Who Pays for the Minimum Wage?

When a business experiences increasing inventories, raising prices is the last thing it should do to resolve the problem. The same principle applies to labor. When a state has a surplus of unemployed workers, raising the price of labor simply causes firms to hire fewer workers. Consequently, unemployment increases.

Yet a coalition headed by labor unions and ACORN (Association of Community Organizations for Reform Now) wishes to impose this exact fate on Michigan’s least skilled workforce. Despite the fact that our state is tied for the second highest unemployment rate in the nation, this coalition is soliciting petitions for a November ballot initiative that would immediately increase the minimum wage to $6.85 per hour, and increase it by the rate of inflation each year thereafter.

It now appears that the state Legislature will respond to this proposed amendment to the Michigan Constitution with a minimum wage increase of its own.

Who is most affected by a minimum wage increase and how does it affect them? To prove that an increase in the minimum wage is necessary to lift the working poor out of poverty, proponents invariably trot out a single mother struggling to make ends meet working at a minimum wage job. But is this worker really representative of the 2.7 percent of all hourly paid workers nationwide who earn the minimum wage or less?

According to the U.S. Bureau of Labor Statistics, in 2004 about half of all hourly paid workers earning at or below the minimum wage in the U.S. were younger than 25; one-fourth fell between the ages of 16 and 19. For hourly paid workers over 25, only 1.7 percent earned a wage at or below the mandated minimum, with many of them retired and working to supplement Social Security or other retirement income. Furthermore, 60 percent of the workers who earn the minimum wage or less were employed in food service jobs such as waiters, waitresses and bartenders, workers whose wages are usually supplemented with tips.

Conclusion: Very few hourly paid workers in the United States earn a minimum wage or less, and those who do are predominantly younger workers gaining valuable experience, older workers supplementing retirement income or workers whose income is supplemented by tips.

Proponents argue that a minimum wage increase will have no noticeable effect on low-wage earners and lower-skilled employees. In other words, businesses will not respond to an increase in their labor costs by decreasing the number of workers they hire. If minimum wage advocates truly believe this, why stop at $6.85 per hour?

But businesses do respond like any rational consumer does when the price of something rises: they buy less because something else looks better. Whether in the short or the long run, businesses replace low-skilled labor with machines, reduce their non-wage compensation, reduce their overtime opportunities or simply do without.

More importantly, the best way to obtain a high-wage job is to first gain experience at a low-wage job. But if the bottom rung of the employment ladder is pulled from them, low-skilled, mostly teenage workers will have fewer opportunities to obtain higher-paying jobs in the future. Labor economists David Neumark and Olena Nizalova find that teenagers who grew up in states with minimum wage floors consistently higher than the federal minimum earned lower wages and worked fewer hours when they reached their
late twenties relative to individuals in other states with a consistently lower minimum wage.

A minimum wage mandate simply creates higher costs for what are invariably smaller, and the least profitable businesses. These businesses are guilty of nothing more than providing low-skilled individuals their best employment opportunities; nobody else offered them a job at a higher wage. A minimum wage is effectively an employment tax imposed on businesses willing to hire the least skilled. Consequently, it is a surefire way to destroy employment opportunities for the most vulnerable of our society.

Mark A. Steckbeck is an assistant professor of economics at Hillsdale College in Hillsdale, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich., are properly cited.