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The minimum wage for the self-employed is $0.00

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President Obama, in his State of the Union address this month, proposed raising the minimum wage to $9.00 an hour.  As recently as 2006 that rate was $5.15, and has been at its current level of $7.25 only since July 2009.  The next day, as if not to be outdone, two Minnesota state legislators proposed raising Minnesota’s minimum wage to $9.50 per hour from $6.15 presently.  (Minnesota businesses currently follow the federal minimum.)

After years of consensus among economists on the effects of the minimum wage, the last twenty years has seen renewed debate over whether minimum wage laws reduce employment, even for low-skilled workers.  The debate turns on a set of case studies where the number of workers hired in a particular industry, such as fast-food chain restaurants, did not fall as a result of an increase in the minimum wage in one state versus another.  Broader studies consistently find disemployment of lower-skilled workers, though the size of the effect is not as large as originally thought. 

Still, an increase in minimum wages from $6.15 to $9.50 is a large increase.  By my estimate that total effect reduces teen employment by approximately 5.5%.  Other estimates could place that anywhere between 3% and 16%.  Some of this has already happened with the rising federal minimum wage.  This effect was not nearly as large as the unemployment of teens due to the Great Recession (teen employment fell from 165,000 in 2005 to 108,000 in 2009) but the rise in the minimum wage did not help.

In Minnesota 93,000 workers made the minimum wage in 2011.  32,000 of them are teenagers, of which 29,000 work part-time.  The number of workers who work at the minimum wage full-time and are over age 24 is only 18,000 of that number (there are almost 2.5 million workers in Minnesota.)  According to a 2007 CBO study, workers below 200% of the family poverty guidelines receiving higher wages due to a minimum wage increase only received 44% of the total rise in wages; the rest went to those above 200% of the family poverty guidelines.

A decline in employment, if true, is a serious issue for those with low skills.  Teens, particularly those from difficult circumstances, must find ways to signal employers that they have the skills needed to hold jobs.  Often those involve little more than courtesy, punctuality, the ability to make change, to work with others, etc.  Teens take low wages to gain that opportunity, and they are frustrated by higher minimum wages.  The employer will be less likely to “take a chance” on a young person, the higher the wage that must be paid.  That loss of experience may lead to lower wages throughout the rest of that teen’s life.

Moreover, the wage is only one feature of an employment contract.  Stricter discipline is possible on almost any job that makes it less enjoyable for the employee.  So too could work conditions change, such as fewer coffee breaks, less heating and air-conditioning, buying your own uniform, fewer vacations and fringe benefits.  Employers will seek workers who are willing to tolerate worse working conditions.  Competition still pushes the value of the job down, even when that is not expressed by wages.  Workers who do not want these worse conditions either must find work in industries uncovered by the minimum wage or work for themselves. 

The minimum wage for the self-employed is $0.00. 

Minimum wage laws thus have many effects beyond whether someone keeps or loses a job.  They influence how people live in the working world, and not in ways the law’s proponents can predict.  It is better to trust the negotiation over terms and conditions of employment to those who will live under them, not those in St. Paul and Washington.  

King Banaian is a Professor of Economics at St. Cloud University and a Senior Fellow at CAE

 

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