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July 27, 2009

Minimum Wage, Maximum Trouble

By

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.

Few small businesses, though, have the profits to pay higher wages.

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 slips.

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 percent.

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 pay.

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 the recession.

James Sherk is the Bradley fellow in labor policy at The Heritage Foundation.

First Appeared in the Tallahassee Democrat

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