Raising the Minimum Wage: Hurting Those Who Need Help the Most

By Dick Clark

On November 4th, Nebraska's voters will have an opportunity to decide whether to increase the state's minimum wage rate. But the increase as proposed will have detrimental, unintended consequences for the vulnerable citizens it aims to help. Click here to download this report in PDF format.

 

Introduction

 

On January 1, 2014, minimum wages were increased in thirteen states. In his 2013 State of the Union address, President Barack Obama called for an increase in the federal minimum wage to $10.10 per hour.[1] Nebraska voters will be asked to weigh in on the minimum wage this coming November. Petitions submitted on July 3[2] were verified by the Secretary of State as having met constitutional requirements,[3] and voters will be presented with the question of whether or not to increase the state’s minimum wage from $7.25, the current federal minimum wage, to $8.00 in 2015 and then to $9.00 at the beginning of 2016.[4] Nebraska’s current minimum wage for most hourly workers is $7.25,[5] the same as the current federal minimum wage. Although recent state legislative proposals included changes for both the general minimum wage and the minimum wage for employees primarily compensated through gratuities, petition sponsors did not propose changing the latter in language that will be presented to voters in November.

 

In this brief, we will first examine the history of these laws and review the regulatory status quo in Nebraska. Next, we will analyze minimum wage laws through the lens of economic science and look at who it is that is most affected by these government policies. Finally, we will review some of the most influential economic research into the effects of government wage controls, and draw conclusions about the impact of the proposed minimum wage increase for Nebraska.

 

Minimum Wage Laws, Past and Present

 

Minimum wage laws first emerged in the late nineteenth century on the other side of the globe, in Australia and New Zealand. The proposal to enact a minimum wage had emerged as part of a list of concessions demanded by gold miners in the Eureka Rebellion in Victoria, Australia in 1856. The demand for a government price floor on wages first became law in these South Pacific countries in 1894, but the purpose was not uniform protection of workers’ rights.[6] In 1925, a minimum wage law was enacted in British Columbia, with the protectionist purpose of benefiting native workers by preventing price competition from Japanese laborers in the lumber trade.[7]

 

A number of American states passed minimum wage laws during the Progressive Era, but courts consistently ruled them unconstitutional.[8] They first entered the national scene during the Great Depression, in the form of the Davis-Bacon Act of 1931. The Act mandated that local prevailing wage rates be paid for work contracted by the federal government or with federal government financing.

 

A general minimum wage in the United States was first enacted as part of the expansive price-fixing powers granted to the National Recovery Administration. The NRA was created by the National Industrial Recovery Act of 1933 (NIRA), part of Roosevelt’s New Deal.[9] After NIRA was ruled unconstitutional by the Supreme Court in 1935,[10] Congress enacted the Fair Labor Standards Act in 1938, legislation which included authorization for a new federal minimum wage.[11] Unlike NIRA, the FLSA survived a court challenge and was determined by the Supreme Court to be constitutional in 1941.[12]

 

The State of Nebraska first enacted its own minimum wage in 1967, when legislators passed the state’s Wage and Hour Act.[13] The purpose of the act in establishing a minimum wage was to “safeguard existing minimum wage compensation standards which are adequate to maintain the health, efficient and general well-being of workers against the unfair competition of wage and hours standards which do not provide adequate standards of living.”[14] In today’s popular parlance, its stated purpose was to mandate a “living wage” for workers.

 

The Economics of the Minimum Wage

 

No minimum wage law can be sufficient to guarantee that all workers will earn a living wage. The economics of the minimum wage are clear: any price floor for wages that is set above the market rate costs jobs and slows new job creation. The Law of Supply and Demand provides that when prices rise, demand will decline as a result.

