Things Folks Know That Just Ain’t So…

What folks know …

Increases in minimum wage benefit the poorer segments of the population.

Why it ain’t so …

Minimum wage laws redirect income to a group of workers that is largely composed of unskilled youth who live at home with their parents. In fact, these laws may be detrimental to those who are poor because of the residual effects, such as higher prices and reduced employment opportunities.

Increasing the minimum wage is commonly viewed by politicians and the public as a desirable means of redistributing income. In fact, the evidence shows that the majority of minimum wage earners are young and unskilled, and not necessarily poor. Therefore, the effect of the minimum wage is actually to transfer resources to those who are already relatively well off, i.e., teenagers in high school who are working in the service sector.

Recent studies indicate that 72.4 percent of men earning minimum wage are 24 years old or younger, while more than one-half of women earning minimum wage are in the same age group. Nearly 60 percent of young women earning minimum wage were identified as living at home with their parents, while 64 percent of young men also live at home. Not surprisingly, the combined clerical, sales, and service sectors are the largest minimum wage employers, accounting for 63.5 percent of all men earning minimum wage and 82.9 percent of all women. Therefore, minimum wage laws are unlikely to raise the income of the poor, but rather raise the incomes of low-wage workers who do not necessarily come from low-income families.

There are other effects of this type of legislation as well. Increasing the minimum wage can increase unemployment, because at a higher wage rate, employers reduce the quantity of labour employed. Thus, when the minimum wage rate goes up from $6 to $7, some people become unemployed because they are laid off. These people lose their jobs because it now costs the employer more to keep them on.

Other empirical and theoretical studies suggest that increases in the minimum wage induce other adverse effects, including reduced on-the-job training, fewer fringe benefits, higher school dropout rates, and reduced rates of human capital formation. Thus, it appears that increases in the minimum wage may have many negative economic effects, most of which are experienced by the young and the unskilled.

In addition to its failure as a means to redistribute income, a hike in the minimum wage often raises the price of goods that tend to be consumed by poorer families and can make the needy even worse off. A large proportion of workers earning minimum wage is employed in the service and sales sectors, i.e., jobs in the retail, food and beverage, accommodation, and personal services industries. Consumption expenditures of lower income individuals are focused on many of these industries. Hence, if an increase in the minimum wage raises the prices of the goods produced by these industries, then the real incomes of the needy may even decline.

Ironically, increasing the minimum wage may hurt the very people that these programs are trying to help.

Editor’s note: Interested readers should see the recent Public Policy Sources entitled “The Economics of Minimum Wage Laws,” by Marc T. Law, available at our web site.

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Last Modified: Wednesday, October 20, 1999.