The Real Cost of Raising the Minimum Wage

January 6, 2014

If raising the minimum wage were cost-free, why stop at $10 or $15 an hour, as some have recently proposed? Why not go straight to $24 an hour, the average hourly wage? That might be considered fair, because no one would have to earn less than average, says Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor and a senior fellow at the Manhattan Institute.

The answer, of course, is because some people are displaced at any minimum wage. It is obvious to the general public that increasing the minimum wage to $24 an hour would displace workers. It is less obvious when amounts are smaller. But when the minimum wage is raised, employers hire higher-skilled people, or switch to different forms of technology, such as placing orders through touchscreens.

  • Finding the effects of raising the minimum wage is challenging, because 97 percent of American workers now make above the minimum wage -- not because it is the law, but because employers have to pay higher compensation packages to retain workers.
  • That is one reason that some academic studies do not find major negative effects of minimum-wage increases.

Those who would be harmed by increasing the minimum wage are young people.

  • Half of minimum-wage workers are under age 25 and 24 percent are teens.
  • This group's unemployment rate is already higher than the 7.3 percent overall rate.
  • The teen unemployment rate is 21 percent, and the African-American teen unemployment rate is 36 percent.
  • The youth (ages 15 to 24) unemployment rate is 12 percent.

About 1.8 million Americans aged 16 to 24 worked for minimum wage in 2012, and many more young Americans coveted those jobs. Many young people start successful careers with minimum-wage jobs without expecting that the job will become a lifetime career. Doug McMillon, who will take over as Walmart CEO, started out as a teen unloading trucks at a Walmart distribution center.

Raising the minimum wage is not cost-free, even to Washington. More low-skill Americans would be out of work. People would buy less of the higher-priced services. Supersizing a wage is not as simple as supersizing a hamburger.

Source: Diana Furchtgott-Roth, "The Real Cost of Raising the Minimum Wage," MarketWatch, December 20, 2013.

 

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