The True Cost of Minimum Wage
Note: This commentary has appeared in the Lancaster New Era, the Bloomsburg Press-Enterprise, and The Patriot News.
Across the country, interest groups are pushing to increase the mandated minimum wage to $10 or $15 per hour, ostensibly to help low-income workers at fast food chains and big box stores. But if a higher minimum wage benefits workers, why not push it to $20 or $30 or even higher? Because experience shows minimum wage increases actually hurt the very workers they aim to help—particularly young minorities.
Joe Olivo can attest to that reality. As a second generation owner of a small printing business in New Jersey, he employs workers who start at minimum wage. New Jersey voters recently approved a one dollar increase in the minimum wage that went into effect January 1, raising it to $8.25 per hour.
In a recent phone interview, Olivo told the Commonwealth Foundation that many people don’t understand the cumulative effect each small increase has on economic growth and the unemployment rate. Any increase impacts his business—he’s even had to lay off employees because of increasing labor costs. “It’s not just those people getting minimum wage that get a raise,” Olivo said, “it affects my whole wage bracket.”
The sad truth is, the minimum wage is one of the best ways to put low-skilled workers out of a job.
Today, minimum wage workers are mostly teens, and the jobless rate for 16 to 19-year-olds has steadily increased as the minimum wage has risen. Further increases will only continue that trend.
Even more concerning is the impact on young minorities. In states like Pennsylvania, which saw minimum wage hikes from 2007 to 2009, more black young adults lost their jobs as a direct result of minimum wage increases than the recession. The result? According to the Bureau of Labor Statistics, black youth unemployment sits at an astonishing 36 percent nationwide—double the rate of white youths and nearly 30 points higher than the general unemployment rate.
Raising the minimum wage will price more young people out of entry-level jobs that help them gain experience—effectively sawing off the first rung of the ladder to their prosperity.
As an anti-poverty program, the minimum wage fails miserably, because few breadwinners actually earn it. Only 10.5 percent of an increased minimum wage goes to poor, working families. In fact, fewer workers overall are making minimum wage. In 1979, 8 percent of workers made the minimum wage; by 2011 it had fallen to just 3 percent.
In essence, the minimum wage feeds the cycle of poverty by forcing low-skilled workers out of jobs. A better approach to combating the major cause of poverty—unemployment—would be reducing the cost of hiring through lowering taxes on employers and enacting health care reform that truly brings costs down.
Olivo’s small business serves as a good example. Asked about a $15 minimum wage, he responded, “I can’t even imagine. I couldn’t make that up in raising prices. It would lead to layoffs and me looking at using more automation, at least I can control that cost.”
Why layoffs? Businesses don’t turn a profit every year. Mandated cost increases force them to find places to cut expenses or raise prices for consumers.
So who gains from raising the minimum wage? Politicians and labor unions. Minimum wage increases tip the balance in favor of higher-skilled—and higher-wage—unionized workers by raising the floor from which they negotiate compensation.
Politicians, on the other hand, can act like they did something for the little guy while receiving union support—which is no small matter. In 2012 alone, government union SEIU Local 668 spent more than $200,000 of its members’ dues on political activity and lobbying.
For Joe Olivo and entrepreneurs everywhere, a higher minimum wage would be one more government-imposed hurdle to overcome. “It’s not just the increase in minimum wage, but health care costs are going up, taxes are going up—it’s just one more thing that makes it harder to do business.”
Lawmakers should be making it easier for small businesses to hire new workers seeking to climb the ladder of success—not adding another entry to the laundry list of obstacles to growth and prosperity.
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Elizabeth Stelle and John R. Bouder are policy analysts at the Commonwealth Foundation (CommonwealthFoundation.org), Pennsylvania’s free-market think tank.