David R. Henderson  

From the Vault: The Negative Effects of the Minimum Wage

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Hobbesian Misanthropy in Th... Oppression is a Negative-Sum G...
But when the minimum wage law confronts the law of demand, the law of demand wins every time. And the real losers are the most marginal workers--the ones who will be out of a job.
This is a quote from David R. Henderson [me], "The Negative Effects of the Minimum Wage," National Center for Policy Analysis, Brief Analysis No. 550, May 4, 2006.

Why post it 7 years later? Because in a mass e-mail yesterday, NCPA President John C. Goodman highlighted it.

Here's another section:

Proponents of a higher minimum wage often argue that that it's difficult to support a family when the only breadwinner earns the current minimum wage. This claim is flawed, for three reasons.

First, for a minimum-wage increase to help a single breadwinner earn money for his or her family, the worker must have a job and keep it at this higher wage. A job at $5.15 an hour, the current federal minimum, is much better than no job at $6.00 an hour.

Second, increases in the minimum wage actually redistribute income among poor families by giving some higher wages and putting others out of work. A 1997 National Bureau of Economic Research study estimated that the federal minimum-wage hike of 1996 and 1997 actually increased the number of poor families by 4.5 percent.

Third, a relatively small percentage of the workers directly affected are the sole breadwinner in a family with children. A study by the Employment Policies Institute shows that in California, for example, only 20 percent of the workers who would have been directly affected by a proposed 2004 minimum-wage increase were supporting a family on a single, minimum-wage income. The other 80 percent were teenagers or adult children living with their parents, adults living alone, or dual earners in a married couple.


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COMMENTS (21 to date)
Arthur_500 writes:

The minimum wage argument continues simply because it FEELS so good to help the poor with higher wages. It seems counter-intuitive that forcing someone to pay more would actually hurt those intended to be the beneficiaries.

The ObamaCare fiasco seems to point this out more clearly than any other example. As the costs of having a full-time employee rise more employers are reducing their full-time staff.

As the requirements increase for insurance, lower priced alternatives are going away.

Possibly more people will begin to understand this basic fact and then will be able to understand why a forced minimum wage does little to help the poor.

Pajser writes:

Lets say increase is $5.00->$6.00 and 90% of employees keep their job after increase. If the same 10% people lost jobs forever, it is bad for them. However, if unemployment is evenly distributed then every worker is better off.

ThomasH writes:

"Why post it [] 7 years later?"

Apparently becasue the folks at Econolog think that the minimum wage is the single most damaging departure from unregulated markets and worst attack on human liberty in the United States in recent decades.

I wish it were!

Jon Murphy writes:

Hey, quick question:

Maybe this is just me being a dunder-head, but if this article was published in 1996, how are you citing a "A 1997 National Bureau of Economic Research study"?

Jon Murphy writes:
However, if unemployment is evenly distributed then every worker is better off.

Except for the 10% laid off. They are, in fact, worse off.

Charley Hooper writes:

@Pajser

Are you assuming that all these employees are being paid exactly the minimum wage and that 90% get moved to the $6.00 rate? If so, your example works because $540 is greater than $500 (assuming we start at 100 employees).

If that mechanism works so well, how can you explain the astronomical unemployment rates among teenagers and minorities? I don't have the current figure, but last year the California teenage unemployment rate was 36.2%. That tells me that many low-skilled workers have been priced out of a job.

Also, public policy needs to consider more than just a small fraction of the population. An increase in the minimum wage hurts business owners and consumers. Together they pay $540 for less work output than they got at $500. The overall result is clearly negative.

David R. Henderson writes:

@Jon Murphy,
Maybe this is just me being a dunder-head, but if this article was published in 1996, how are you citing a "A 1997 National Bureau of Economic Research study"?
I won’t name call--you did that to yourself, Jon. But 2006 comes well after 1997. :-)

David R. Henderson writes:

@Pajser,
Lets say increase is $5.00->$6.00 and 90% of employees keep their job after increase. If the same 10% people lost jobs forever, it is bad for them. However, if unemployment is evenly distributed then every worker is better off.
Two responses:
(1) It’s not even. The least skilled are the ones who will lose their jobs.
(2) Read the whole piece. For the ones who keep their jobs, how do you think employers will respond when they are forced to pay a higher wage than they and the employees had agreed on? Do you think there could be other components of compensation that are adjusted? And, if so, in which direction do you think those components will be adjusted?

Jon Murphy writes:

Thanks, Professor...I hate when I make mistakes like that. For whatever reason, I was reading that number as 2007!

I guess I am a dunder-head :-)

David Henderson Author Profile Page writes:

ThomasH, I notice that you tend to get upset when I address the minimum wage. This time, fortunately, your upset was a little more focused. The minimum wage is certainly NOT the most damaging departure from unregulated markets or the worst attack on human liberty in the United States in recent decades. I think policies that are contenders for those categories would be the drug war and restrictions on immigration.
But I’m open to new ideas. Which government assaults on liberty would YOU like to see addressed? I don’t promise to address them, but I would like to hear your views.

