Minimum Wage, Minimum Opportunity

California and other states should fall for the myths behind calls to raise minimum wage

While federal minimum wage legislation has gone down to defeat in the Senate, the issue has continued to be a hot topic in many states, including California. Even Governor Schwarzenegger, who twice vetoed increases in the state’s minimum wage, proposed a 15 percent increase, from $6.75 an hour to $7.75 an hour, earlier this year in his State of the State Address. Petitions are being circulated for a similar measure for the November ballot, and efforts to increase state minimum wages are underway in neighboring Arizona and Nevada, as well as in several other states.

Polls repeatedly show that minimum wage increases are overwhelmingly popular. After all, who could be against improving the lot of poor people? Then again, surveys also show that the general public is incredibly ignorant of basic economic principles. Besides, if $7.75 an hour is a decent wage, isn’t $10 an hour better? Why not go all out and make it $50 an hour, or even $100 an hour? If only politicians would wave the magic wand, everyone in America, from teenagers working in coffee shops to entry-level construction workers and administrative assistants, would have six-figure salaries! Or would they?

In fact, the minimum wage has the perverse effect of actually hurting many of the very people it is intended to help. To some, this may seem counterintuitive. But let’s examine what actually happens when a minimum wage is imposed (or increased).

The first people affected are the business owners who have employees at or below the new minimum wage. Since they must now pay these employees more, their costs have just gone up. If you are a business owner, you have several choices in dealing with these higher costs: (1) you can offset them by reducing labor costs elsewhere, by either laying off employees or cutting their hours; (2) you can put off planned expansion of your business, including additional hiring; or (3) you can pass off your higher costs to consumers in the form of higher prices. Chances are, you will choose some combination of these.

This is just what happened after the last federal minimum wage increases of 1996—97. According to a survey of National Restaurant Association members, the last federal minimum wage increase led to the loss of 146,000 entry-level jobs. In addition, restaurants postponed adding another 106,000 positions, and 42 percent of respondents said they increased menu prices to cover the higher salaries. And that is just a sampling of businesses in one industry.

In 2004, the California legislature passed a measure to increase the minimum wage by one dollar an hour, just as Gov. Schwarzenegger and the Democrats in Sacramento are proposing now. The increase would have imposed an estimated $2 billion in costs on businesses statewide, and a study by the Employment Policies Institute estimated that it would have resulted in the loss of nearly 19,000 jobs the year after it was to be enacted. Schwarzenegger vetoed the legislation, but his resolve has apparently weakened. Elections tend to have that effect.

In addition to layoffs and foregone hirings, job seekers who lack experience or education are doubly hurt because the minimum wage makes it even more difficult for them to find a job. Those who lacks job skills, and whose labor is worth only $5 an hour, are prevented by law from offering their labor at this price to compete with other job seekers. Instead, they must now compete with people worth $5.50, $6.00, $6.50 an hour, all the way up to the minimum wage. They simply cannot compete. So instead of making $6.75 an hour, they are making zilch; they are unemployed. Five dollars an hour might not be much, but it’s better than nothing.

It is a myth that minimum-wage earners are typically heads of households working full time to feed their poor families on their meager incomes. In reality, most minimum-wage earners are part-time workers, young people new to the labor market, or other family members trying to provide some supplementary income. Moreover, they don’t stay minimum-wage earners for long. According to the Bureau of Labor Statistics, 63 percent of minimum-wage workers receive raises within their first year of employment.

Legislators can pass laws to impose a higher minimum wage on businesses, but they cannot abolish the laws of supply and demand. If they really want to help the working poor, they should remove regulatory barriers, like the minimum wage and occupational licensing laws, that prevent people from competing for jobs and seeking economic opportunity.

Adam B. Summers is a policy analyst at Reason Foundation. An archive of his work is here and Reason’s California research and commentary is here. This column was originally published by the California Libertarian Party’s Libertarian Perspective.