On July 24, the minimum wage increase Congress passed two years
ago will enter its final phase, increasing the cost of hiring
unskilled workers by 10 percent. Economic research demonstrates
that higher minimum wages come at the cost of higher unemployment
for low-skilled workers, but when Congress passed the minimum wage
increase unemployment was low. Now, in the middle of a deep
recession, unemployment has risen sharply for the least skilled
workers. Wage growth has flattened since the start of the year.
This minimum wage increase will artificially increase costs for
struggling businesses at exactly the wrong time. And as a result,
it will cost 300,000 teenagers and young adults their jobs.
Even advocates of a higher minimum wage should recognize that a
recession is the wrong time to enact such legislation. Congress
should postpone this minimum wage increase until the unemployment
rates of teenagers and unskilled adults return to historically
normal rates.
Minimum Wage Increase Passed in Strong
Economy
In 2007, Congress voted to increase the minimum wage, raising it
in three $0.70 increments from $5.15 to $7.25 an hour. The first
increase took place in July 2007, the second in July 2008, and the
final increase will take effect on July 24, 2009. This final
installment represents a 10 percent increase in the cost of hiring
minimum wage employees.
The economy seemed healthy at the time that Congress passed the
increase. Unemployment was below 5 percent. Since then the economy
has slipped into a deep recession and unemployment has doubled to
nearly 10 percent. Unemployment among the least skilled workers has
jumped by an even larger amount. Congress should reconsider this
minimum wage increase in light of the recession.
Minimum Wage Maximizes
Unemployment
Congress trades off higher minimum wages against increased
unemployment in all economic conditions because the true minimum
wage is zero. Businesses will not hire workers whose labor produces
less than the cost of hiring them. Employers will not pay $7.25 an
hour to hire a worker whose hourly efforts bring in only an
additional $7.00. Consequently, higher minimum wages price some
less-skilled workers out of work. While some workers will get a
raise, others will lose their jobs.
Most minimum wage research confirms this effect: Two-thirds of
recent minimum wage studies find that it reduces employment, with
the overwhelming majority of the most rigorous studies reaching
this conclusion.[1]
Although individual studies give different estimates, the
typical results from research suggest that a 10 percent increase in
the minimum wage will reduce employment among heavily affected
groups of workers by roughly 2 percent. One study found that each
10 percent increase would cost 1.2 percent to 1.7 percent of
low-income workers their jobs.[2] Another study found that in
the long term, a 10 percent increase in the minimum wage reduces
teenage employment by 2.7 percent.[3]
These estimates show that--under normal economic
circumstances--this scheduled increase will cost 300,000 teenagers
and young adults their jobs.[4]
Businesses Cannot Afford Higher Costs
Now
The current fiscal climate however, does not constituent
"normal" economic circumstances. The economy is in a sharp
recession, and most employers do not have the profits to pay higher
wages. Nor can they pass costs on to consumers by raising prices,
because Americans have become particularly budget conscious.[5]
Average wages did not grow in the last quarter.[6]
The minimum wage increase amounts to an artificial 10 percent
increase in the cost of hiring unskilled workers. Businesses always
respond to higher costs by economizing, but they are especially
sensitive to higher costs now. They will respond to this minimum
wage hike by trying to reduce their overall payroll costs as much
as possible. They will reduce hours and cut even more jobs than
would be expected in normal economic times. Wage growth has
flattened since the start of the year because employers cannot
afford to pay more.
Unemployment Spiking for Less Skilled
Workers
The government should not discourage businesses from hiring
unskilled workers right now. Whatever the debate over raising the
minimum wage in normal times, unskilled workers cannot afford
another 300,000 job losses now. Figure 1 shows the overall
unemployment rate and the unemployment rate for teenagers and
adults without a high school diploma and adults with a bachelor's
degree or higher. Unemployment has increased much more rapidly for
less skilled workers than for Americans as a whole.
The overall unemployment rate has risen 4.5 percentage points
since the start of the recession. However, the unemployment rate
for workers most affected by the minimum wage--teenagers and less
educated adults--has risen at a much faster rate. Unemployment
among teenagers has risen 6.4 percentage points to 22.7 percent.
The unemployment rate for adults without a high school diploma has
risen 7.8 percentage points to 15.3 percent. However, the
unemployment rate for workers with a bachelor's degree or
higher--almost none of whom earn the minimum wage--has only risen
by 2.5 percentage points. Less-skilled workers have borne the brunt
of job losses in the recession. Now is the wrong time to put
another 300,000 employees out of work.
First Rung on a Career Ladder
Putting 300,000 employees out of work would be particularly
painful because minimum wage jobs provide unskilled workers with
the opportunity to gain experience and become more productive. Few
workers start at the minimum wage and stay there for decades.
Rather, most minimum-wage jobs are entry-level positions and are
typically taken by low-skilled workers with little workforce
experience. Fully 40 percent of minimum-wage workers did not have a
job in the previous year.[7]
Minimum-wage jobs teach these workers valuable job skills, such
as how to interact with customers and co-workers or accept
direction from a boss--expertise that is difficult to learn without
actual on-the-job experience. Once workers have gained these
skills, they become more productive and earn higher wages.
Two-thirds of minimum wage workers earn a raise within a year.[8]
Minimum-wage jobs provide valuable work experience that leads to
higher-paying jobs--or that, during a recession, are needed to find
employment. The minimum wage increase will saw off the bottom rung
of the career ladder for many unskilled workers.
Postpone Minimum Wage Increase
Already facing weak demand and flattening wage growth,
businesses cannot afford an artificial 10 percent increase in their
labor costs. Even supporters of raising the minimum wage should
recognize that the government should not stimulate job losses in
the middle of a recession. Congress should postpone the minimum
wage increase until unemployment among the most affected workers
returns to normal levels.
James Sherk is Bradley Fellow in Labor Policy
in the Center for Data Analysis at The Heritage Foundation.