Spotlight on economics: Why not raise the minimum wage?

Farm Forum

There are many well-intentioned reasons to support an increase in the national minimum wage. Raising the minimum wage has been seen to have minimal, if any, impact on unemployment, while it obviously increases the incomes of the low-wage workers who receive it.

The current minimum wage falls below what most consider to be a “living wage” on which a family actually could be supported. Thus, raising the minimum wage has been seen as a way to reduce poverty.

Given these reasons, it is reasonable to ask: Why not support a minimum wage increase? After all, we care about our fellow human beings and have a responsibility to do what we can to help each other out, especially those who suffer in poverty.

The problem with raising the minimum wage does not lie in the intentions of its supporters, but rather in the actual effects that such policy has on those it is intended to aid. It is true that the past increases in the minimum wage have had little effect on aggregate unemployment rates, but that is a misleading abuse of the statistics.

Of course, increasing the minimum wage will have the greatest impact on those whose wages fall below the new wage threshold. This falls primarily on young workers with only a high school education. We shouldn’t ask ourselves what effect the minimum wage will have on aggregate unemployment, but on unemployment among those who will be most affected: the youth.

A 2013 paper by economist Aspen Gorry of Utah State University published in the European Economic Review took a deeper look at the effects of the last raise in the U.S. minimum wage by the Fair Minimum Wage Act of 2007. It was increased from $5.15 to $7.25 an hour during the years 2007 to 2008. Gorry’s analysis focuses on unemployment in the high school educated youth population.

“Between 2006 and 2010, the unemployment rate for high school educated workers aged 15 to 24 went from 11.3 to 22.5 percent . . . the unemployment during the recession was disproportionately focused on young workers,” Gorry states.

The analysis presented in that research is based on the premise that young people who are employed at or near the minimum wage gain valuable job experience that helps them find higher wage employment later in life. This leads to the conclusion that, of the 11.1 percentage point increase in unemployment, 3.3 percentage points of the increase was attributable to the increase in the minimum wage and not the recession.

In a current working paper, Gorry and I have used the analytical framework of Gorry’s to examine the impact of raising the minimum wage to $9 and $10.10 as was recently scored by the Congressional Budget Office. Using more recent data reflective of the current labor market, we find that the impact of raising the minimum wage to $9 on youth unemployment will be much larger than the previous minimum wage increase.

The effects are an order of magnitude larger for an increase to $10.10. The impacts of current proposals are much larger due to the fact that wages, as a whole, have not risen much since the last wage increase, which has led to a larger percentage of the population being impacted by the current proposal as opposed to the increases from the Fair Minimum Wage Act of 2007.

Even more troubling is that this high level of unemployment among youth will lead to increased unemployment and lower wages as the youth of today age. This happens because the unemployed youth are denied the ability to gain productivity-enhancing job experience. This loss will follow them throughout their lives.

While raising the minimum wage will have a negligible impact on the aggregate unemployment rate, it will have significant impacts on unemployment among the youth population. This unemployment has more than just a contemporaneous effect. The inability to gain job experience hurts employability and wages throughout the lives of those affected.

If we are to raise minimum wages, we need to be aware that this is a policy that comes with a cost. Unfortunately, much of the cost of such a policy comes at the expense of those whom the policy is intended to benefit.

This does not rule out the possibility of using minimum wage hikes as a means to alleviate poverty, but does suggest that policymakers need to be smart as they implement it. A smart minimum wage proposal might exempt young workers from the full minimum wage hike as has been done by several European countries. These countries have a separate minimum wage for workers of various ages.