3 Misconceptions About The Minimum Wage

During his fifth State of the Union address, President Obama once again issued a plea to Congress to raise the federal minimum wage:

“Of course, to reach millions more, Congress needs to get on board. […] Tim Harkin and George Miller have a bill to fix that by lifting the minimum wage to $10.10. This will help families. It will give businesses customers with more money to spend. It doesn’t involve any new bureaucratic program. So join the rest of the country. Say yes. Give America a raise.”

For the past several months, support for raising the minimum wage has gained tremendously in momentum with heavy democratic support. The problem with this debate, are the persistent misconceptions that many people have about minimum wage laws.

 

 

While opponents of raising the minimum wage often assert that it will lead to higher unemployment, proponents argue that such job losses have never been statistically observed. This is simply untrue.

In 2007, David Neumark, economist at the University of California Irvine, and William L. Wascher, economist for the Board of Governors of the Federal Reserve System, published extensive literature reviewing the most credible studies on the effects of minimum wage over the last 20 years.

Their comprehensive review of over 100 studies provides strong evidence to support the claim that any artificial increase in wages will lead to unemployment:

“the studies surveyed in this monograph correspond to 102 entries in our summary tables. Of these, nearly two-thirds give a relatively consistent indication of negative employment effects of minimum wages, while only eight give a relatively consistent indication of positive employment effects. In addition we have highlighted in the tables 33 studies (or entries) that we regard as providing the most credible evidence, and 28 (85%) of these point to negative employment effects.”

In 2006, Joseph Sabia, economist at the University of Georgia, also released a comprehensive study on the effects of minimum wage on retail and small business employment. Using data from 1979 through 2004, Sabia observed that a 10% increase in minimum wage resulted in a 0.9-1.1 percent drop in retail employment, and a 0.8-1.2 percent drop in small business employment.

Even the Bureau of Labor Statistic numbers revealed that the first ever minimum wage law in 1939 resulted in a job losses for 10-13 percent of the workers who previously earned less than the new minimum wage. These, along with numerous other studies and papers are why 79 percent of economists agree that increasing the minimum wage will increase unemployment among young and low-skilled workers.

 

 

Historically, minimum wage earners have been young adults early in their career, and teenagers working part-time jobs. Over the last few years however, many have insisted that this is no longer the case, and that most minimum wage earners are in fact poor adults struggling to get by. However, this claim is not backed up by data.

In fact, very few people truly meet that description. According to Mark Wilson, principal at Applied Economic Strategies, just 4.7 percent of all minimum wage earners match that biography.

In a study published via the Employment Policy Institute, Bradley Schiller, former economist at UC-Berkley, asserts that most families in which an adult works a minimum wage job are not reliant on that wage.

Schiller found that out of every 10 families with children, in 8 of those cases the minimum wage job accounts for less than 20 percent of the families total income.

According to his study, almost Sixteen percent had spouses who earned between $30,000 and $40,000, and 12 percent had spouses who earned between $20,000 and $30,000. Thus, the individual earning minimum wage was not the primary bread winner.

In his conclusion, Schiller summarizes his findings by stating:

“The most noteworthy observation made in the study is that few families rely on earnings from ABMW jobs. […] Few adult minimum wage workers have families to support. And those adult minimum workers who do have families get substantial income from spousal employment.”

The notion that minimum wage workers are struggling to get by and raise a family is mostly untrue and greatly exaggerated. [5]

As for younger workers, according to the Bureau of Labor Statistics,

 

A common talking point among “raise the wage” advocates is that many European countries, as well as Australia, have higher minimum wages without any adverse effects.

Yet according to the Global Finance Data, countries in Western Europe with a minimum wage have an average jobless rate twice as high as those countries without a minimum wage.

For example, France has $12.09 minimum wage and an 11.1 percent jobless rate. Norway by contrast has no minimum wage yet has a 3.5 percent jobless rate. While minimum wage certainly may not be the sole driving force behind France’s jobless rate, the numbers certainly suggest things are not “just fine” in Europe.

Last spring, the Spanish Central Bank actually suggested suspending its minimum wage as a means to increase hiring and make their economy more competitive.

In regards to Australia, last year Australia had the third highest cost of living in the world. This supports economic theory that an increase in the minimum wage will lead to higher prices.

Also, though the unemployment rate in Australia is currently 5.8 percent (the highest it’s been in 4 years), Roy Morgan Research, a private company, has been tracking unemployment in Australia since 1992, and their numbers indicate that Australia actually has an 11.2 percent unemployment rate. Most adults in Australia make more than minimum wage and thus are not too affected by it. As for young, low-skilled workers, those most likely to be affected by minimum wage, the youth unemployment rate is 12.7 percent.