Minimum Wage, Maximum Trouble on hold

COMMENTARY Jobs and Labor

Minimum Wage, Maximum Trouble on hold

Jul 27th, 2007 5 min read

Research Fellow, Labor Economics

As research fellow in labor economics at The Heritage Foundation, James Sherk researched ways to promote competition and mobility.

Supporters of the latest minimum-wage hike have the best of intentions. They want the higher minimum wage to lift low-income families out of poverty -- but that doesn't change where the road paved with good intentions leads. The increase will actually harm the very workers it's intended to help.

Raising the minimum wage seems an obvious way to help low-income workers. Their wages go up and they earn more money. How could raising the minimum wage possibly hurt them?

Because the workers who will earn the new minimum wage after it rises are not the same workers who earned the old minimum wage before it went up. Since it costs more to hire workers, employers will hire fewer of them. And they will change who they hire for the positions they keep.

If the government forces companies to pay higher wages, more skilled and productive workers will apply for their positions. Given the choice between hiring an unskilled worker and one with more experience, companies virtually always hire the more productive employee. Employers will replace many of the unskilled workers who work for the minimum wage today with more skilled workers who would have earned more than $5.15 an hour regardless.

Many economic studies demonstrate that employers respond in exactly this manner. Outside the dry world of academic journals, this means that welfare recipients trying to get off the dole, new immigrants who speak little English, and inner-city minority teenagers from disadvantaged backgrounds have a much harder time finding jobs. These workers tend to lack jobs skills that make them attractive employees.

Given a choice between hiring a middle-class college student or a minority teenager who goes to an inner-city public school, employers will hire the college student if both will work for the same wage. Raising the minimum wage by 50 percent also raises the probability that teenage African-American high-school dropouts will lose their jobs by over 25 percent.

As a result, research consistently shows that higher minimum wages do not reduce poverty. Most of the benefits go to suburban teenagers or college students, not those who actually need help. While some low-income workers get a raise, many others lose their jobs.

Putting unskilled employees out of work hardly helps them. Worse, though, is the way the lack of job opportunities makes it harder for these employees to gain the skills necessary to get ahead in the market place.

Minimum-wage jobs are entry-level positions. Few workers who start out at minimum wage stay there. Over time, they demonstrate their reliability and gain valuable skills such as how to interact productively with customers, or accept direction from the boss. This makes them more valuable and earns them raises. Two-thirds of minimum-wage workers earn a raise within a year.

When the minimum wage rises, it saws off the bottom rung of the career ladder for many unskilled workers. They become less attractive to hire at the higher wages, so they miss the opportunity to gain valuable work skills and earn raises. A policy designed to help them leaves them in poverty. Past increases in the minimum wage have hurt the earnings and job prospects of unskilled workers over a decade after they passed for precisely this reason. Many unskilled workers were denied the ability to get on-the-job-training with a minimum-wage job and were left playing catch-up when they finally did find an entry-level job.

They may mean well. But supporters of the new minimum-wage hike have hurt the low-income workers they wanted to help.

James Sherk is Bradley Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.

The rich soil of the Midwest can grow just about anything. Including, apparently, dollar bills. In fact, to grow those, one doesn't even need a plot of land.

Consider Chicago.

A skyscraper-and-concrete landscape is an unlikely place for farmers to set up shop. Yet there are at least 1,705 farmers in the city. Or, at least, that's how many Chicago-based people and groups cash federal farm subsidy checks, according to the Environmental Working Group, a think tank that tracks farm subsidies.

EWG's report found farmers in surprising places. Look at the cramped quarters of the 60611 zip code. That 1.6-square-mile stretch contains an estimated 24,744 people (the Web site calls it "100 percent urban"). But, apparently, there's always room for a few crops.

According to EWG, three of the Top 10 farm subsidy recipients in the Chicago metro area list 60611 as their home ZIP code. These include Theodore D. Tieken Jr. (who brought home $286,415 in federal assistance between 2003-2005), Nancy Tieken ($222,688) and Elizabeth Kirkpatrick ($222,688). Good work if you can get it.

It's not just individuals cashing subsidy checks. Over in the 60604 ZIP code (also 100 percent urban) are two farms in EWG's Top 10: F & J Farms and Frymire Farms Inc. It's difficult to imagine what these farms are raising in this ZIP code, since the things that grow best here seem to be tall structures, including the Metcalfe and Kluczynski Federal Buildings. But these "farmers" are certainly raking in the cash.

Of course, individuals and farms aren't the only recipients of Washington's largesse. In fact, plenty of that funding is, literally, for the birds.

Seven "habitat foundations" made EWG's Top 40 list for Chicago subsidy recipients. These include the Green Wing Teal Habitat Foundation, Blue Wing Teal Habitat Foundation (why save birds with one wing color and not save birds with a different wing color?), Ringbill Habitat Foundation, Wood Duck Habitat Foundation, Gadwall Habitat Foundation, Pintail Habitat Foundation and Mallard Habitat Foundation. EWG says these conservation groups have pulled in more than a million dollars combined in federal farm subsidies the last three years.

All these groups have something in common: They're all part of the Wetlands Initiative, a non-profit organization founded in 1994 "to focus restoration efforts and funds on reversing the environmental damage created by the drainage of wetlands in the upper Midwest."

Now, it may be a great idea to protect wetlands. And, if private individuals want to come together and invest money for that purpose, more power to them. But that's not what's happening here. Instead, federal farm subsidies are being spent to take farmlands out of production and turn them into wetlands for waterfowl.

Not surprisingly, lawmakers don't like to talk about these projects when they discuss farm policy. Instead, they talk about how they're helping family farmers, the type of hardworking Americans who built this country. But the unfortunate fact about farm subsidies is that they go mostly to big agribusiness and politically connected individuals -- including many in Chicago and around the country.

And we taxpayers are picking up the bill. Farm subsidies cost the average household $216 in annual taxes along with $104 in higher food prices.

Money doesn't grow on trees. In fact, with farm subsidies, you don't even need soil to grow money -- just a willing federal government.

It's time to make America green, by ending foolish farm subsidies and once again giving our citizens the freedom to farm, without the meddling of a federal government that can't tell the difference between a city condo and a cornfield.

Ed Feulner is president of The Heritage Foundation.

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