 

 

Private employers value workers based on the productivity they bring to an enterprise. This added productivity, described by economists as the “marginal revenue product” of that worker, must exceed the cost of employing the worker in order for the business to benefit from hiring him. Mandating a higher minimum wage means outlawing employment that cannot be compensated at the higher, legal rate. As economist Murray Rothbard explained,

 

There is only one way to regard a minimum-wage law: it is compulsory unemployment, period. The law says, it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum-wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result…. Laws that prohibit employment at any wage that is relevant to the market (a minimum wage of 10 cents an hour would have little or no impact) must result in outlawing employment and hence causing unemployment.[15]

 

Although proponents of raising the minimum wage sometimes deny this basic economic analysis in their rhetorical support for these policies, legislators have explicitly recognized the negative effect of minimum wage laws on opportunities for workers. This is why the Fair Labor Standards Act of 1938 included exemptions in the federal minimum wage law for employers who employ mentally or physically disabled workers. The law provides that the Secretary of Labor “to the extent necessary to prevent curtailment of opportunities for employment, shall by regulation or order provide for the employment, under special certifications, of individuals… whose earning or productive capacity is impaired by age, physical or mental deficiency, or injury, at wages which are lower than the minimum wage.” Studies suggest that more than 300,000 American workers earn subminimum wages authorized by these ”14(c) permits.”[16]

 

Rather than guaranteeing a living wage for disabled or infirm workers, who are presumably in greatest need of external support, the law recognizes that their lower earning capacity is the result of their impaired productivity and that forbidding a lower wage would eliminate jobs that they might otherwise be able to secure.[17] Why then, are other workers with low productivity not given the opportunity to work and gain experience that will naturally enhance both their productivity and personal income?

 

The minimum wage is really economic protectionism for more expensive, organized labor, because higher-wage workers gain an advantage from government regulations that outlaw competition from cheaper alternatives. This anti-competitiveness is even more significant when considering regional and national market conditions.

 

If the minimum wage was $8 and the union wage was $40, employers give up five hours of low-skilled work for every union worker-hour utilized. But increasing the minimum to $10 means employers give up four hours of low-skilled work for every union worker hour…. Workers and employers in high cost of living areas, where virtually everyone earns above the federal minimum wage, benefit, by raising the cost of production imposed on rivals where wages are lower.[18]

 

Besides putting some people out of work and preventing new workers from getting jobs to begin with, minimum wage laws also create negative externalities for the general population. The minimum wage reduces overall economic productivity, causes consumer prices to rise, hurts exports, slows population growth, weakens real estate values, and reduces economic competitiveness with neighboring jurisdictions with lower labor costs.[19]

 

Among its neighbors, Nebraska’s current minimum wage presents a relatively low hurdle for workers. Nebraska, Iowa, Kansas, South Dakota, and Wyoming all have an effective minimum wage identical to the federal minimum wage of $7.25 per hour. Missouri’s minimum wage is currently $7.50 per hour, and its minimum wage law provides for cost-of-living adjustments. Colorado’s minimum wage is $8.00 per hour and also features cost-of-living adjustments.[20] If voters approve the November ballot question, Nebraska’s minimum wage would jump to a higher level than all of its neighbors but Colorado starting January 2015, and would move even higher than Colorado’s current minimum at the beginning of 2016.

 

Because Nebraska is a low cost-of-living state with low labor costs compared to other states, the adverse effects of a minimum wage increase will be more pronounced in Nebraska than in states with relatively high market wages and high costs of living. As Creighton economist Michael Thomas recently explained,

 

Businesses can relocate to places with lower cost of living to take advantage of lower wages that actually go further than higher wages would go elsewhere…. [When] minimum wages are higher, or if a higher national minimum wage is enacted, much of the cost advantage of places like Nebraska starts to go away.[21]

 

 

Who Will Be Affected by a Higher Minimum Wage?

 

While the impact of minimum wage laws is felt across the economy, the most acute effects are on the population for which the laws are supposed to provide relief: low-skill workers whose limited work productivity does not justify higher market wages. However, contrary to the promises of advocates for minimum wage hikes, the net effects are negative, not positive, for these workers.

 

To examine the effect of minimum wage laws, it is useful to first examine the population for which these price floors are relevant. While it may come as a surprise to many, the fact is that most minimum wage earners are young, part-time workers mostly living above the poverty line. Average family income for these workers is over $53,000.[22]

 

According to the latest U.S. Bureau of Labor Statistics report on minimum wage workers, minimum wage workers tend to be young. While workers under 25 years of age comprise only a fifth of hourly workers, they make up about half of those earning the federal minimum wage or less.[23] Most older workers earn higher wages, with only about 3 percent of workers age 25 or older earning the federal minimum wage or less.[24]

 

