Why the minimum wage should not be increased

by R. Morris Coats

Bayou Business Review, 12/28/98 p. 27

The President remains embroiled in his own independent-council snare. As I write, the House of Representatives has voted to impeach the President despite his curiously timed attack on Iraq. I don't wish to kick a man when he's down, and I won't, but Clinton's recent proposal to raise the minimum wage ever higher deserves a swift, hard boot.

The proponents of increasing the minimum wage note the obvious--a person cannot raise a family on minimum-wage pay. To that, I must respond the way that children these days (including my own) often respond to the obvious, with that painfully annoying "No Duhhh!"

What Clinton and union supporters of an increased minimum wage fail to tell people is that the majority of minimum-wage earners live in families with above average incomes. Increases in the minimum wage go to richer families more than to poorer ones, because most minimum-wage earners live with their parents or are second-income earners.

There are quite a few other unintended consequences of raising the minimum wage that the proponents fail to mention. First, while it is true that a higher minimum wage entices people off of welfare rolls, it is also true that employers, at the same time, cut their hiring of minimum-wage workers. Certain tasks will go unfilled, such as late-night hours at the local supermarket or fast food outlet. Alternatively employers substitute higher skilled $9/hr. workers for 2 unskilled workers whose wages have just been pushed above $5/hr. by the last minimum wage hike. It is no wonder, then, why labor unions, which represent almost no minimum wage workers, are such big proponents of higher minimum wages.

The net effect of more people seeking minimum-wage employment and fewer openings for minimum-wage workers is to make it harder for these workers to find jobs, especially first jobs. In other words, raising the minimum wage increases the unemployment rate among vulnerable first-time job seekers, making experience difficult to obtain.

Not only do employers cut back on hiring of unskilled, undereducated and inexperienced workers, but they also cut back on on-the-job training, as training costs go up if they have to pay minimum wage while training workers. This is somewhat alleviated with allowances for sub-minimum training wages and subsidies to employers who provide training. But such subsidies and sub-minimum training wage programs invite abuse. The bottom line here is to make it difficult for workers to gain skills on the job.

Another unintended consequence of minimum wage increases is that high school students over 16 who were on the verge of quitting school to seek minimum wage work, but hadn't made the choice yet, get enticed to quit with a higher minimum wage. The result, of course, is to increase the number of people who have little hope of obtaining a job better than one that pays minimum wage.

Perhaps the most socially damaging unintended consequence of an increase in the minimum wages is on the hiring of racial minorities. We would be "in denial" were we to assert that racial prejudices among employers have disappeared. But when labor markets are balanced, that is, when wages are at levels that yield the same number of job openings as qualified job applicants at that wage, for an employer to discriminate along racial lines the employer either has to leave positions unfilled or has to raise wages further to fill the positions. Keep in mind that the reason the employer has a position to fill is that by filling it, the employer expects to increase her profits.

Racial discrimination in hiring, for instance, turning down qualified African-American workers, is a self-imposed limitation on an employer's labor supply. A smaller labor supply forces the employer to pay more for workers, adding to the costs of doing business. If that employer is competing against others who have no such self-imposed limit on the workers they hire, competition drives the racially discriminating employers from the market. When a high minimum wage gets passed, one that raises the number of job seekers above the level of job openings, employers who have racially discriminating predilections now can discriminate against those of certain racial groups at no cost.

It is time to see any proposal for a higher minimum wage for what it is, the equivalent of a tariff on non-unionized, unskilled labor. Such policies favor the skilled workers, but they actually make it more difficult for the poorest among us to get ahead. To support higher a minimum wage is to tell our young, unskilled workers, especially those who are members of racial minorities, that they will have to face additional obstacles if they wish to raise a family. Is this the message we wish to send?