July 27, 2009
By James Sherk
Imagine a small-business owner trying to survive the recession.
What would he do if hiring workers suddenly became more expensive?
What would you do? This is not a hypothetical question. The federal
minimum wage automatically increased from $6.55 to $7.25 an hour on
July 24 -- the last part of an increase Congress passed two years
Few small businesses, though, have the profits to pay higher
So most will lay off some workers and cut the remaining workers'
hours to keep their costs down. Unemployment among low-skilled
workers has risen even more sharply than overall unemployment. Now,
thanks to Congress, even more entry-level workers will receive pink
That wasn't the goal when Congress passed the minimum-wage
increase. At the time the economy was doing well and Congress
wanted to help low-wage workers get ahead. Why not require
employers to pay them more? Unfortunately Congress cannot re-write
the law of unintended consequences. Businesses don't pay workers
more than the value they add to their company. An employer will not
hire a worker for $7.25 an hour if that worker adds only $7 an hour
to the company's revenue. Businesses that did so would quickly go
out of business. Employers will respond to this minimum-wage
increase by laying off all their unskilled workers who produce less
than $7.25 an hour.
Economists have documented this painfully well. Many studies
show that increasing the minimum wage by this amount causes
businesses to cut employment of low-skilled workers by roughly 2
Unemployment hurts even in a good economy. In the middle of a
deep recession, it causes particular harm. Almost one in 10
Americans lack work, and unemployment has risen even more for
unskilled workers. Nearly one in four teenagers looking for work
cannot find it, and more than one in seven adults without a
high-school diploma lack jobs. Less skilled workers usually have
higher unemployment rates than their more skilled peers, but not
this much higher. Congress shouldn't do this in the middle of a
deep recession -- especially since it will stall the eventual
recovery. Unemployment has risen so quickly because business
investment has dropped sharply, and with it new job creation.
Companies that are not investing or expanding do not need to hire
more employees. Consequently workers who lose their jobs have much
greater difficulty finding new ones.
Unemployment will not fall until businesses resume investing in
new enterprises. Ask yourself: Will raising the minimum wage
encourage or discourage such investing? Will it encourage or
discourage entrepreneurs from starting new small businesses?
Raising the minimum wage now will help keep unemployment among
unskilled workers high.
This creates a long-term problem for them. Few Americans work
for the minimum wage very long. They are entry-level jobs that
offer inexperienced workers on-the-job training in essential work
skills: interacting with customers, co-operating with co-workers,
and accepting direction from the boss. As minimum-wage workers
become more productive, they earn higher wages. Two-thirds of
minimum wage workers earn a raise within a year. A higher minimum
wage doesn't just price some unskilled workers out of a job today.
It prevents them from gaining the skills that would allow them to
earn more in the future. Research shows that higher minimum wages
reduce worker's earnings a decade later. Minimum-wage jobs are more
valuable for the experience they offer than the low wages they
Good intentions aside, minimum-wage supporters cut off this
bottom rung of many workers' career ladders.
Policy-makers can argue whether trading higher wages for some
against lost jobs for others makes sense in normal times. But even
minimum-wage supporters should recognize that the American economy
cannot afford to lose more jobs right now. Congress should put off
this final minimum wage increase until unemployment among the most
affected workers falls back to average levels. Now more than ever,
small-business owners shouldn't have to worry about who they will
lay off, and whose hours they will cut, in order to make it through
Sherk is the Bradley fellow in labor policy at The Heritage
First Appeared in the Tallahassee Democrat
Imagine a small-business owner trying to survive the recession. What would he do if hiring workers suddenly became more expensive? What would you do? This is not a hypothetical question. The federal minimum wage automatically increased from $6.55 to $7.25 an hour on July 24 -- the last part of an increase Congress passed two years ago.
Research Fellow, Labor Economics
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