More Evidence of Minimum Wage Fallacies

While it seems many are incessantly clamoring for an ever-increasing, government-mandated minimum wage, a recent article from Southwest Economy, a publication of the Federal Reserve Bank of Dallas, illustrates some of the fallacies of, and problems with, the minimum wage. Increasing the costs of doing business only forces entrepreneurs to try to pass along those costs to consumers and/or cut costs elsewhere by laying off workers, cutting workers’ hours, or postponing planned investments in their businesses. If we could simply legislate prosperity, why not just pass a law setting a minimum wage of $100 an hour. We’d all be rich! Here are some excerpts from the article:

Not setting a higher wage floor has its advantages. Low employment costs attracted businesses, encouraged entrepreneurship and spurred job growth in Texas, particularly on the low-skill end. Consumers benefited from lower prices, and some low-wage workers found jobs. At the same time, the policy likely enticed more low-wage workers to move to the state because of job opportunities that might not have existed under a high minimum wage policy. [. . .] Simple employment growth regressions for 1994ââ?¬â??2008, which control for business cycle effects, suggest that a $1 increase in the minimum wage on average reduces Texas payroll employment by about 15,500 jobs. The job losses are concentrated in the leisure and hospitality, manufacturing, and education and health industries. [. . .] The irony of minimum wage increases is that they may hurt the people they are designed to helpââ?¬â??namely the least-skilled workers. Employers that face mandated wage hikes often try to offset higher employment costs by hiring more-productive workers. [. . .] In the long run, higher minimum wages will raise employment costs, compelling students to get more education and businesses to invest more in workers through on-the-job training. Job growth may be slower as a result, however, and employment rates among low-skill workers could decline.

The federal minimum wage increased from $5.85 an hour to $6.55 in July, and will increase again to $7.25 in July 2009.