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Debunking the $15 minimum wage

By Christopher Kuo
web posted December 5, 2016

“I have supported the fight for 15….I will work as hard as I can to raise the minimum wage. I always have.? These words by Hillary Clinton refer to her goal of raising the federal minimum wage to $15. Though Clinton has lost the 2016 presidential election, her desire to increase the federal minimum wage lives on, influencing the policy proposals of Democrats throughout the country. Liberals have long trumpeted the idea that raising the minimum wage will give wider economic opportunities to low-income individuals and ensure greater “economic justice.? In reality, however, the policy of raising the minimum wage hurts the very people it was designed to help, leading to greater unemployment among unskilled workers and rising prices for consumers.

To begin with, the consequences of raising the minimum wage correspond to a basic law of economics--the law of demand. This law states that when the price of a good increases, the quantity demanded of it decreases. In this case, the minimum wage is the price for labor, and raising the minimum wage will decrease the quantity demanded for labor, especially for unskilled labor. The effect of a minimum wage that is set above the equilibrium price for labor is shown in the graph below:

Graph


As one can see, a minimum wage above the equilibrium wage results in a surplus of (L2-L1) quantity of labor. This means that unemployment will result.

Indeed, the increased costs from the raise in the minimum wage will force businesses to increase prices, decrease the working hours of their employees, or lay off some workers. This chart from the Heritage Foundation illustrates how an increase in the minimum wage will greatly increase the cost of hiring workers, leading to increased unemployment.

Chart


Moreover, when businesses start firing employees, unskilled workers will be the first to go. A recent report by the Heritage Foundation encapsulates this idea. “Employers will not pay workers more than the value they produce,? it states. “Employers would respond [to a $15 minimum wage] by reducing employment of affected workers by approximately one-fifth, eliminating roughly seven million FTE jobs.? The experience of African American economist Thomas Lowell also validates the destructive impact that minimum wage hikes can have on unskilled or disadvantaged workers. In a 2015 article for Townhall, Sowell describes his experience of working as a black teenager. When he first started working, he says, the unemployment rate for black 17-year-old males was still in the single-digits, but liberals soon began pushing for increases in the minimum wage rate. The result? “Ten years later, the unemployment rate for black 17-year-old males was 27.5 percent -- and it has never been less than 20 percent in all the years since then.? Clearly, increases in the minimum wage can have negative effects on unskilled and disadvantaged workers. In the words of renowned economist Milton Friedman, minimum wage hikes “assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed.?

This is all well and good, you may say, but is there concrete evidence that minimum wage hikes harm rather than help? Absolutely. For instance, take the recent increase in Seattle’s minimum wage from $9.47 per hour to $11 per hour. The city commissioned a group of economists to study the effects of this minimum wage hike. Overall, Seattle’s labor force experienced a relatively good year, with rising wages. But the economists concluded that this occurred because of Seattle’s rapidly expanding economy, not because of the minimum wage increase. In the end, their 2016 report concluded that low-wage Seattle workers experienced a 1.1% decrease in the likelihood of remaining employed. Moreover, there was a substantial increase in the number of laborers who shifted from working in Seattle to working in other areas. The hours worked by Seattle workers also lagged behind regional trends by about four hours per week. These conclusions align with the analysis from a 2014 nation-wide study conducted by the National Bureau of Economic Research (NBER). The NBER paper indicated that “binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers.? Hence, economic data clearly backs up the claim that minimum wage hikes result in harmful economic consequences.

In short, we have seen that minimum wage hikes result in negative consequences for the economy. Contrary to popular opinion, increases in the minimum wage can directly harm unskilled and disadvantaged workers. Ultimately, Clinton’s emphasis on raising the minimum wage reveals a fundamental lack of understanding regarding the economy, and an unwillingness to recognize the tradeoffs inherent in such a policy. The renowned economist Milton Friedman said it best: “The rise in the legal minimum-wage rate is a monument to the power of superficial thinking.? ESR

Christopher Kuo is a high school student and this his first contribution to Enter Stage Right. (c) 2016

 

 

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