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MEER AND SMITH: The economic and political mischief of minimum-wage laws

Executive fiats that raise salaries also cost jobs

- - Friday, January 31, 2014

Wouldn't it be great if our nation's leaders really could just wave a magic wand and raise workers' wages? With bigger paychecks for the same work, those who earn the least in the labor market would be able to afford more and their quality of lives would drastically improve. "Poof" — problem solved.

President Obama would like to do just that. In his State of the Union address Tuesday night, he asked Congress to raise the minimum wage from $7.25 to $10.10.

Can regulation really improve worker welfare so easily, though? Do businesses just need a not-so-gentle nudge to improve the lives of those caught at the bottom of the income scale? Does water really run uphill?

Despite the faddish calls for wage controls, the fundamentals of economics don't change just because public opinion does. Wages are not arbitrary, but reflect the reality of the labor's worth to employers and consumers alike.

Policies that distort reality, such as increasing the minimum wage, have repercussions, and in this case, hurt the very people they are trying to help.

First, it is important to understand who these minimum-wage earners are and some basic statistics about the group's makeup:

Only about 3 percent of the workforce is paid the minimum wage, and less than one-half of 1 percent of minimum-wage earners are heads of households with children.

About a quarter of minimum-wage earners are in high school or college.

Around 60 percent of minimum-wage earners who remain in the workforce are paid more than that within a year. In other words, after gaining basic work experience, their wages go up.

Minimum-wage earners are a minor percentage of the workforce and are primarily composed of young, unskilled workers who do not have dependents. Furthermore, they rapidly move out of the minimum-wage category.

These facts are critical to understanding the value of minimum-wage jobs and the damage raising the minimum-wage inflicts on individuals and on the economy in general.

One of us (Jonathan Meer) led a recent study, "Effects of the Minimum Wage on Employment Dynamics," which examined the effects of wage controls on job growth. The findings are critical to consider in evaluating policies that intervene in the labor market.

The study reveals that a 10 percent increase to the minimum wage reduces the rate of job growth by approximately one-quarter in the first year following implementation. The president's call to raise the minimum wage from $7.25 to $10.10 — a 40 percent increase — would no doubt have devastating effects on job growth.

A great number of the jobs that would have been created would never even come into existence. Far from a win-win, there seems to be an awful lot of losers in this situation.

The result would not simply be that people are fired, it's that they would never be hired in the first place. While old jobs do not necessarily cease, new jobs are never created.

Given the makeup of minimum-wage earners, this result means that young and ambitious, but inexperienced, workers are robbed of the opportunity to take the first steps in their careers and acquire the professional skills to start climbing.

In the face of staggeringly high unemployment among young workers, it's especially callous to impose hurdles to entering the labor market and starting to accumulate income and experience.

The illusion that market forces can be bent to the will of politicians with the stroke of a pen is enticing, but false. If we truly want to help the most vulnerable, we need to look for well-targeted policies that help them get ahead, rather than repeat empty slogans.

Jonathan Meer is an assistant professor of economics at Texas A&M University in College Station, Texas. Adam C. Smith is an assistant professor of economics at Johnson & Wales University in Charlotte, N.C.