NS3040 Winter Term 2015 The Minimum Wage. Minimum Wage I David Henderson, The Negative Effects of the Minimum Wage, NCPA Idea House, May 4, 2006 Main.

NS3040 Winter Term 2015

The Minimum Wage

Minimum Wage I

• David Henderson, The Negative Effects of the Minimum Wage, NCPA Idea House, May 4, 2006

Main ideas

• Minimum wage law while popular politically and with many groups confront the law of demand

• The law of demand will win every time

• The losers are the most marginal workers – the ones who will be out of a job

• If intent of public policy is to reduce poverty or provide a minimum household standard of living – much more effective and efficient means.

• Minimum wage the most inefficient in meeting poverty/living standard goals.

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Minimum Wage II

• Creates Unemployment

• In a free market wage reflects the willingness of workers to work (supply) and

• The willingness of employers to hire them (demand)

• Worker productivity is the main determinant of what employers are willing to pay.

• Most working people are not directly affected by the minimum wage

• Their productivity and hence pay is already well above it

• Law of demand says at higher prices less is demanded

• Because a legislated increase in the price of labor does not increase workers’ productivity some will lose their jobs

• Which ones – those who are the least productive

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Minimum Wage III

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Minimum Wage IV

Impact-Employment Effects

•Minimum wage mostly harms teenagers and young adults – typically have little work experience and take jobs that require fewer skills

•Empirically

•Comprehensive survey of minimum wage studies found that a 10 percent increase in minimum wages reduces employment of young workers by 1% to 2%.

•Gov Schwarzenegger’s proposed 15% increase in state minimum wage would destroy about 35,000 to 70,000 unskilled jobs – putting 1.5 to 3% young Californians out of work

• Overall proposed minimum wage increase in California would eliminate about 70,000 to 140,000 jobs

• A 15% increase nationwide would destroy about 290,000 to 590,000 young people jobs and 400,000 to 800,000 jobs overall 5

Minimum Wage VImpact Encourages Teenagers to Drop Out

•Studies have found minimum wage entices some teenager students to dropout of school

• Some newer dropouts take jobs from the less educated and lower productivity teens who have already dropped out

• Failure to find work early in life harms young people’s long run earnings – lower lifetime earnings

Hurts the Poor

•Minimum wage actually redistributes income among poor families giving some higher wages and putting others out of work

• One (1997) study estimated that the federal minimum wage hike of 1996 and 1997 actually increased number of poor families by 4.5%

• Small percentage of workers directly affected are sole breadwinner of family – around 20% 6

Minimum Wage VI

Reduces Other Job Benefits

•Often employers respond by cutting benefits and/or training

Reduces Competition

•Key proponents are labor unions

•Union members make well above minimum wage

•By getting minimum wage increased they reduce competition from lower paid workers

•Politicians in North like minimum wages because it reduces competition from the south

Fairness Issue – Falls on Employer

•Cost is borne by employers who created the jobs.

•If national policy, costs should be shared broadly

Bottom Line – Inefficient way to deal with problem – other alternatives cheaper and more effective 7

Minimum Wage VII

• David Newmark, Who Really Gets the Minimum Wage, Wall Street Journal, July 6, 2014

• Main Points

• Looks at impact of the President’s $10.10 target minimum wage proposal.

• Analysis suggests many more low-wage workers will get a raise than will lose their jobs

• But that argument is about low wage workers, not low income families

• Minimum wages are ineffective at helping poor families because such a small share of the benefits flow to them.

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Minimum Wage VIII

• Census figures show only a weak relationship between being a low-wage worker and being poor

• Many low wage workers are in higher income families – workers who are not the primary breadwinners and often contribute small share of family income

• Some workers in poor families earn higher wages but don’t work enough hours

• About half of poor families have no workers – minimum wage does no good

• Situation has changed over time

• In 1939 (right after federal minimum wage established) 85% of low wage workers were in poor families

• Then minimum wage targeted poor families as well.

• Today this figure has fallen to around 17%

• The same minimum wage policy today is much less effective than when it was first designed

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Minimum Wage IX• As of early 2000s 34% of low wage workers were in

families far from poor with incomes more than three times the poverty line

• New study – if were to raise the minimum wage to $10.10 nationally:

• 18% of the benefits (holding employment fixed) would go to poor families

• 29% would go to families wit incomes three times the poverty line or higher

• For a minimum wage $15 an hour

• Share of benefits going to poor families declines to 12%

• Share to families more that three times poverty line increases to 36%

• Does not account for the sizeable employment losses that would likely result from such a large minimum wage increase 10

Minimum Wage X

• Evidence suggests should consider alternative polices

• Earned Income Tax Credit (EITC) directly targets low-income families, rather than low wage workers

• The United States federal earned income tax credit or earned income credit (EITC or EIC):

• Is a refundable tax credit for low to moderate income working individuals and couples—particularly those with children.

• The amount of EITC benefit depends on a recipient's income and number of children.

• Studies show the higher EITC increases incomes of poor families, and by encouraging work – leads to more low income families earning way out of poverty

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Minimum Wage XI

• If a more equitable income distribution is also a policy goal, the EITC has the advantage of falling disproportionately on those with the highest incomes

• Rising minimum wage is ineffective on that score because it is paid by those who hire low wage labor

• Some employers of low wage labor may be rich, but many are not.

• Bottom Line: Desire to help poor and low income families is understandable. But increasing the minimum wage is a misguided way to do it.

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