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WebMemo #1294 on Jobs and Jobs and Labor Policy

January 2, 2007

Minimum Wage Hikes Hurt Unskilled and Disadvantaged Workers' Job Prospects

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Supporters of raising the minimum wage say that it is an important way to help disadvantaged workers get ahead. Though the majority of minimum wage workers are teenagers or young adults under the age of 25, the case for raising the minimum wage focuses on how it will help low-income adults who are struggling to get by.[1] But businesses change their mix of workers when the minimum wage rises. If they must pay higher wages, companies hire more highly-skilled and productive workers. Poor, low-skill workers thus lose out.

No Way to Fight Poverty

Minimum wage supporters seek to help poor, disadvantaged workers get ahead, but the minimum wage is not an effective anti-poverty tool. First, it is poorly targeted. It affects the employment of all minimum wage workers, not just the poor. Most minimum wage earners do not come from poor families. A majority are between the ages of 16 and 24, and less than a fifth live below the poverty line.[2] Suburban teenagers and college students working part time make up a substantial portion of the minimum-wage workforce.

Even while over-broad, the minimum wage discourages companies from hiring the very workers that its advocates seek to help. Minimum wage earners usually earn low wages because they lack skills and experience. Higher-skill workers are more productive and will work only for higher wages. When the minimum wage forces employers to pay higher wages, they substitute highly-skilled and productive workers for lower-skill workers, destroying job opportunities for lower-skilled workers.

Given the choice between hiring an unskilled worker for $7.25 an hour and a worker with more experience for the same rate, companies will always choose the more experienced worker, who will be more productive. By raising the minimum wage, the government makes it more difficult for unskilled workers to find work.

This is not just a theoretical argument. Research consistently demonstrates that higher minimum wages lead businesses to hire skilled workers at the expense of unskilled workers. David Neumark, an economist at Michigan State University, and William Wascher, a researcher at the Federal Reserve, examined how teenage employment and school enrollment changed after states raised their minimum wages.[3] They found that when states raised their minimum wage, low-skill teenagers-younger teens and those who had dropped out of school-were more likely to become unemployed. At the same time, higher-skill teenagers were more likely to get jobs, sometimes leaving school to do so. When they have to pay higher wages, businesses hire higher-skill workers, freezing the least skilled and least productive workers out of the job market.

Other studies have reached the same conclusion. David Fairris and León Bujanda of the University of California-Riverside examined how contractors in Los Angeles reacted after the city passed a "living wage" ordinance that required them to pay their employees at least $8.50 an hour.[4] Farris and Bujanda found that companies began hiring more highly-skill workers after the law went into effect. Workers hired after the law took effect were almost twice as likely to have had formal job training as workers hired before.[5]

Fairris and Bujanda also examined how much employees earned before they began working for the contractors. Workers hired after the wage law took effect had earned an average of 18 percent more in their previous jobs than workers already at the firm.[6] This again shows that businesses responded to the law by hiring more higher-skill workers, and fewer lower-skill workers, than before. A minimum wage increase forces businesses to pay the workers they hire more, but it does not force businesses to hire the same mix of workers. As a result, businesses hire different workers, to the disadvantage of lower-skilled, low-income workers.

Studies Cited by Minimum Wage Supporters Show Impact on Unskilled Workers

The vast majority of studies of the minimum wage show that it reduces employment.[7] Supporters of raising the minimum wage usually respond by pointing to the few studies that suggest it has little effect on employment rates. But even these studies often show that employers substitute higher-skilled workers for disadvantaged workers when the minimum wage rises.

Kevin Lang and Shulamit Kahn of Boston University examined how restaurant employment changed after minimum wage hikes in the late 1980s and early 1990s.[8] They found no evidence that the minimum wage reduced total restaurant employment, but they did find that it dramatically changed the mix of workers that restaurants hired. Teenage and student employment rose, while adult employment dropped. Teenagers are often more attractive employees than disadvantaged adults, and when the minimum wage rose businesses hired them instead of low-skill adults. A higher minimum wage is great news for a high school student working part time to buy an iPod. But it hurts the lower-skill adult workers who need the job to support themselves and their families.

