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11 Things you should know about the minimum wage

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As is becoming a common New Year’s theme, the minimum wage increased on Monday in more than a dozen states across the U.S. According to the Economic Policy Institute, 18 states increased the lowest legal wage allowed:

• Alaska: $9.84, $.04 increase
• Arizona: $10.50, $.50 increase
• California: $11.00, $.50 increase
• Colorado: $10.20, $.90 increase
• Florida: $8.25, $.15 increase
• Hawaii: $10.10, $.85 increase
• Maine: $10.00, $1.00 increase
• Michigan: $9.25, $.35 increase
• Minnesota: $9.65, $.15 increase
• Missouri: $7.85, $.15 increase
• Montana: $8.30, $.15 increase
• New Jersey: $8.60, $.16 increase
• New York: $10.40, $.70 increase
• Ohio: $8.30, $.15 increase
• Rhode Island: $10.10, $.50 increase
• South Dakota: $8.85, $.20 increase
• Vermont: $10.50, $.50 increase
• Washington: $11.50, $.50 increase

Out of the 19 states that raised minimum wages last year, 16 raised them again in 2018 (Alaska, Arizona, California, Colorado, Florida, Hawaii, Maine, Michigan, Missouri, Montana, New Jersey, New York, Ohio, South Dakota, Vermont, and Washington).

Will the increases help pull people out of poverty? Do they increase unemployment? Although the debate about this issue as raged since 1938, when President Franklin Delano Roosevelt introduced the first federal minimum wage, few Americans truly understand whether wage floors help or hurt workers.

To help you better understand the issue, here are ten other points you should know about minimum wage laws:

1. Both sides of the debate believe they are arguing in defense of the poor. Most people who support or oppose minimum wage laws and/or increases share a common objective — helping the working poor. Because both sides have noble intentions, the merits of the debate over minimum wage laws and minimum wage increases should be based on empirical evidence that it will actually help, rather than harm, the poor.

2. Economists disagree about the effects of small increases in minimum wages. It’s true that economists disagree about the effects of the minimum wage on employment and the living standards of minimum wage earners. But almost all of the disagreement is about relatively small increases (less than 20 percent). Almost all economist agree that significant increases to the minimum wage or attempts to bring it in line with a “living wage” (e.g., $12-15 an hour) would lead to significant increases in unemployment. Even some liberal economists warn that increasing the wage to $15 an hour would harm employment.

3. The primary argument for minimum wage increase is that it increases the value of the worker’s labor. — The efficiency wage theory of labor holds that higher real wages improve labor productivity by reducing worker turnover and the associated costs of hiring and training new workers, by reducing the incentive for workers to unionize, and by increasing the opportunity cost of being fired — thereby giving the worker incentive to be more productive. Under this view, small increases to the minimum wage will have no deleterious employment effects.

The assumption is that paying higher wages increases worker satisfaction, thus reducing turnover. This is a reasonable assumption only if there is a price disparity between similar jobs. Given a choice between working at American Eagle for $7.25 an hour and at the Gap for $10, most would prefer to fold sweaters for the higher wage. They will even be willing to work harder (thus increasing their labor value) to appeal to an employer paying the higher wage. But if every store in the mall (and every other job in the area) is required to pay $10 an hour, then the decision to switch jobs will be based mainly on non-monetary factors.

But there is another element that is often overlooked in discussions about minimum wage increases. Because of the labor price differential, Gap can be more choosy about who they hire; their willingness to voluntarily pay a higher minimum pay gives them an advantage over other employers since they’ll have more applicants to choose from. Unless their store managers are incompetent, Gap will only be hiring people whose labor is truly valued at $10 a hour. In other words, they will be getting what they are willing to pay for.

That is why conservatives claim government-mandated negates the effects of the efficiency theory and can kill jobs. Not only will businesses that were willing to pay more lose their advantage in hiring, those not willing to pay more will fire/not hire people whose labor is valued at less than $10 an hour. Once minimum wages are raised, turnover rates also increase as people decide to stick with or leave a job based on other factors. And the people who will never be hired (e.g., low-skilled workers, new immigrants) are shut out of the labor market completely.

4. The primary argument against minimum wage increases is that it discriminates against those who have low-skills. Milton Friedman once described the minimum wage as a requirement that “employers must discriminate against people who have low skills.” As Anthony Davies explains, “the minimum wage prevents some of the least skilled, least educated, and least experienced workers from participating in the labor market because it discourages employers from taking a chance by hiring them. In other words, workers compete for jobs on the basis of education, skill, experience, and price. Of these factors, the only one on which the lesser-educated, lesser-skilled, and lesser-experienced worker can compete is price.”

5. The minimum wage redistributes wealth from the low-skilled poor to the more skilled working poor and middle class. Many supporters of minimum wage increases mistakenly believe that increases in wage rates are transfers of wealth from employers and investors to the workers. But as Anthony Davis explains, the money to pay for the increased wage must come from at least one of four places: higher prices for consumers, lower returns to investors, lower prices to suppliers, or a reduced work-force. Empirical research has shown that the primary effect of minimum wage increases is reduced employment, which essentially transfers the wealth (in unearned wages) from the less skilled to the more skilled working poor and middle-class teenagers.

