker. By comparison, about 15 of every 100 adults in the labor force are functionally illiterate, eight have not graduated high school, a half-dozen are mentally ill and another half-dozen chronically abuse drugs or alcohol. There is some overlap here, but I otherwise choose the most conservative estimates.
So, an adult working at minimum wage shows special signs of labor market disfavor. These are people who need vast amounts of both public and private help, but it is not labor markets that are to blame.
Economic theory is unambiguous about the effect of the minimum wage, and every textbook tells the same story. Any time the minimum wage is set lower than the going wage for unskilled work, there is no effect. Anytime the minimum wage is set above the going wage, some workers lose jobs. Unsurprisingly, empirical studies of minimum wage laws report both effects.
Fortunately, most minimum wage increases lag far behind the going wage for unskilled work. When it exceeds that, as it did during the last series of increases during the Great Depression, people lose jobs.
The most common losers are workers in places with a high supply of workers or in places with low demand for their services. That means urban and rural poor, mostly teens, bear the job loss burden of minimum wages.
Efforts to fix labor markets sometimes call for raising the minimum wage, but no one should mistake this for concern for workers.
The minimum wage debate is all about empowering the unions who seem to have forgotten how to actually attract workers. That is why the movement is at death’s door.
If we really wanted to help minimum wage workers, we could do better. First, we could adopt a training wage, say, an hourly rate of $6, that businesses could pay young workers for up to 90 days. Job experience is the best source of employment skills for those who lack them.
Second, we could usher more uneducated kids back into school. Public assistance or unemployment payments to men and women without a high school diploma should be contingent to their going back to school.
The stimulus bill waived that requirement for Temporary Assistance for Needy Families recipients and softened the rules for unemployment compensation.
Finally, we could increase earned income tax credit for the very poorest workers.
The Depression-era New Deal paid people to work, but the stimulus bill paid people not to work. A minimum wage increase will only get less work and weaker labor markets.
It is a bad idea.