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Minimum wage’s unintended consequences

This op-ed appeared January 13, 2018 in the Hutchinson Leader

On January 1st, legally mandated minimum wages went up across Minnesota. For large employers the rate went up from $9.50 per hour to $9.65 and for small employers from $7.75 to $7.87. Minneapolis city council went even further, announcing that employers would have to pay workers at least $10 an hour.

Some see this as good news. WCCO rhapsodized that “Thousands of Minnesota families will take home bigger pay cheques” But economic theory and empirical evidence suggest that, in fact, these increases in minimum wage rates will hurt the very people they are intended to help.

No employer will knowingly pay a worker more than that worker adds to their revenues. If they did they would be adding more to their costs then to their income and a business that did that wouldn’t be around very long. So, if that Minneapolis worker generated $9.50 an hour in revenue on December 31st, 2018, and the same on the following day, it is now costing the employer money to employ them. Instead of a bigger pay cheque, that worker is likely to get a pink slip.

A minimum wage law simply criminalizes wages below a certain level. If someone lacks the skills to generate revenues for an employer of at least that level, all the law does is make it illegal to hire them.  They might lack these skills because they are young and just getting into the labor force. So, we might expect younger workers to be disproportionately affected by minimum wage laws.

And we do. One dark spot in Minnesota’s supposedly rosy employment picture is youth unemployment. In November 2016, the state’s youth unemployment rate was 9.6%. In November 2017, it stood at 10.6%. As Minnesota’s Department for Employment and Economic Development notes, this “coincides with an increase in the state minimum wage to $9.50 per hour ($7.75 for those under 18) in August 2016, which is notable because minimum wage rules tend to apply disproportionately to teen workers.”

This ties in with a much broader range of empirical evidence. In 2008, economists David Neumark and William L. Wascher surveyed two decades of research into the effects of minimum-wage laws. They found that “minimum wages reduce employment opportunities for less-skilled workers … [that] a higher minimum wage tends to reduce rather than to increase the earnings of the lowest-skilled individuals … [that] minimum wages do not, on net, reduce poverty … [and that] minimum wages appear to have adverse longer-run effects on wages and earnings.”

We all want to see higher wages for workers. But these will only come in a sustainable way from increasing worker productivity. For this, we need to look at education, investment, entrepreneurship, and all the interconnected policies which influence these. True, this doesn’t have the attractive simplicity of a politician simply decreeing that employers will only be allowed to pay above $X, but it will work.

John Phelan is an economist at the Center of the American Experiment.

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