A recent article on the Harvard Business Review (HBR) blog noted President Obama’s State of the Union Address and the proposal to raise the federal minimum wage from $7.25 to $9. The conclusion of the article was that “the minimum wage makes economists smile”; the author declared that economists have become “more favorably disposed to minimum wages.” This and other such articles have generated good discussion.
Those favoring minimum wage laws will always have the emotional advantage. Paying hard-working people low wages simply appears exploitive and unfair. We should all want every worker to have a “living wage.” Most of us have likely experienced working minimum-wage jobs or know others who do. Are not those who argue against minimum wage laws heartless?
However, one should consider the rest of the story. It is important to take into account the difference between noble intentions and actual outcomes. Contrary to the thesis of the HBR article, a majority of professional economists actually conclude that minimum wage laws have a negative impact on young and unskilled Americans seeking employment. In Basic Economics (2011), Thomas Sowell cites recent studies showing how the minimum wage increased unemployment among low-skilled workers in the United States and other countries.
Sowell does not see minimum wage jobs as career jobs. Once workers gain experience and acquire skills their worth becomes greater than the minimum wage. He argues that it is a disservice to prevent young people from getting some working experience. Moreover, the effects are far-ranging when young people lose the opportunity to have lower wage jobs where they gain valuable on-the-job training. Many employers eliminate jobs or fail to create new jobs rather than meet mandated wages artificially raised.
The tradeoffs are difficult. One wishes higher wages for everyone, but that is not realistic for those starting out. Any job (minimum wage or not) can be in jeopardy if the wage remains higher than the output. Sadly, the real minimum wage for too many young Americans is zero (unemployment).
The focus of Reaganomics was different. During Reagan’s two terms, the minimum wage remained unchanged (thus, “it declined in real terms, adjusted for inflation”). Promoting a growing free market economy and the existence of many employers competing for the services of workers was the Reaganomic approach for protecting workers. From 1980 to 1988, America witnessed the creation of 18 million new jobs.