Minimum Wage Leads to Benefit Cuts, Unemployment
October 28, 2014
While many in the public may be in favor of raising the minimum wage, Iain Murray, vice president at the Competitive Enterprise Institute, explains why such legislation would harm the people it is alleged to help.
Seventy-nine percent of economists agree that the minimum wage increases unemployment for young and unskilled workers, and numerous studies on the effect of the wage confirm that view. For example:
- A 2007 study by economists David Neumark and William Wascher analyzed 100 minimum wage studies, finding that two-thirds of the studies showed negative effects of the wage on employment. Most damage was to low-skilled workers and the young. Just one-eighth of the studies found positive effects.
- A study by professor Aspen Gorry showed how the minimum wage impacts youth because it affects a worker's ability to gain job experience. He found that the 2007 federal minimum wage increase raised unemployment generally by 0.8 percentage points but unemployment for 15- to 24-year-olds by nearly 3 percentage points.
- France has a minimum wage of $12 per hour and a youth unemployment rate of 24 percent -- twice the rate in the United States. According to Gorry, the difference is entirely due to France's wage rate.
How does the minimum wage remain so popular if it has such negative effects? Murray says that most people only see the paychecks that rise, while few see the negative effects that follow: job losses, cuts to hours, increases in automation and a loss of fringe benefits. Moreover, many workers -- often the young and most unskilled -- are simply not hired in the first place due to minimum wage increases.
The loss of fringe benefits is one that NCPA Senior Fellow Richard McKenzie analyzed in a recent study. He explained that, while many minimum wage advocates will claim there are relatively few job losses from minimum wage hikes, the hikes have effects in other areas: the nonmonetary fringe benefits that employers offer their employees. Indeed, Murray explains that the loss of benefits is exactly what has happened in SeaTac, Washington, which recently raised its minimum wage to $15 per hour:
- The Northwest Asian Weekly reports that one hotel cleaning lady in SeaTac said of the wage, "It sounds good, but it's not good." Since the increase, she has lost her 401(k), employer health insurance, paid holidays and vacations. And while her employer previously fed her and covered her parking costs, she is now responsible for both of those expenses.
- One SeaTac waitress reported similar effects. Not only have her tips decreased, but her employer quit covering her parking and food costs.
Consumers are also hit by the wage increase, as fast food restaurants will pass on the increased labor costs to their customers.
Murray cites an interesting poll from Bloomberg News from March 2014. When it asked respondents whether they supported the minimum wage rising to $10.10 per hour, 69 percent supported the proposal while 28 percent opposed it. But then the poll changed its wording, explaining to respondents that a CBO study found that the wage increase would increase 16.5 million Americans' incomes but destroy 500,000 jobs. When asked whether that trade off was acceptable or unacceptable, only 34 percent found it acceptable.
Source: Iain Murray, "Minimum wage, maximum damage," Washington Examiner, October 27, 2014.
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