Raising Wages, Raising Unemployment

Part of President Biden's Covid-19 stimulus plan is a proposed increase of the minimum wage to $15 an hour. It's not clear what this has to do with Covid nor is it clear why the Biden administration is pushing for this increase when the majority of studies over the last thirty years have shown that raising the minimum wage has a deleterious effect on employment, an effect that certainly seems on the face of it to be plain common sense.

Charles Fain Lehman at The Washington Free Beacon cites a study that shows precisely this. Lehman writes:

The analysis, published Monday by the National Bureau of Economic Research, combed through academic literature on the minimum wage and determined that nearly 80 percent of studies conducted since 1992 have found that an increased minimum wage leads to a decrease in the level of employment.

The effect, study authors David Neumark of U.C Irvine and Peter Shirley of the West Virginia state legislature find, is most pronounced for teens and young adults, particularly for the less-educated—meaning that these groups are most likely to be pushed out of the labor market by a hike in the minimum wage.

The new study comes as congressional Democrats reintroduce legislation to raise the federal minimum wage to $15 an hour and as President Joe Biden pushes for the same hike as part of his proposed $1.9 trillion COVID-19 stimulus plan. Neumark and Shirley's findings serve as evidence that these pushes could cost American jobs as the unemployment rate remains elevated thanks to the coronavirus recession.

It's remarkable that supporters of raising the minimum wage would think that such an increase would have an overall benefit. Many businesses operate on very thin profit margins, a circumstance that's obviously been exacerbated by the pandemic. If the minimum wage is raised, several things will likely happen:

1. Those who are paid more than minimum wage will also have to be given raises so that they remain above their entry level colleagues. Thus, a business' entire payroll will have to be increased.

2. Staff will be cut back and fewer people will be hired. Those who remain will be given a heavier workload and perhaps fewer benefits. Even with these measures some businesses will simply not be able to survive and will close their doors putting all their employees out of work.

3. A minimum wage twice what it is now will make many minimum wage jobs look more attractive to more highly qualified workers who will in turn be more attractive to employers. The poorly educated and economically deprived job-seeker will find it even harder to find work since with a higher minimum wage he or she will be squeezed out of the applicant pool by better qualified applicants.

4. Since the Democrats' proposal would apply to the federal government it's very probable that the law would stipulate that any business that the government contracts with to provide goods and services must itself meet the $15 minimum wage standard. This would mean that the goods and services these businesses provide will cost more which means that the American taxpayer will have to pay more than we already do for our government.

Even so, the Democrats are pushing ahead with plans to pass a $15 federal minimum wage into law, notwithstanding the Congressional Budget Office's finding last year that such a move would result in the loss of between 1.5 million and 3.7 million jobs.

It's hard to see the wisdom in that.