Chart: What happens when the minimum wage is raised?

President Obama is pushing to raise the minimum wage to $9 per hour.

The rationale is well-intended: get low-earners closer to a “living wage”

The major argument against the move is econ 101 … and empirical evidence.

The below chart – from AEI’s Mark Perry —  cuts to the chase.

image

The chart plots the level of the Federal minimum wage against the number of percentage points that the teenage unemployment rate is over the all-inclusive unemployment rate.

Implicitly, the analysis assumes that the bulk of minimum wage jobs go to teens … and, measuring the differential (instead of the gross rate) normalizes to the overall state of the economy.

The conclusion is stark: when you raise the minimum wage you lose jobs.

Period.

But, some folks argue that economic life is better for the minimum wagers who retain their jobs.

Not so fast …

Prof. Perry also argues that the increase in earnings that come along with a hike in the minimum wage is largely illusionary since …

  • Employers are likely to cut back employees’ hours to keep aggregate labor costs in check
  • Employers may simply balance costs by reducing benefits, e.g. stop providing restaurant workers with free or discounted meals, requiring employees to pay for previously free uniforms

He also poses an interesting question: if a hike in the minimum wage doesn’t destroy jobs – as proponents argue – why not simply hike it to $15 .. or $20 … or higher.

Hmmm.

The bigger question that faces the U.S. labor market is what to do when a large portion of the labor force is undereducated, under-skilled, and under-motivated …  and, doesn’t add enough economic value to justify more than a non-living wage.

My POV: Other than blaming schools and initiating small-scale training programs, there isn’t much effort (or discussion) directed at the fundamental problem.

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4 Responses to “Chart: What happens when the minimum wage is raised?”

  1. TK Says:

    Setting the minimum wage artficially high would clearly create problems, but wouldn’t setting the minimum wage too low also have disadvantages? The current minimum wage is not a living wage. As a result we have to issue tax credits, distribute food stamps and extend government medical care through emergency rooms.

    This topic is far from simple…

  2. Nicolas Durand Says:

    This is clearly a very complex problem without an obvious solution. Actually, I asked Prof. Nollen that exact same question in class :)

    Just to be provocative, I’ll ask if setting ANY minimum wage is smart? If we let it completely free, the market will decide. And according to the above theory, we should get to 100% employment. With employees making maybe as little as $1/hour but (again according to prof. Perry) this time with loads of benefits such as, maybe, free company cars and lobster for lunch <:).

    Finally, I think it's a little misleading to only display the teenage unemployment rate. What about general employment? Do these minimum wages only apply to teenagers? We're comparing apples and oranges here.

  3. Chris Says:

    Agreed – this is a canard for the larger picture of a failed education system AND failed family structures.

    I think Charles Murray has it right – over the last 50 years we’ve sorted our society into fairly homogeneous buckets of similar intellegence, work ethics and moral values. This sorting has huge impacts on economic opportunity and outcomes. It’s insane to think that marginal tax rates and price floors for labor can combat the “Fishtown” world view.

  4. Andrew L. Says:

    Spot on. If we agree that a wage floor is bad and we agree that the current lowest wage is not enough to have a decent life, the question isn’t at what price we should set an artificial wage floor.

    The question is what skills do we need to deliver to lift everyone into a higher wage class and how do we build those skills. There is no structural economic reason that the lowest hourly wage in any market should be below the cost of living in that same market.

    Hey also, I would like to put the immigration people and the minimum wage people in a steel cage and watch them have at it.

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