Poverty and the Minimum Wage

As part of his efforts to get Congress to raise the federal minimum wage from $7.25 to $10.10 per hour our supreme ruler recently used his executive power to mandate that all Federal Contractors pay a minimum of $10.10 per hour.  Obama, like most Democrats, contends that a hike in the minimum wage will reduce poverty.  Obama and the Democrats are mistaken and I’m going to explain why.

In 1938 the Fair Labor Standards Act was passed by the Congress which, among other things, set a federal minimum wage of 25 cents per hour.  Since then Congress has made many increases in the minimum wage, largely due to inflationary pressures.

Today the Federal Minimum Wage is $7.25 per hour.  This is the wage for unskilled and inexperienced workers, many of whom are teenagers.  Adults who work for minimum wage are often new immigrants or people who don’t speak English very well.  While many assume that minimum wage earners are strapped for life to a low wage, the vast majority of minimum wage earners advance on to higher paying jobs within a matter of months.  It is rare to work at a minimum wage job for a lifetime.

Currently the $7.25 minimum wage is not disrupting the market for labor.  Indeed, the market wage for most unskilled workers is already above $7.25 (somewhere around $8 per hour in most jobs).  I don’t mind minimum wages below market equilibrium, as they don’t affect the economy.

Years ago economists Card and Krueger did a landmark study on the employment effects of rising minimum wages.  Many studies have been done since.  Generally these studies have concluded that the unemployment effects of minimum wage hikes are modest.  The irony is that while most workers that earn the minimum wage are unskilled, their labor is essential for the business at hand.  For example, you can’t run a McDonalds without counter help!

According to the CBO, a $10.10 minimum wage would raise the wages of about 20 million workers, but would also lead to a loss of jobs for around 600,000 people who can least afford to be unemployed.  Prices of the products and services produced by minimum wage workers will also have to rise, causing hardship for poor people more than rich people.  As a result of their higher minimum wage, low wage McDonalds employees are much more likely to pay more for the high-calorie burgers that they produce.  Rich people can eat sushi.

I doubt that the Congress will approve a minimum wage hike; especially to the $10.10 level.  What I do know is that while minimum wage hikes marginally help some workers, they end employment for the poorest of Americans, who have the most to lose.  After all, if minimum wages were a cure for poverty we would have raised them to $50 per hour…then no one would be poor!  Right????

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2 Responses to Poverty and the Minimum Wage

  1. Dan says:

    The CBO also forgot to add in all the current and future young black and brown men who will be priced out of any chance of working in a legal industry. At $10/h an employee will need to make the company at least $15-20/h just to have a job. For a person with no skills, their future is legislated to the black market. The unemployment rate in minority communities is stubbornly sky high and this move will do nothing to help. The only good done by this law is making rich white liberals feel better about themselves.

  2. Bhawna Rai says:

    It is a nice one…very informative.

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