The Negative Effects of Minimum Wage Laws

July 9, 2012

While the aim of minimum wage laws is to help workers, decades of economic research show that minimum wages usually end up harming workers and the broader economy. In particular, minimum wages stifle job opportunities for low-skill workers, youth and minorities, which are the groups that policymakers are often trying to help, says Mark Wilson, a former deputy assistant secretary of the U.S. Department of Labor.

If the government requires that certain workers be paid higher wages, then businesses make adjustments to pay for the added costs, such as reducing hiring, cutting employee work hours, reducing benefits and charging higher prices. Some policymakers may believe that companies simply absorb the costs of minimum wage increases through reduced profits, but that's rarely the case.

  • The main finding of economic theory and empirical research over the past 70 years is that minimum wage increases tend to reduce employment.
  • Evidence of employment loss has been found since the earliest implementation of the minimum wage.
  • The U.S. Department of Labor's own assessment of the first 25-cent minimum wage in 1938 found that it resulted in job losses for 30,000 to 50,000 workers.
  • This figure amounts to between 10 and 13 percent of the 300,000 covered workers who previously earned below the new wage floor.

Since this first implementation of the minimum wage, an incredible number of researchers have attempted to assess its impacts, especially because the minimum wage is much larger now than it was then.

  • In 2006 David Neumark and William Wascher published a comprehensive review of more than 100 minimum wage studies published since the 1990s.
  • Nearly two-thirds of the studies reviewed by Neumark and Wascher found a relatively consistent indication of negative employment effects of minimum wages, while only eight gave a relatively consistent indication of positive employment effects.
  • Moreover, the studies that focused on the least-skilled groups (those most likely to be adversely affected by minimum wages) found especially strong evidence for unemployment effects.

Based on his studies, Nobel laureate economist Milton Friedman observed: "The real tragedy of minimum wage laws is that they are supported by well-meaning groups who want to reduce poverty. But the people who are hurt most by higher minimums are the most poverty stricken."

Source: Mark Wilson, "The Negative Effects of Minimum Wage Laws," Cato Institute, June 21, 2012.

For text:

http://www.cato.org/publications/policy-analysis/negative-effects-minimum-wage-laws

 

Browse more articles on Economic Issues