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Policy Briefing: The Economic Effects of Minimum wages

Policy Briefing: The Economic Effects of Minimum wages

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Published by: Independence Institute on Feb 04, 2011
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7777 Bonhomme Ave.Suite 2150St. Louis, MO 63105 www.showmeinstitute.org
b r i e f i n g
number 2 october 2, 2006
The federal minimum wage hasbeen $5.15 since 1997, but 18 statesand the District of Columbia haveminimum wages higher than the federallevel. Missouri will join those statesif voters approve Proposition B inNovember, which would raise the state’sminimum wage to $6.50 and index itto the Consumer Price Index (CPI)thereafter.Proponents claim that the proposalis an effective way to fight poverty. Theysay that minimum wage laws help poor workers move up the economic ladder.But the best economic studies suggestotherwise. Economic theory says thatwhen the price of unskilled labor rises,employers look for cheaper alternatives.For example, a manager at McDonald’smight respond to a minimum wage hikeby replacing three less-skilled workerswith two more-skilled workers, or byinvesting in equipment that allowsthe restaurant to produce the sameamount of food with fewer workers. Theempirical evidence tends to confirmthese predictions. Although measuringthe exact impact of changes in theminimum wage can be challenging, thebest empirical research suggests thatincreases in the minimum wage tendto reduce the employment of low-wageworkers.Even worse, minimum wagestend to reduce the education, workexperience, and job training of low-income workers over the long-term. Asa result, fewer will be able to eventuallyobtain better-paying jobs. Missourilawmakers and voters should take thesefactors into account before increasingthe state’s minimum wage.
Who Benefits from Higher Minimum Wages?
When a minimum wage goes up,the higher wages don’t always go to theworkers who need them most. Minimumwage laws create winners and losers—
pair of studies in 2000, Card and Krueger were unable to replicate their results usinggovernment payroll data, and an analysisof payroll records obtained directly fromthe fast-food restaurants found that NewJersey’s minimum wage increase led toemployment declines.Other case studies have found thathigher minimum wages do indeed lower the job prospects of young workers. A2006 study replicated Card and Krueger’s“case study” technique in a study of theeffects of an increase in Illinois’s minimumwage between 2003 and 2005. They foundthat the increase reduced employmentin restaurants in Illinois compared torestaurants across the border in Indiana.Another 2006 study of employmentalong the Oregon-Washington border found that minimum wage hikes reducedemployment in the restaurant sector andhad mixed results in the hotel sector.
Some of the cross-state surveyslooked at whether increases in theminimum wage could have more seriouslong-term effects. Employee turnover inindustries that rely on unskilled labor isgenerally high, and many employers canrespond to a minimum wage increasequickly by firing workers they can nolonger afford. However, some companiestake longer to react. Some firms might optto buy labor-saving equipment, changeproduction methods, or use higher-skilledlabor that would require new hiring andtraining. All of these changes take time.Much of the evidence points to a lageffect on job losses due to a minimumwage hike. Drops in teenage employmentcaused by a higher minimum wage aresharper over the long-term.
Moreover, there is evidence thatminimum wage hikes have negativelong-term impacts on low-wage workers.The literature on the long-term effects of minimum wages is less extensive thanthe literature on the short-term effects,but some studies show that minimumwages reduce formal job training amongyoung workers, training which wouldincrease their wages in the future.Minimum wage laws can also reduceschool enrollment. One study foundthat adult workers who were subject tominimum wages at younger ages hadlower wages and earnings than other workers; this is likely due to reductions intraining, experience and schooling thatmight have allowed them to take higher-wage jobs.
Hence, the evidence suggests thatminimum wages hurt the very workersthat they’re supposed to help. Rather thanpursuing a policy that would discouragelow-wage work and take jobs away fromthose who need them the most, Missouripolicymakers and voters should focuson policies that are narrowly targeted athelping workers who live in poverty.
For more details, please seeShow-Me Policy Study no. 2, which isavailable at www.showmeinstitute.org.
Some studiesshow that minimum wagesreduce formal  job training among young workers, training which would increase their wages in thefuture.
the economic effectsof minimum wages
 what might missouri expect frompassage of proposition b?
By David Neumark 
David Neumark is professor of economics at the University of California,Irvine. He is a researchassociate at the National Bureau of Economic Research. He holds a Ph.D.from Harvard University.

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