Educational attainment is also highly correlated with wage levels. Almost 10 percent of high-school dropouts earn minimum wage or less, compared with 3.8 percent of high school graduates who did not attend college, and only 2.1 percent of college graduates. But getting a boost from further education does not necessarily require completion of four years of college. Workers who earned associate’s degrees in occupational programs were as likely as workers who completed a bachelor’s degree to earn more than the minimum wage.[25]

 

Women are more likely to earn minimum wage or less than are men, at 5 percent versus 3 percent respectively.[26] Race and ethnicity are not as significant as they once were, though black workers are still more likely than white workers or Latinos to earn the minimum wage or less. Asian workers were the least likely to earn the federal minimum wage or less among the major race and ethnicity groups.[27]

 

Unsurprisingly, occupational groups that do not require high levels of education or experience on the part of workers are the ones that also feature the greatest number of minimum wage employees. Almost two-thirds of those earning the federal minimum or less in 2013 were in the service industry, mostly working in food preparation and food service.[28]

 

About 4.3 percent of all hourly employees nationwide earn a wage equal to or less than the federal minimum wage. In Nebraska, with its lower cost of living, about 5.1 percent of hourly workers earn minimum wage or less.[29] This means a boost in the Nebraska minimum wage will impact more workers here than would an increase in states with higher average wages at the outset. And since Nebraska relies more on minimum wage workers than other states, the anticompetitive impact of a higher minimum wage would be even greater.

 

A minimum wage increase will cause consumer prices to rise, but they will not rise uniformly. Rather, it will be those goods and services currently provided by low-wage workers that will become noticeably more expensive. Fast-food restaurants are increasingly turning to automation,[30] but for traditional restaurants a hike in the wage paid to dishwashers and others not primarily paid via gratuity will mean that menu prices must rise to compensate.[31] Retailers using low-wage workers as sales staff will also find it more difficult to compete on price with online sellers whose employment costs are centered around higher-wage warehouse and technology work — jobs that will be largely unaffected by a minimum wage increase.[32]

 

 

Research on the Effects of Minimum Wage Increases

 

Contrary to the claims of its advocates, a sizable majority of economic studies show that increases in the minimum wage have negative employment effects.[33] A survey of economics literature by David Neumark and William Wascher revealed virtually no published research indicating that minimum wage laws have a positive effect on employment. The same review found that studies focusing on the impact of minimum wage laws on the most vulnerable segments of the workforce present “overwhelming evidence” that minimum wage hikes result in serious disemployment effects for laborers with the least valuable skills.[34] Enacting a higher minimum wage did not reduce poverty, but instead redistributed income among low-income families.[35] Perversely, higher minimum wages also tended to discourage completion of high school and technical training programs.[36]

 

Proponents of raising the minimum wage often cite a 1994 study by economists David Card and Alan Krueger to support the claim that minimum wage increases do not result in job loss. Their research into the effects of a 1992 increase in the New Jersey minimum wage surveyed fast-food restaurants in New Jersey and neighboring Pennsylvania — with its minimum wage unchanged — to estimate the effect of the higher minimum wage on employment. Their conclusions contradicted the “textbook model” of minimum wage analysis, and the authors asserted that the data did not indicate employment was reduced as a result of the higher mandated wage.[37] Other economists have since thoroughly critiqued their survey methodology and data quality.[38] Although notable policymakers and officials (including President Clinton) continued to tout the 1994 study,[39] Card and Krueger eventually retracted their claims.[40]

 

A subsequent study by Saul Hoffman and Diane Trace contradicted Card and Krueger’s original findings. Examining transborder labor effects in New Jersey and Pennsylvania on all workers — not just those employed in the fast-food industry — Hoffman and Trace found “consistent evidence that employment of ‘at-risk’ groups was negatively affected” by increases in the minimum wage.[41]

 

A June 2014 publication by the Center for Economic and Policy Research (CEPR) claimed that job growth was faster in the states with higher minimum wage levels.[42] However, further examination of the underlying data shows that the states that raised their minimum wage levels had substantially higher unemployment than other states to begin with. A state that starts with greater than 10 percent unemployment may add many jobs but still not be situated as favorably as a state with lower unemployment to begin with.[43]

 

A 2013 study by Jonathan Meer and Jeremy West found some locales where employment growth continued after the minimum wage was increased. However, the authors determined the growth was likely attributable to pre-existing trends rather than the legal wage increase. The data suggested that overall job growth, though still positive, was substantially diminished.[44]

