Increasing The Minimum Wage Does More Harm Than Good
Thousands of fast-food workers in dozens of cities across the country walked off the job a few days before Labor Day 2013 to protest the federal minimum wage of $7.25 an hour. They argued that at this wage, workers cannot live affordably. Workers demanded an increase to $15 an hour and their protest garnered support in some circles. After the walkout, the New York Times editorialized that increasing the minimum to $15 “would support the legitimate demands of the strikers and underscore the pressing needs of the country’s growing ranks of low-wage workers.” Some political leaders have called for an even higher minimum wage. U.S. Sen. Elizabeth Warren (D-Mass.) stated during a March 2013 hearing of the Senate Committee on Education, Labor, and Pensions that a federal minimum wage of $22 an hour would not be unreasonable. The recent protest is the latest event keeping the minimum wage issue at the forefront of public debate. Proponents of increasing the minimum wage often extoll the virtues of raising the minimum wage as an effective anti-poverty program, albeit one that clearly infringes upon the right of employers by legal enforcement.
While reducing poverty is a laudable goal, proponents often ignore the negative effects that raising the minimum wage has on workers, especially those just entering the labor market or those who lack sufficient skills to realize a higher wage. At its very core, setting a minimum wage is simply a form of price control, which economists of all stripes recognize as a recipe for resource misallocation. With calls for further increases in the minimum wage unabated — even during times of economic distress — it is important to clarify the potential consequences and costs of such policy actions. It is useful, therefore, to consider the fundamentals of what happens in the labor market to workers and employers when the government sets wages that are different from those established in the market for labor. In this essay, we focus on the predictions from a simple model of the labor market, present evidence based on recent research, and consider the important though often ignored question of just who pays for increases in the minimum wage. Unlike popular wisdom, it is not just employers.
Establishing a minimum wage higher than the going wage rate for the low-skilled segment of the working population will harm many of the very workers for whom the minimum wage is supposed to help.
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