Marketplace Scratch Pad

Bad timing for minimum wage?

Scott Jagow Jun 12, 2009

Here’s an interesting debate. Next month, the minimum wage is set to go from $6.55 an hour to $7.25. This is the third and final step of a hike that was passed in Spring, 2007. But unemployment was 4.5% back then. Now, it’s 9.4%. Should we postpone the wage increase?

David Neumark, an econ professor at the University of California, Irvine, says yes, we should put it off. From the Wall Street Journal:

Minimum wages, like most public policies, confront us with trade-offs. An employed, low-skilled worker who keeps his job earns a slightly higher wage. But a worker who loses his job, or a labor-market entrant or unemployed worker who cannot find a new job, pays a much higher cost. Given present economic conditions, the imperative should be to create and enhance job opportunities.

Neumark argues that, based on his research, minimum wage increases reduce the employment of young, low-skilled people:

The best estimates from studies since the early 1990s suggest that the 11% minimum wage increase scheduled for this summer will lead to the loss of an additional 300,000 jobs among teens and young adults…

The reduction in jobs for youths might be an acceptable price to pay if a higher minimum wage delivered other important benefits. Many people believe, for instance, that it helps low-income families. Here, too, the evidence is discouraging. There is no research supporting the claim that minimum wages reduce the proportion of families living in poverty…

How can this be? Because the relationship between being a low-wage worker and living in a poor family is remarkably weak. Many low-wage teenagers and young adults are in higher-income families, and many poor families have no workers.

Obviously, we’re in a time when the public sentiment is that the “little guy” deserves some help too. Politically, I’m guessing hell would have to freeze over before President Obama said no, we’re not going to give workers 70 cents more an hour.

But economically, it’s a valid debate to have. If increasing the minimum wage leads to companies cutting more jobs or hiring less, but it puts more money into the pockets of the already-employed, is it a good policy decision?

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