Mark Wilson writes The Negative Effects of Minimum Wage Laws in the Cato Institute Policy Analysis, 6/21/12

Some summary points from his paper:

  • 1.8 million hourly workers were paid the minimum wage in 2010.
  • Of those 49% were aged 24 or under.
  • 62.2% of those were living in families making two or more times the official poverty level.
  • Only 16.8% were below the poverty line.
  • 51% are aged 25 and up.
  • More of these workers are at or below the poverty line. 29.2% near the poverty level and 46.2 at less than 1.5 times the poverty level. Even within this group, 24.8% voluntarily work part time and only 34.3% work full time for a full year.
  • Only 20.8% of those earning the minimum wage are heads of households or full time working spouses.  30.8% are children and 32.2% are students. Many minimum wage earners live in households well above the poverty level.
  • Markets with few employers are called monopsony models.  Higher minimum wages in monopsony markets have different effects than in more competitive markets.  Many examples used to minimize the impact of higher minimum wages use monopsony models rather than competitive markets.

Effects of minimum wages:

It is commonly noted that higher minimum wages drives the employment of the least experienced and the poorest out of the labor market. There are other impacts  related to this reality:

  • Lower skilled workers are replaced by higher skilled workers.  If you are going to pay more, you may as well try to get more output.  This is one reason why unions support higher minimum wages: because it creates demand for union jobs.  Lower skilled workers are driven out of the labor market.
  • In a global economy most industries are unable to pass the higher cost on to the consumers. They thus make other cuts such as benefits for all the workers and training,  They also have greater incentives to install labor saving devices. In industries like fast food where the higher wage costs can be passed on to consumers in the form of higher prices, the higher prices hit the poorest the hardest.
  • As the younger teenage group is the most affected there is often an increase in criminal activity. “In June the unemployment rate for teenager is 24.9% .” “The unemployment for minority teenagers is 38.2%.”
  • Minimum wage increases do not reduce poverty levels.  The poorest American’s do not work and thus do not benefit from higher wages. Most of the minimum wage earners do not live in poor families.

HKO added points:

While short term relief is made available by increasingly generous unemployment benefits, the unemployed become chronic.  Steady work is a tough habit to develop, an easy habit to break, and is even tougher to regain.

During periods of economic growth the effects of a higher minimum wage can be muted.  The combination of a dramatic increase in the minimum wage in 2006, the higher friction costs of regulations and laws like Obamacare, and the extended unemployment t benefits is the reason unemployment has stayed so stubbornly high.