Pajser writes:
Murphy: Except for the 10% laid off. They are, in fact, worse off.
They are not fired (and others do not stay) for life. Once 90%·6 > 100%·5, the creative destruction (perhaps with help from the state) will distribute wins and losses "evenly enough."
Henderson: For the ones who keep their jobs, how do you think employers will respond...
Employers will try other ways to obtain the same profit and workers will tend to accept it. But it will be harder, otherwise other ways would be used already. Perhaps some of these are already regulated: working time, safety ...
Hooper: ... how can you explain the astronomical unemployment rates among teenagers and minorities?
Minimum wage probably contributes to unemployement; still, 90%·6 > 100%·5. Also, it is true that minimum wage redistributes (partly) from business owners and consumers to poor workers.


Jon Murphy writes:

Pajser, you are making so sense.

The people who are laid off, no matter for how long, are in fact worse off because of this. They were making $5, now they are making $0.

You're making an awful lot of unrealistic assumptions.

Brandon Berg writes:

IIRC, fewer than 10% are single parents supporting two children. So why does is this family type featured so prominently in left-wrong rhetoric about the minimum wage? Because that's how many children you need to assume to justify the claim that a full-time minimum-wage job won't put you above the poverty line.

Bostonian writes:

http://reason.com/blog/2013/11/12/most-americans-favor-raising-the-minimum
Most Americans Favor Raising the Minimum Wage, Unless it Costs Something
by Emily Ekins
Reason.com
November 12, 2013 9:12 am

"Gallup finds that three-fourths of Americans favor raising the federal minimum wage to $9 an hour, whereas 22 percent oppose such a proposal. This is similar to what the Reason-Rupe poll found earlier this year; however, support flips and 56 percent oppose if it caused employers to lay off workers. All policies come with a price and polling questions constantly phrased as benefits-only propositions will continue to overestimate support. Instead, questions should measure what Americans would be willing to give up in order to raise the federal minimum wage."

Dale Carville writes:

Hypothetical Scene: You manage a restaurant kitchen with ten employees. You announce to the workers there will be a vote.

"Two options: Either nine of you get a one dollar raise and one of you is laid off, or no one gets a raise and you can all remain. Now before the vote is taken Id like to introduce David Henderson, he's here to make the case that you MUST vote to forgo the raise, for the sake of the lowest skilled who will have to seek work elsewhere...."

Libertarians don't roll the tape this far. Once you've proved that the tradeoff of a raise means someone loses a job you close down the discussion.

In the real world that vote comes out 10-0 for the raise. Even the laid off one is happy to try his luck in a job market that's been extra-incentivized. Only on a blackboard does he have no hope because he isn't worth the wage. In his mind he has a shot. I've been that guy. In 1991 the minimum wage went up to 4.25. I was the newest guy with the least skills. I was happy for my co-workers and looked much more favorably upon a job market where any job i eventually landed would pay 20% more than what i had been making.

Whenever the minimum wage is being discussed it's always strange to see economic conservatives (who show no concern for low-wage workers the other 364 days of the year) suddenly find their inner social worker, one in possession of a paradoxical up-is-down form of social justice that says "more money for the poor hurts the poor".

"It's for your own good that your wages don't rise", you might say, if you ever took your argument to its supposed beneficiaries, the workers themselves. Why don't you?

Why doesn't the libertarian seek out minimum wage workers, teach them Econ 101 on the back of a paper napkin and then encourage them make their own case, to the public, to the meddling do-gooders, against the minimum wage?

If you only speak amongst eachother, never reaching out to the people whose best interests you have in mind, decade after decade, as one misguided catastrophic wage increase after another wreaks its barely detectable disemployment effect on these folks who are maybe one Econ 101 lesson away from understanding what you know, can you really be said to care?

After I saw David Freidman speak on the wicked effects of such policies, I asked him "If they are bedeviled by harms that paradoxically appear to be help, do you go out and speak to the poor, to warn them, to explain these things to them?"
His response: "I speak to poor people often, but not on these subjects..."

If libertarians aren't prepared to take their message to the victims of the very policies they've dedicated their lives to eradicating, one must wonder if they can be taken at their word, can these arguments really be sincere, or is it all just a rhetorical strategy that allows you to turn the tables, take the high ground, and stick it to those meddling do-gooders who regularly frame you as greedy and merciless pigs?

Charley Hooper writes:

Dale Carville,

Whenever the minimum wage is being discussed it's always strange to see economic conservatives (who show no concern for low-wage workers the other 364 days of the year) suddenly find their inner social worker...

Libertarians show concern for low-wage workers 365 days a year. The best thing to help everyone, including low-wage workers, is freedom. The biggest mistake is to think that using force to favor a particular group in the short-term helps society, and even that particular group, in the long-run.

