New Minimum Wage Study: Tradeoffs Exist

Many progressives strongly support minimum wage increases. This is troubling, because the effects those increases actually have on many poor people are regressive. Signaling your concern for the poor is different from actually helping the poor; feeling good about yourself is often different from actually doing good for others. At the very least, minimum wage supporters should acknowledge that the minimum wage has tradeoffs. It is not a free lunch.

A new study by UC-San Diego economists Jeffrey Clemens and Michael Wither on the minimum wage reaffirms the obvious. Some workers benefit from minimum wage increases, and this is a good thing. But it comes at a cost. Other workers lose their jobs:

Over the late 2000s, the average effective minimum wage rose by nearly 30 percent across the United States. Our best estimate is that this period’s minimum wage increases reduced working-age adults’ employment-to-population ratio by 0.7 percentage point. This accounts for 14 percent of the total decline over the relevant time period.  [p.5]

This finding is in line with what I’ve pointed out before, that the minimum wage has a reverse-Robin Hood effect. Some workers lose their entire income, which gets transferred instead to other workers fortunate enough to keep their jobs, and get raises besides. Income redistribution programs are supposed to flow from better-off people to worse-off people—not the other way around.

If the goal is to lift as many people as possible out of poverty, minimum wage increases are simply not up to the task. The tradeoffs are too severe.

Clemens and Wither also find another, less publicized effect:

In addition to reducing employment, we find that binding minimum wage increases increased the likelihood that targeted individuals work without pay (by 2 percentage points or 12 percent). [p. 4]

They call this the “internship effect.” Internships are often restricted to people well-off enough to afford working for little or no pay for a few months, or even a year, while they learn how to do a particular job. Clemens and Wither find that the internship effect is “is concentrated among individuals with at least some college education [p. 4].” Lower-income workers without any college education tend to simply be disemployed altogether. Minimum wage increases hurt the poorest of the poor, intentionally or not.

Iain Murray’s and my recent Washington Examiner article lists other minimum wage tradeoffs:

Breaking out of poverty is difficult for many people, and the evidence is that a minimum wage adds to the difficulty. Workers are fired, hours are cut, jobs are not created, non-wage perks, including insurance, free parking, free meals, and vacation days evaporate, annual bonuses shrink, prices rise, (squeezing minimum wage earners themselves), big businesses gain an artificial competitive advantage over their smaller competitors, and crime rates rise. It is a bleak litany.

Clemens and Wither have put a number on just how much artificial unemployment recent minimum wage hikes have caused: an additional 0.7 percentage points in the working-age adults’ employment-to-population ratio. This translates to just a few tenths of percentage points in the traditional unemployment rate statistic. Which, more importantly, also translates to unnecessary hardship for hundreds of thousands of poor people.

Like it or not, supporting a minimum wage increase means supporting throwing deserving people out of work. Good intentions do not equal good results.