The Cost of a Minimum Wage Increase

November 5, 2013

We are rarely subjected to debate over the minimum wage apart from election season, but America's painfully sluggish return to economic normalcy has politicians scrambling to do something to help the working class. While the minimum wage debate usually plays out at the federal level, there is now a grassroots push across the country to raise wages beyond the federally mandated $7.25 per hour. Unfortunately, success won't guarantee a happy ending for workers, say Antony Davies, senior scholar with the Mercatus Center, and James R. Harrigan, a fellow of the Institute of Political Economy at Utah State University.

  • Washington state voters are considering Proposition 1, which would raise the minimum wage to $15 per hour for workers in and around SeaTac airport.
  • In Minneapolis there is talk of raising the minimum wage to $9.50, and in Washington, D.C., to $11.50.
  • New Jersey's minimum wage is likely to rise to $8.25.
  • Ohio's will increase to $7.95 in January.

The point that many politicians never fully grasp is that raising the minimum wage does not increase the value of the worker's labor. It increases the cost of the worker's labor. And as everyone knows, the more something costs, the less of it we buy. This is as true of workers in the labor market as it is of anything else.

In a bizarre twist, raising the minimum wage hurts the very people it aims to help. National employment data from 1975 through 2012 show that on average, a 10 percent increase in the minimum wage has been followed by no change in employment among college-educated workers, a half-percentage point increase in unemployment for those with high school diplomas, and a one percentage point increase in unemployment for those without high school diplomas.

This is what happens when economics takes a back seat to political considerations. The feel-good rhetoric of increasing the minimum wage outweighs the economic reality that there is no such thing as a free lunch. Every cost must be paid by someone, and those who will pay for a minimum wage hike are the very people we are trying to help.

Source: Antony Davies and James R. Harrigan, "Raising the Minimum Wage Is No Free Lunch," U.S. News & World Report, October 21, 2013.

 

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