Correct ideas are not always popular ones. I freely admit that most North Carolinians favor increasing the legal minimum wage, through either congressional or legislative action. Supporters believe that it will help workers rise out of poverty, and that the cost will be borne primarily by business owners or consumers.
They are wrong about this. Government-mandated minimum wages nearly always boost the incomes of some workers at the expense of other workers losing their jobs. Still, I can understand why so many people support the idea of raising the minimum wage. It seems like it ought to work. But in practice, its consequences diverge wildly from its intentions.
To suggest that artificially raising the price of something isn’t likely to reduce purchases of it is like suggesting that sticking a pin in a balloon isn’t likely to pop it. Sure, you can devise a gag balloon or magic trick that performs differently, that allows you to poke at it with reckless abandon and still keep the balloon intact. To cite such an exception in an attempt to disprove the basic laws of physics, however, would convince no one.
Similarly, the existence of a few studies suggesting little to no effect of minimum wages does not constitute proof that basic economic principles are absent from the labor market. Two of the nation’s most-respected labor economists, the University of California-Irvine’s David Newmark and the Federal Reserve’s William Wascher, have spent years pointing this out in a series of academic studies and reviews. They’ve demonstrated that the outlying studies on the minimum wage are often methodologically flawed or based on errant data. They’ve also demonstrated that the vast majority of rigorous studies find a negative effect of minimum wages on employment, particularly among the lowest-skilled workers.
Newmark and Wascher’s 2007 paper in Foundations and Trends in Microeconomics, for example, concluded that “the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect.” Just this year, they published a new study in the Industrial and Labor Relations Review confirming that minimum-wage hikes still result in job losses for teens and others just entering the labor market for the first time.
Thanks to two other economists, Andrew Hanson of Marquette University and Zackary Hawley of Texas Christian, we now have a reasonable estimate of how President Obama’s proposed minimum-wage hike would affect North Carolina’s labor market. Their paper, just published in the Journal of Labor Research, takes into consideration differences in preexisting wage rates and living costs across the states. It shows that raising the federal minimum wage from $7.25 an hour to $10.10 an hour, as the administration and Democrats in Congress want to do, would eliminate as many as 1.5 million jobs nationwide.
Here in North Carolina, Hanson and Hawley estimate a low-bound job loss of 7,312 and a high-bound loss of 46,100 from their main model. Alternative models also produce sizable effects, some nearing 50,000 lost jobs.
Fairness requires me to point out, however, other workers would gain from the policy. They’d get more pay. Minimum wages act as a kind of income redistribution — kicking some workers to the curb in order to pay other workers more. But the welfare gains aren’t apportioned in a way that left-wing supporters of the policy ought to like. Middle-income whites boosting their discretionary incomes are disproportionately among those who gain. Lower-income black and Hispanic youngsters who may well need their jobs to meet their family’s basic needs are disproportionately among those who lose.
The best way to boost the wages of low-skilled workers is to boost the productivity of their labor. Better tools and equipment are one answer. Better education and training are another. Also keep in mind that on-the-job training can’t happen unless someone is, indeed, on the job. So making it attractive for entrepreneurs to start new firms and businesses to hire more workers will help, too.
What doesn’t help is government jabbing away with its needle — and then pretending not to hear the pop.
John Hood is chairman of the John Locke Foundation.