Minimum Wage Jobs as Job Training

Lower-skill workers become less employable when the minimum wage rises. Their loss goes beyond the wages they are not earning, however. They also lose the opportunity to gain the skills that would allow them to move up the career ladder. Minimum-wage jobs are often entry-level positions that teach unskilled and inexperienced workers the skills that make them more productive employees and enable them to earn raises.

Skills like how to interact with coworkers and customers have to be learned on the job, and minimum-wage jobs provide inexperienced workers the opportunity to learn these skills. Two-thirds of all minimum-wage workers earn a raise within a year of starting out.[9] Even for lower-skill adult workers several years out of school, minimum wage jobs are paths to advancement. Over half of workers holding minimum-wage jobs eight years after they left school earned a raise within a year.[10] By reducing their job prospects, the minimum wage deprives many unskilled workers of the opportunity to gain the skills that will enable them to earn higher wages.

Conclusion

Far from giving disadvantaged workers a leg up, raising the minimum wage cuts off the bottom rung of the career ladder for many lower-skilled workers. When government raises the minimum wage, companies substitute higher-skill employees for less productive ones. If businesses have to pay the same wage, they will always choose to hire more productive applicants. In this, the minimum wage discourages them from hiring the very workers who need entry-level jobs the most. Further, the minimum wage deprives many unskilled and inexperienced workers of the opportunity to gain the skills that earn more money. Raising the minimum wage is no way to help poor, low-skill workers out of poverty and into skilled, higher-paying employment.

Show references in this report

[1] Rea Hederman and James Sherk, "Who Earns the Minimum Wage: Single Parents or Suburban Teenagers," Heritage Foundation WebMemo No. 1186, August 3, 2006, at www.heritage.org/Research/Economy/wm1186.cfm.

[2] Ibid.

[3] David Neumark and William Wascher. "The Effects of Minimum Wages on Teenage Employment and Enrollment: Evidence from Matched CPS Surveys." In Solomon Polchek, ed., Research in Labor Economics, Vol. 15, 1996, Greenwich, Conn.: JAI Press.

[4] David Fairris and Leon Bujanda, "The Dissipation of Minimum Wage Gains for Workers Through Labor-Labor Substitution," Working Paper, April 2006, at http://client.norc.org/jole/SOLEweb/Fairris.pdf.

[5] Ibid. 12 percent of workers hired before the wage increase had prior formal training, as shown in Table 3. Column 2 of Table 4 shows that, relative to these "stayers" and controlling for firm effects, workers hired after the living wage ordinance took effect were 11 percentage points more likely to have had prior formal training.

[6] Ibid., Table 5, column 2.

[7] David Neumark and William Wascher, "Minimum Wages and Employment: A Review of the Evidence," NBER Working Paper No. 12663, November 2006, at http://www.nber.org/papers/w12663; Neumark and Wascher find that two-thirds of research papers on the minimum wage find negative employment effects, as do 18 of the 19 most reliable studies.

[8] Kevin Lang and Shulamit Kahn, "The Effect of Minimum-Wage Laws on the Distribution of Employment: Theory and Evidence," Journal of Public Economics, vol. 69(1), July 1998, pp. 67-82.

[9]David Macpherson and William Evan, "Wage Growth Among Minimum Wage Workers," Employment Policies Institute, June 2004, Table 1, at http://www.epionline.org/studies/macpherson_06-2004.pdf. The two-thirds figure comes from examining data after the last federal minimum wage increase in 1997 and is based on data from 1998 to 2002.

[10] William Carrington and Bruce Fallick, "Do Some Workers Have Minimum Wage Careers?" Monthly Labor Review, May 2001, p. 21, Table 3, at http://www.bls.gov/opub/mlr/2001/05/art2full.pdf.

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