Saturday, February 16, 2013

The President's Bad Idea

In his State of the Union speech the other night President Obama called for raising the federally mandated minimum wage from $7.25 to $9.00. Is this a good idea? People making the minimum wage might certainly think so, but there are a lot of reasons why Congress should simply ignore it. Michael Strain at the American Enterprise Institute explains some of them. After presenting a brief and gloomy description of the current labor market crisis which has boosted real unemployment to over 14% Strain says this:
The consequences of the labor market crisis are vast. Divorce rates increase when the unemployment rate is high, as does the probability of suicide. Workers are losing valuable skills every day that they are unemployed. If they do return to work they will be less productive. But many may not return to work. Some economists believe that a worker who endures a long spell of unemployment will have a hard time finding a job because prospective employers may wonder why so many other firms have passed on the worker. The longer a worker is unemployed the more his professional network will deteriorate, making it even harder for her to find a job.

What happens to workers who can't find a job? The sad fact is that many will go on disability insurance, making it even less likely that they will ever again earn a living in the labor market - significantly reducing the chance that they will be able to live a full life, earn their own success, provide for their families, and realize their full human potential.

The labor market is more than an economic crisis. It is a human crisis.
But what does this have to do with the minimum wage? Strain explains:
The economic effects of minimum wage increases have been studied dozens and dozens of times in the past few decades. Different studies come to different conclusions, of course. But economists David Neumark and William Wascher, after conducting an exhaustive literature review, conclude that "among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries."

They continue: "The studies that focus on the least-skilled groups that are likely most directly affected by minimum wage increases provide relatively overwhelming evidence of stronger disemployment effects for these groups."

The weight of the evidence suggests that increasing the minimum wage decreases employment, especially for lower-skilled workers.
In other words, raising the minimum wage makes it more costly for employers to hire and keep marginal workers. If they can get by with four rather than five someone will either not get hired or will be laid off. Nor will a minimum wage increase really help alleviate poverty as the president claimed:
The evidence suggests that it will not. Economists Joseph Sabia and Richard Burkhauser find that a small minority of workers who would benefit from a minimum wage increase - around ten percent - live in poor households. The White House itself states that workers who would benefit from a minimum wage increase bring home less than half of their household's total wage and salary income.

In other words, the workers who will benefit from an increase are secondary and tertiary earners - think more of teenagers with summer jobs, of spouses earning some income on the side, or of elderly grandparents earning some retirement income, and less of primary breadwinners. In fact, Professors Sabia and Burkhauser find that around two-thirds of minimum wage workers live in households with incomes more than twice the poverty line.

Speaking of teenagers: The unemployment rate for 16-to-19 year old African Americans is a massive 37.8 percent. For white teenagers, the rate is 20.8 percent. This crushing unemployment will ripple through the rest of their lives, affecting their labor market outcomes for years to come. Why does it make sense to increase the cost of hiring these unemployed teenagers by increasing the minimum wage?
Raising the minimum wage is a simplistic, short-sighted, feel-good answer to a difficult problem that will only exacerbate the very conditions it's intended to alleviate. Serious problems require serious thinking by serious people. Our president needs to do better.