 

In February 2014, the Congressional Budget Office estimated the impact of the President’s minimum wage proposal. It found that a $9 per hour minimum wage implemented in the second half of 2016 would likely cost 100,000 to 200,000 jobs nationwide. A $10.10 minimum wage would naturally cost even more jobs, with the CBO estimating that between 500,000 and 1 million jobs would be lost.[45]

 

 

Researchers studying the likely impact of a minimum wage increase in Maryland recently summarized the scholarly consensus on the impact of raising the minimum wage:

 

Raising the minimum wage has economic consequences: it reduces employment particularly among low-skilled workers; increases wages of affected workers but at the expense of low-wage workers losing their jobs; has no net effect on low-income families or on reducing poverty rates; produces negative effects on skills and school completion rates; raises prices particularly for goods and services in retail/hospitality, construction and health care sectors; weakens the local economies’ competitive position in regional markets; and, over the long term, may lower the earnings of workers later in their work life who were the beneficiaries of increases in minimum wage rates as teenager workers.[46]

 

 

Conclusion

 

It is only a combination of work experience and education that can sustainably raise low-skill workers’ standards of living by boosting their productivity and their personal earning potential. Legally prohibiting the employment of lower-skill workers means blocking opportunities for vital work experience that can grow a worker’s productivity. Because of the demographics of minimum wage earners, these lost opportunities will disproportionately hurt young workers,  those with lower education attainment, women, and — to a lesser extent — racial and ethnic minorities.

 

Workforce development is critically important for Nebraska, which is already confronting demographic challenges relating to out-migration and an aging workforce.[47] As the minimum wage discussion continues, Nebraskans should be mindful of the benefits of a competitive labor market. Raising the minimum wage would hurt the most vulnerable workers first, but it would ultimately mean higher prices for consumers, less competitive exports, and a less productive state economy.

 

In contrast, policies that promote the development of a more productive workforce through greater educational and employment opportunities will naturally grow wages without simultaneously exacerbating unemployment. Wages are already on the rise in the Midwest.[48] Nebraska should be careful not to disrupt that welcome trend.

 

 

Endnotes:

 

[1] Fuller, Stephen S., Parker Bedsole, and Scott Nystrom. “The Impact of Raising the Minimum Wage on the Maryland Economy.” Regional Economic Models, Inc. January 2014.

[2] Stoddard, Martha “Petition drive to raise Nebraska's minimum wage has more than 130,000 signatures.” Omaha World-Herald. July 4, 2014. [URL: http://www.omaha.com/news/metro/petition-drive-to-raise-nebraska-s-minimum-wage-has-more/article_d7093fe8-02f0-11e4-9596-0017a43b2370.html]

[3] Chokshi, Niraj.  “A minimum wage hike makes the Nebraska ballot, after qualifying in South Dakota and Alaska, too.” Washington Post. August 15, 2014. [URL: http://www.washingtonpost.com/blogs/govbeat/wp/2014/08/18/a-minimum-wage-hike-makes-the-nebraska-ballot-after-qualifying-in-south-dakota-and-alaska-too/]

[4] Initiative Petition. Received May 6, 2014. Nebraska Secretary of State.

[5] Neb. Rev. Stat. § 48-1203 (2007).

[6] Nystrom, Scott. Presentation: “The Macroeconomic Impact of Changing the Minimum Wage.” Regional Economic Models, Inc. 2014.

[7] Ibid.

[8] Nystrom.

[9] Ibid.

[10] A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935).

[11] Nystrom 2014.

[12] United States v. Darby Lumber Co., 312 U.S. 100 (1941).

[13] Currently codified as Neb. Rev. Stat. § 48-1201 to 48-1209.

[14] Neb. Rev. Stat. § 48-1201 (2007).

[15] Rothbard, Murray N. “Outlawing Jobs: The Minimum Wage, Once More.” Making Economic Sense. Ludwig von Mises Institute. 1995.

[16] Freiling, Nicholas. “Even the Feds Admit Minimum Wages Cause Unemployment.” Ludwig von Mises Institute. June 17, 2014. Citing the Fair Labor Standards Act of 1938.

[17] Ibid.

[18] Galles, Gary. “How Special-Interest Groups Benefit from Minimum Wage Laws.” Ludwig von Mises Institute. February 15, 2014.

