The Dark Side of the Minimum Wage

It hurts the very people it’s supposed to be helping.

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President Biden and his fellow Democrats are pushing hard to increase the federal minimum wage to $15, and polls show strong support for the measure. That’s understandable — after all, who doesn’t care about poor people and want them to do better?

The problem is that Americans don’t fully understand how the minimum wage works, or the many ways it hurts the very people it’s supposed to help. As the National Bureau of Economic Research (NBER) notes in a new review of the relevant academic studies, the economic consensus on minimum-wage laws is much clearer, and much more clearly negative, than the press often makes it out to be: The data show that increasing the minimum wage results in a significant net increase in unemployment. The increase is particularly pronounced among young adults — and most pronounced of all among low-skilled workers.

After an exhaustive review of studies on state-level minimum-wage increases enacted since the early 1990s, the authors conclude that “there are far more negative than positive studies, and that there is a very large number of negative and [statistically] significant estimates.” In particular, nearly 80 percent of the studies show negative employment impacts, and more than 55 percent show negative impacts with higher than 90 percent statistical confidence. On the other side, only 20 percent of studies show any positive impact, and barely 5 percent show positive impact with greater than 90 percent statistical confidence.

Many people seem to think that merely by passing a law, we can make an hour of someone’s time worth more than it is in the free market. But that is simply not true. In a free society, government cannot, through any law or regulation, determine what an hour of somebody’s labor is actually worth. Only the market can do that. That is because, except in a planned economy like China’s, business owners cannot be required to operate at a loss. They will only pay their workers what they can afford, given what consumers are willing to pay for their goods and services. The only thing such laws really do is segregate those workers whose marginal product is below the minimum wage and deprive them of the right to work. Employers must then adjust their inputs in accordance with what they can obtain for goods and services in sectors where demand may or may not be elastic.

As the NBER review suggests, people routinely mischaracterize the findings of academic studies of this issue. Just this week, for example, the Economic Policy Institute (EPI) described a 2019 analysis by the Congressional Budget Office (CBO) as concluding that raising the minimum wage to $15 an hour “would raise the earnings of 27 million low-wage workers.” But the CBO actually didn’t go that far. What it said was that wages would likely rise for 17 million low-wage workers and might rise for 10 million more — if the economy underperformed for the next five years. It also concludes that hiking the minimum wage to $15 an hour would likely result in a net loss of 1.3 million jobs, and perhaps as many 3.7 million jobs.

The EPI also estimates that a $15 hourly minimum wage would raise the annual earnings of affected workers by $91.1 billion, and that every dollar of that increase would save federal taxpayers 34 cents in welfare and earned-income tax credits and other benefits. But again, the CBO study comes to a much different conclusion: “The $15 option would reduce real incomes by $9 billion overall,” with an $8 billion increase in incomes for those below the poverty line more than offset by a $16 billion loss of income for those above the poverty line.

Read the full article at National Review.