Sad Fallout From a Higher Minimum Wage

The good news on unemployment this year is that less than 6% of the labor force is looking for work. It’s been nearly 15 years since the annual unemployment rate was as low as it is today and the outlook for the year ahead is equally optimistic. But these figures offer little cheer for the thousands who have persistent trouble in finding or keeping a job.

A solution to the double problem of the hard-core unemployed and the young job-seekers who have trouble getting their first job continues to elude policy-makers. It is an issue that deserves high priority.

But the current proposal that is working its way through the Congress to raise the minimum wage would only make it harder for the low-skilled and those who have recently left school to find work.

The harmful effects of the higher minimum wage are real and hit hardest at just those people who have the least skills and the least ability to find work. An increase in the minimum wage would mean not only fewer jobs in total, but also fewer opportunities for on-the-job training.

If the minimum wage rises by the proposed 51% over the next four years, many employers would not be able to afford to provide the training opportunities and good jobs with advancement possibilities would become dead-end jobs. In other cases employers would stop hiring the unskilled in favor of workers who bring higher skills to the job.

Since nothing in the real economy happens in a vacuum, that changing demand for labor has many ripple effects. When employers try to replace their lowest-skilled workers to get workers whose skills justify the higher wage that they are forced to pay, they initiate pressure that pushes up wages throughout the labor force and eventually creates higher inflation. In the meantime, some of those at the bottom of the job ladder will have become unemployed and in turn will have less prospect than before of becoming employable.

So the direct effect of a higher minimum wage would be increased unemployment and increased inflation. And although the principal victims of the policy would be the low-skilled workers who cannot find work or are relegated to dead-end jobs, the costs of the bad policy will also fall on the general public that is forced to pay higher taxes for increased welfare and unemployment benefits and higher prices for all goods and services.

There are additional ripple effects. Some jobs would disappear. The rise in wages would force employers to look for ways to produce their products with fewer employees. Other jobs may shift to the underground economy. The underground economy generally offers employees worse working conditions and less worker protection, as well as lower wages than the regular economy. Moreover, the higher minimum wage not only doesn’t help those workers who are already in the underground economy but actually hurts them by forcing more workers to compete in that low-wage economy.

The Reagan Administration has consistently opposed increases in the minimum wage. But in an election year, relying on a presidential veto is a risky way to protect the country from bad policy. The proposed minimum wage hike should be stopped before it gets to the President’s desk.