6. The most frequently cited empirical research in favor of minimum wages increases was proven wrong. — The most famous empirical study in favor of the minimum wage is David Card and Alan B. Krueger’s 1994 study of New Jersey’s minimum wage hike of 1992. Their study found that the increase in the minimum wage had no negative effect on employment—in fact, it had a slightly positive effect (though it also found that prices at fast-food restaurants increased). The main criticism of the research was that they did not measure actual employment data, but only surveyed store managers by telephone, asking whether the managers had hired or fired, or intended to hire or fire, workers following the increase in the minimum wage. However, two follow-up studies that looked at the actual payroll data found that the increase in the minimum wage in New Jersey led to a decline in employment in the fast-food industry — the opposite effect claimed by Card and Krueger’s study. (Note: In New York Times op-ed last fall, Krueger wrote that “a $15-an-hour national minimum wage would put us in uncharted waters, and risk undesirable and unintended consequences.”)

7. Minimum wage increases disproportionality affect African Americans. Employment among African American males between the ages of 16 and 24 is disproportionately responsive to the minimum wage. A ten percent increase in the minimum wage would reduce employment by 2.5 percent for white males between the ages of 16 and 24, 1.2 percent for Hispanic males between the ages of 16 and 24, and 6.5 percent for African American males between the ages of 16 and 24. Professors Even and Macpherson estimate that in “the 21 states fully affected by the federal minimum wage increases in 2007, 2008, and 2009,” young African Americans lost more jobs as a result of minimum wage hikes than as a result of the macroeconomic consequences of the recession.

8. Few people actually earn a minimum wage. Workers earning $7.25 per hour represent only 4.7 percent of the nation’s 75.3 million hourly-paid workers and 2.8 percent of all workers.

(Source: Mercatus Institute)

9. The typical minimum wage worker is a white teenage girl who works part-time. The majority of minimum wage earners are young (50.6 percent are ages 16 to 24) and almost 1 in 4 are teenagers (24 percent are ages 16 to 19). 44 percent are in food-preparation and serving-related occupations; 15 percent are in sales and related occupations, and the rest are scattered.

10. Historically, minimum wage laws have been used to discourage immigration and oppress the poor and minorities. A minimum wage was seen to operate eugenically through two channels: by deterring prospective immigrants and also by removing from employment the “unemployable.” As Thomas C. Leonard explains, progressive economists in the early 1900s believed that “the job loss induced by minimum wages was a social benefit, as it performed the eugenic service ridding the labor force of the ‘unemployable.’” More recently, businessman and political activist Ron Unz has argued that increases in minimum wages are necessary to reduce both legal and illegal immigration. As Unz says, “Critics of a rise in the minimum wage argue that jobs would be destroyed, and in some cases they are probably correct. But many of those threatened jobs are exactly the ones that should have no place in an affluent, developed society like the United States, which should not attempt to compete with Mexico or India in low-wage industries.”

Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

Comments

  • Mark D. Isaacs

    Let’s raise the Minimum Wage to $1,000 an hour an eliminate poverty once and for all! :)

  • Steve Vinzinski

    A really well composed article Joe.You developed very objectively all of your ideas.It is a very pragmatic issue the minimum wage.I know of no logical answer.Milton Friedman,John Maynard Keanes and Theodore Samuelson all have debated the issue.It is at times hard to set value on work.The poor and homeless are suffering so much in this country.The weather on the east Coast is very cold a fifty seven year old man froze to death today six miles from where i live.I am somewhat certain he at one time was on minimum wage just in reading the article in the local paper.My wife is intently involved with the shelters.It is an very hard question worth,why is a jet fighter pilot worth one million dollars a year to Boeing or other companies to test the F-35.One can say they cost 500 million dollars to build.All i say is the meek,mild and poor shall inherit Heaven.

  • Excellent article! Thanks!

    The disagreement among economists come from different techniques. Micro economists know for a fact that higher min wages reduce demand for labor. Macro economists ignore micro and do regression analysis because their whole system is built on correlations. But regressions provide conflicting evidence. That’s because politicians aren’t stupid. They know that a higher min wage reduces employment, so they set the min as close to the market wage for entry level work as they can. Micro econ says that a min wage hurts employment only if it is above the market wage. It has no effect if it is equal to or below the market wage. The fact that regressions often show no impact merely proves how deceitful politicians are.

    For the morality of min wages, the theologians of Salamanca decided they were immoral because 1) a min wage would create unemployment among the working poor and 2) helping the poor is the job of all in society, not just employers so the best way to help the working poor was charity.

  • Alan Grey

    I’ve heard a couple fairly accurate descriptions of the minimum wage.
    * The minimum wage is always $0
    * The minimum wage actually makes it illegal to hire low skilled workers