Following the money government spends isn't easy in Hawaii, according to a new report - Photo: Emily Metcalf
Photo: Emily Metcalf

In his State of the Union address Tuesday, President Obama said the national minimum wage should be raised to $9 per hour. Hey, why not $500 per hour? Wouldn’t an even higher minimum wage raise standards of living even more?

The economy doesn’t work that way. No worker gets a raise just because the government sets a higher minimum. He gets a raise if his employer thinks his labor is worth the higher wage. If his labor isn’t worth the legal minimum wage, then the employer is going to pay him nothing, because he won’t employ the worker. The real minimum wage is zero. The higher the legal minimum wage, the larger the number of people who can’t be employed legally at a wage employers are willing to pay.

In a Cato paper published last year, Mark Wilson reports that most empirical research over the last 70 years confirms that minimum wage increases reduce employment among low-wage, low-skilled workers. Wilson writes:

Evidence of employment loss has been found since the earliest implementation of the minimum wage. The U.S. Department of Labor’s own assessment of the first 25-cent minimum wage in 1938 found that it resulted in job losses for 30,000 to 50,000 workers, or 10 to 13 percent of the 300,000 covered workers who previously earned below the new wage floor. […]

Following passage of the federal minimum wage in 1938, economists began to accumulate statistical evidence on the effects. Much of the research has indicated that increases in the minimum wage have adverse effects on the employment opportunities of low-skilled workers.And across the country, the greatest adverse impact will generally occur in the poorer and lower-wage regions. In those regions, more workers and businesses are affected by the mandated wage, and businesses have to take more dramatic steps to adjust to the higher costs.

As an example, with the original 1938 imposition of the minimum wage, the lower-income U.S. territory of Puerto Rico was severely affected. An estimated 120,000 workers in Puerto Rico lost their jobs within the first year of implementation of the new 25-cent minimum wage, and the island’s unemployment rate soared to nearly 50 percent.

Similar damaging effects were observed on American Samoa from minimum wage increases imposed between 2007 and 2009. Indeed, the effects were so pronounced on the island’s economy that President Obama signed into law a bill postponing the minimum wage increases scheduled for 2010 and 2011. [Internal citations omitted.] [“The Negative Effects of Minimum Wage Laws,” by Mark Wilson, Cato Institute, June 21, 2012]

But minimum wages do help some workers—union workers. As James Sherk explains, most companies can substitute high-wage/high-skill labor for low-wage/low-skill labor. Higher minimum wages tend to reduce the competition between those two groups of workers, leading to even higher wages for the high-wage/high-skill workers—who tend to be unionized workers. Sherk writes:

This is not just a theoretical argument. Researchers have found that this is what happens when the minimum wage rises. Using data from government surveys, economists at the Federal Reserve and the University of California-Irvine examined how past increases in the minimum wage affected the earnings of both low-income and unionized workers.

They found that increasing the minimum wage had few statistically significant effects for unionized workers who earn well above the minimum wage. For example, United Auto Workers members in Detroit who earn $75 an hour do not usually perform work that could be done by any number of unskilled workers. But the minimum wage significantly increases the earnings of union members who compete with low-skilled workers for jobs. The researchers estimated that if the minimum wage were hiked 40 percent, unionized workers who earn between the minimum wage and twice the minimum wage could see their earnings rise between 20 and 40 percent. The evidence shows that a higher minimum wage unambiguously helps union members. [Internal citations omitted.] [“Union Members, Not Minimum-Wage Earners, Benefit When the Minimum Wage Rises,” by James Sherk, The Heritage Foundation, February 7, 2007]

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