What happens when the minimum wage is raised?

President Obama is pushing to raise the minimum wage to $10.10 per hour.

Interesting play

$10.10 … not $10.

Why?

To make folks think that he thought about it … that $10.10 is some kind of magical optimum.

Putting that silliness aside, the rationale is well-intended: get low-earners closer to a “living wage”

The major argument against the move is econ 101 … and empirical evidence.

The below chart – from AEI’s Mark Perry —  cuts to the chase.

image

The chart plots the level of the Federal minimum wage against the number of percentage points that the teenage unemployment rate is over the all-inclusive unemployment rate.

Implicitly, the analysis assumes that the bulk of minimum wage jobs go to teens … and, measuring the differential (instead of the gross rate) normalizes to the overall state of the economy.

The conclusion is stark: when you raise the minimum wage you lose jobs.

Period.

But, some folks argue that economic life is better for the minimum wagers who retain their jobs.

Not so fast …

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Prof. Perry also argues that the increase in earnings that come along with a hike in the minimum wage is largely illusionary since …

  • Employers are likely to cut back employees’ hours to keep aggregate labor costs in check
  • Employers may simply balance costs by reducing benefits, e.g. stop providing restaurant workers with free or discounted meals, requiring employees to pay for previously free uniforms

He also poses an interesting question: if a hike in the minimum wage doesn’t destroy jobs – as proponents argue – why not simply hike it to $15 .. or $20 … or higher.

Hmmm.

The bigger question that faces the U.S. labor market is what to do when a large portion of the labor force is undereducated, under-skilled, and under-motivated …  and, doesn’t add enough economic value to justify more than a non-living wage.

My POV: Other than blaming schools and initiating small-scale training programs, there isn’t much effort (or discussion) directed at the fundamental problem.

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