[19] Fuller, Stephen S., Parker Bedsole, and Scott Nystrom. “The Impact of Raising the Minimum Wage on the Maryland Economy.” Regional Economic Models, Inc. January 2014. pp. 20–21.

[20] “Minimum Wage Laws in the States.” Wage and Hour Division. Unites States Department of Labor. January 1, 2014. [URL: http://www.dol.gov/whd/minwage/america.htm]

[21] Thomas, Michael D. “Higher Minimum Wage Means Fewer Opportunities for Workers.” Platte Institute for Economic Research. August 6, 2014.

[22] Sherk, James. “Who Earns the Minimum Wage? Suburban Teenagers, Not Single Parents.” Issue Brief #3866, Heritage Foundation, February 28, 2013.

[23] “Characteristics of Minimum Wage Workers, 2013.” United States Bureau of Labor Statistics. Report 1048. March 2014. [URL: http://www.bls.gov/cps/minwage2013.pdf]

[24] Ibid., pp. 1–2.

[25] Ibid., Table 6.

[26] Ibid., p. 2.

[27] Ibid., p. 2.

[28] Ibid., Table 4.

[29] Ibid., Table 3.

[30] Hu, Elise. “The Fast-Food Restaurants That Require Few Human Workers.” NPR. August 29, 2013. [URL: http://www.npr.org/blogs/alltechconsidered/2013/08/28/216541023/the-fast-food-restaurants-that-require-few-human-workers]

[31]  Wong, Venessa. “When the Minimum Wage Goes Up, the Menu Price Also Rises.” Business Week. February 25, 2014. [URL: http://www.businessweek.com/articles/2014-02-25/when-minimum-wage-goes-up-the-menu-price-also-rises]

[32] Fox, Emily Jane. “How Amazon's new jobs really stack up.” CNN Money. July 20, 2013. [URL: http://money.cnn.com/2013/07/30/news/companies/amazon-warehouse-workers/]

[33] Neumark, David and William L. Wascher. “Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research.” Working Paper 12663. National Bureau of Economic Research. November 2006. [URL: http://www.nber.org/papers/w12663]

[34] Ibid.

[35] Fuller et al., citing Neumark, David and William L. Wascher. Minimum Wages. MIT Press. 2010.

[36] Ibid., p. 4.

[37] Card, David and Alan B. Krueger. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” American Economic Review.  Vol. 84, no. 4. September 1994. [URL: http://davidcard.berkeley.edu/papers/njmin-aer.pdf

[38] Hoffman, Saul D. and Diane M. Trace. “NJ and PA Once Again: What Happened to Employment When the PA-NJ Minimum Wage Differential Disappeared?” Eastern Economic Journal. Winter 2009. [URL: http://www.palgrave-journals.com/eej/journal/v35/n1/full/eej20081a.html] pp. 115–116.

[39] Ibid.

[40] Morin, Greg. “Welfare, Minimum Wages, and Unemployment.” Ludwig von Mises Institute. January 16, 2014.

[41] Ibid.

[42] Wolcott, Ben. “2014 Job Creation Faster in States that Raised the Minimum Wage.” Center for Economic and Policy Research. June 30, 2014. [URL: http://www.cepr.net/index.php/blogs/cepr-blog/2014-job-creation-in-states-that-raised-the-minimum-wage]

[43] Thomas.

[44]Meer, Jonathan and Jeremy West. “Effects of Minimum Wage on Employment Dynamics.” Texas A&M University. December 2013. [URL: http://econweb.tamu.edu/jmeer/Meer_West_Minimum_Wage.pdf]

[45] “Estimated Effects on Employment of an Increase in the Federal Minimum Wage, Second Half of 2016.” Congressional Budget Office. February 2014.

[46] Fuller et al., pp. 1–2.

[47] “State Taxation and Migration.” Platte Chat. Platte Institute for Economic Research. January 15, 2014.  [URL: http://www.platteinstitute.org/research/detail/state-taxation-and-migration]

[48] Jordon, Steve. “New jobs, rising wages in the forecast for Midwestern economy.” Omaha World-Herald. February 3, 2014. [URL: http://www.omaha.com/money/new-jobs-rising-wages-in-the-forecast-for-midwestern-economy/article_528a3a97-615b-56d4-be26-f894dde2d7bc.html]

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