The Minimum Wage Is Hardest on the Poor

Any way you slice it, increasing the minimum wage in Michigan to $7.15 an hour, a proposal that may appear in a statewide referendum next year, is likely to make it more difficult for the working poor to find jobs. Raising the minimum wage will either draw new workers into the workforce, reduce the number of unskilled workers, or both. Whatever happens — even in a fluky situation where the number of jobs appears to increase — those who most need the work will have a harder time finding it.

The "classical" model of the effect of minimum wages on the market for unskilled labor is fairly familiar: increases in the minimum wage draw more potential workers into the labor pool, but at the same time employers will reduce their use of unskilled labor — perhaps by hiring more skilled workers, or using more machinery, or even reducing the level of service that they offer customers. The result is fewer jobs available for unskilled workers.

A strong economy can mask the job-eliminating effects of a minimum wage increase. For instance, the rate of employment for teenagers nationwide dropped sharply when the minimum wage was raised, in two stages, from $3.35 to $4.25 an hour in 1990 and ’91, but when the minimum wage was increased again, to the current $5.15 in 1996 and ’97, the employment rate for teenagers held steady.[1] The difference was that the latter minimum wage hike occurred in the midst of an economic boom.

In recent years this common-sense understanding has come under question. While most economists still support this traditional view of the minimum wage, others have argued that the loss of jobs is minimal and a few have even argued that minimum wage hikes increase the number of unskilled jobs.

This controversy led Duke economists Peter Arcidiacono and Thomas Ahn to create what they call the "search" model of minimum wages, in which the number of jobs available to unskilled workers is not determined solely by the willingness and ability of employers to pay a given wage, but is also affected by the ability of employers and employees to "match-up". It is conceivable that, with an increased minimum wage drawing job-hunters out of the woodwork, more job hunters will find "matches," leading to an increase in jobs. But there is a catch: the new job hunters will not be members of poor families; they are much more likely to be teenagers from middle-class and well-to-do families. So even if the number of unskilled jobs increases, the poor are likely to find themselves squeezed out of them.

How does this happen? Arcidiacono and Ahn note that these new workers will tend to have a higher "reserve" wage than those who found work under the lower minimum wage — in other words, they were willing to forego working when the wage was lower. These people are likely to have been reasonably well off without working — otherwise they would have probably been in the labor force already — so your new work force will have more well-off teenagers, and fewer members of poor families.

This matches the results of a study of minority and inner city teenagers during the early 1990’s, which found that increases in the minimum wage increased the likelihood that they would be idle (neither working nor attending school) while white teenagers and those living outside of central cities were more likely to either be in school or working after a minimum wage increase.

Whether it happens because a higher minimum wage reduces the overall number of unskilled jobs, or because the higher wage attracts teenagers from well-off families who crowd out poorer job-seekers, the effect is the same — an increased minimum wage makes work much more difficult to find for members of poor families.

And lawmakers should not underestimate the value of these jobs to low-income families, value which goes well beyond the admittedly modest wages; low wage work is often a pathway out of poverty. Experience and reputation earned in entry-level jobs can and frequently does lead to more lucrative jobs. Low-wage earners frequently see their wages rise quickly: full-time workers hired at the minimum wage received a median pay increase of 10.4 percent within their first year, which shows that low-wage employees are able to work through minimum wage jobs into better ones.

The people of Michigan would be wise to allow this process to continue. While most supporters of minimum wage increases probably mean well, the truly humanitarian response is to leave the minimum wage alone, and leave as many jobs as possible for poor, unskilled workers who wish to join the labor force and begin the process of working their way out of poverty.

Paul Kersey is a former labor research associate with the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.

[1] Wilson, Who is Paid the Minimum Wage and Who Would Be Affected by a $1.50 per Hour Increase? Heritage Foundation, June 28, 2001