David R. Henderson writes:

@Dale Carville,
Whenever the minimum wage is being discussed it's always strange to see economic conservatives (who show no concern for low-wage workers the other 364 days of the year) suddenly find their inner social worker, one in possession of a paradoxical up-is-down form of social justice that says "more money for the poor hurts the poor".
Of course, as you probably know if you read this blog, I’m not an economic conservative. But one way we libertarians shows, not just our “inner social worker,” but also our inner anti-racist, is by opposing the minimum wage. Early support for the minimum wage was profoundly racist. I’ll point you to a JFK statement while he was a Senator in the late 1950s.
Also, one way you probably know, if you follow this blog, that we, and especially Bryan, show our concern for the poor is with our opposition to restrictions on immigration. That would, of course, help mainly help poor people in other countries. Will you join us, Dale, in opposing those--all 365 days of the year? Another way we, and especially I, show our concern for the poor is by opposing the drug war. Will you join me in opposing that?

john hare writes:

@Dale Carville,

Your scenario is accurate as far as it goes. May I suggest the same type vote to 10 unemployed people. If we keep minimum wage the same, one or two of you will get a job in the next couple of months. If we lower it, half of you will get a job in the next couple of months.

When I talk to minimum wage workers, they respond as you suggest. When I talk to unemployed workers, I get a different response.

Caveat, in my company one $15.00 an hour employee is considered preferable to two employees at $7.50 each. One has a job worth focusing on while the two can go elsewhere anytime for the same money.

Dale Carville writes:

"But one way we libertarians show, not just our “inner social worker,” but also our inner anti-racist, is by opposing the minimum wage."

Yes, and Hitler was a vegetarian, Republicans freed the slaves, and the Baltimore Ravens were once the Cleveland Browns.

I'm chiefly interested in why you and yours can't (or don't attempt to) find any young unemployed people to make these arguments on their own behalf.

Wages are one of several points where workers and business owners have opposing interests. The fact that your argument is made exclusively by businessmen and their subsidizees, while claiming to be delivering it on behalf of workers, is a lurid crock of sh-t that's been going on for a hundred years or more.

I'm reminded of this January effort by Bryan Caplan to crowdsource an anti-minimum wage argument that might appeal to "soft-hearted people": http://econlog.econlib.org/archives/2013/01/make_the_feelin.html

After sixty fails the whole effort is declared a bust. If we were dealing with an argument that had an actual constituency the answer would be simple. Find a number of young unemployed people who share this blog's point of view and have them tell their story. Again, I ask, has that ever been attempted? If not, why not?

I invite you, Mr. Caplan (and Mr. Hare, for that matter, who i doubt has had sincere conversations with unemployed people who desire to work for less) to come down to Tennessee and spread the gospel of lower wages to the unemployed men and women that come to the First Presbyterian for lunch everyday.

Until libertarians come out to speak to, and make a good faith effort to persuade, those whose freedom they claim to believe is constricted by state and federal minimum wage policies, these perennial assertions will remain the most hapless and transparently insincere of the libertarian's arsenal of complaints.

Phil writes:

David wrote:

Early support for the minimum wage was profoundly racist.

It was also profoundly sexist. The first minimum wage laws to be upheld by the Supreme Court were designed to protect women. From Muller v. Oregon 208 U.S. 412 (1908):

"That woman's physical structure and the performance of maternal functions place her at a disadvantage in the struggle for subsistence is obvious. This is especially true when the burdens of motherhood are upon her. Even when they are not, by abundant testimony of the medical fraternity continuance for a long time on her feet at work, repeating this from day to day, tends to injurious effects upon the body, and as healthy mothers are essential to vigorous offspring, the physical well-being of woman becomes an object of public interest and care in order to preserve the strength and vigor of the race."
Charley Hooper writes:

@Dale Carville,

You are confused in certain areas. First, you confuse economics with advocacy. Second, you are assuming that everyone can understand economics as well as economists. Third, you assume that people will put their self-interests aside when shown the overall view of a policy.

You want us to go to Tennessee and spread the gospel. We are talking about economics here, not advocacy or protesting or community organizing. If we had infinite time, yes, we would like to do what you suggest, but our opportunity costs are too high.

You are assuming that minimum wage employees can understand the nuances of this issue. I’ve been in economics classes with many college students who didn’t get it. There are “highly educated” members of society who don’t get it. But that doesn’t mean it’s wrong. If minimum wage employees could understand the nuances of the minimum wage law, they could be employed as economics and earn far more.

There are multiple constituencies here and some will win while others will lose. The minimum wage law will cause some to lose their job or not get a job in the first place. There are some--employers--who will need to pay a higher wage and others--consumers--who will also pay more for less. Then there are the employees who will make a higher wage, but might have other costs imposed upon on them. Overall, the minimum wage law is clearly a loss for society at large. I don’t fool myself to think that the groups that benefit from the minimum wage law will magically put aside their self-interests to support a smarter policy, especially one that they might not understand.

This issue is all about freedom and opportunity. The freedom to make contracts, work at a job, earn money, gain valuable experiences, learn about serving others and working as a team, build resumes, build confidence, and move onto better jobs. The people who particularly need this kind of freedom and opportunity are the young, the poor, those with weak skills, the under-educated, minorities, and the downtrodden.

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