Minimum Wage Increases Do More Harm Than Good

July 30, 2013

U.S. youth unemployment now stands at 16 percent for 16-24 year olds, 23 percent for teens and a shocking 40 percent for black teens. More than 10 million young people are either unemployed or underemployed, says James Dorn, vice president of monetary studies at the Cato Institute.

Would increasing the federal minimum wage from $7.25 per hour to $10.10 over the next three years, and then indexing it for inflation, improve the job outlook and brighten the future for younger workers?

  • Proponents of the Fair Minimum Wage Act of 2013 argue that increasing the federal minimum would put more money into the hands of low-skilled workers, stimulate consumption and create jobs.
  • They contend that if the federal minimum wage had kept pace with inflation since 1968, the nominal minimum wage would now be nearly $11 per hour.

Many businesses say they already pay their workers more than the federal minimum wage.

  • Firms that are already paying more than the federal minimum wage do so because their workers are producing more than $7.25 per hour.
  • Moreover, if workers produce at least $12 per hour, then an increase in the minimum to $10.10 would not affect their job status, but the higher minimum wage rate could drive smaller rivals out of business or prevent new firms from entering.
  • Hence, one should be skeptical of businesses that favor raising the minimum wage.

Workers with more education and higher skills, and who are combined with better technology and more capital, will be more productive than teens or younger workers with less education and fewer skills.

  • High wage rates are the result of high productivity, not the cause.
  • Economic growth is not the result of high wages or the minimum wage; it is caused by factors that increase productivity and that expand economic freedom, so that people are free to choose and to utilize their knowledge and skills.

The minimum wage is unfair to low-skilled workers with little experience because it prices them out of the labor market and prevents them from achieving the upward mobility that is the hallmark of a dynamic free-market economy.  If the Fair Minimum Wage Act is passed, workers who cannot produce at least $10.10 per hour will not be able to find an entry-level job.

Source: James Dorn, "The Minimum Wage Is Cruelest to Those Who Can't Find a Job," Forbes, July 22, 2013.

 

Browse more articles on Economic Issues