October 21, 2013

Raising the Minimum Wage Is No Free Lunch

Antony Davies

Senior Affiliated Scholar

James R. Harrigan

Summary

We are rarely subjected to debate over the minimum wage apart from election season, but America's painfully sluggish return to economic normalcy has politicians scrambling to do something to help the working class. While the minimum wage debate usually plays out at the federal level, there is now a grassroots push across the country to raise wages beyond the federally mandated $7.25 per hour. Unfortunately, success won't guarantee a happy ending for workers.

We are rarely subjected to debate over the minimum wage apart from election season, but America's painfully sluggish return to economic normalcy has politicians scrambling to do something to help the working class. While the minimum wage debate usually plays out at the federal level, there is now a grassroots push across the country to raise wages beyond the federally mandated $7.25 per hour. Unfortunately, success won't guarantee a happy ending for workers.

Washington state voters are considering Proposition 1, which would raise the minimum wage to $15 per hour for workers in and around SeaTac airport. In Minneapolis there is talk of raising the minimum wage to $9.50, and in Washington, D.C. to $11.50. New Jersey's minimum wage is likely to rise to $8.25. Ohio's will increase to $7.95 in January.

It comes as no surprise that politicians love talking about and raising the minimum wage. Few are ever shown the door for being perceived as a friend of the working class. But perception and reality are rarely the same thing in the political world.

According to the Bureau of Labor Statistics, fewer than 3 percent of U.S. workers earn the minimum wage. Those who do tend to be entry-level workers – people with little work history, less education and fewer skills than those who earn more. About one-third of minimum wage earners also earn tips, which, in many cases, actually puts them significantly above the minimum wage in reality, if not officially. In the end, the minimum wage affects very few workers.

So why should we care? For precisely the same reason that politicians do: because minimum wage workers are often the most disadvantaged among us. They cannot compete with the rest of the labor market in terms of skills, education or experience, and as a result they make less money.

For some of these people, an increase in the minimum wage is clearly a good thing – but not for everyone. This is the point that many politicians never fully grasp. Raising the minimum wage does not increase the value of the worker's labor. It increases the cost of the worker's labor. And as everyone knows, the more something costs, the less of it we buy. This is as true of workers in the labor market as it is of anything else.

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