MANDATING UNEMPLOYMENT: CONGRESS PREPARES TO KILL MORE JOBS

July 15, 2009

When the economy was humming in May 2007 with an overall jobless rate of 4.5 percent, Congress approved a three-step minimum wage hike.  The final step of this legislation will take place on July 24, raising the federal minimum wage to $7.25 an hour from $6.55.  However the national jobless rate is now 9.5 percent and thousands of employers are facing razor-thin profit margins, say observers.

There's been a long and spirited debate among economists about who gets hurt and who benefits when the minimum wage rises.  But in a 2006 National Bureau of Economic Research paper, economists David Neumark of the University of California, Irvine, and William Wascher of the Federal Reserve Bank reviewed the voluminous literature over the past 30 years and came to two almost universally acknowledged conclusions:

  • First, "a sizable majority of the studies give a relatively consistent (though not always statistically significant) indication of negative employment effects."
  • Second, "studies that focus on the least-skilled groups (i.e., teens, and welfare moms) provide relatively overwhelming evidence of stronger disemployment effects."

Proponents argue that millions of workers will benefit from the bigger paychecks.  But about two of every three full-time minimum-wage workers get a pay raise anyway within a year on the job.  Meanwhile, those who lose their jobs or who never get a job in the first place get a minimum wage of $0.  And single mothers without jobs also lose out on other benefits provided by programs such as the Earned Income Tax Credit (EITC), say observers.

Consider a single mom with two kids who earns the current $6.55 minimum at a full-time, year-round job:

  • In 2009 she receives a $5,028 EITC cash payment from Uncle Sam -- or about an extra $2.50 per hour worked.
  • Other federal income supplements, such as the refundable child tax credit, add another $1,900 or so.
  • Thus at a wage of $6.55 an hour, her actual pay becomes $10.02 an hour -- more than a 50 percent increase from the current minimum.

But that single mom can't collect those checks if she doesn't have a job, and the tragedy of a higher minimum wage is that it will prevent thousands of working moms striving to pull their families out of poverty from being hired in the first place, say observers.

Source: Editorial, "Mandating Unemployment: Congress Prepares to Kill More Jobs," Wall Street Journal, July 13, 2009.

For text:

http://online.wsj.com/article/SB124743988386729701.html 

 

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