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Why a Higher Minimum Wage Will Hurt the Poor

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Why a Higher Minimum Wage Will Hurt the Poor

March 18, 2015

This article originally appeared in New York Daily News.

Gov. Cuomo’s proposal to raise the city’s hourly minimum wage from $8.75 to $11.50 would harm the very people it is intended to help - poor and low-skill New Yorkers. If the wage floor is raised, they would have fewer job opportunities and less chance of climbing the career ladder.

To understand why, do a thought experiment. If raising the minimum wage were cost-free, why stop at $11.50 an hour? Why not go straight to $25 an hour, the average hourly wage? That might be considered fair, because no one would have to earn less than the current average.

Everyone realizes that at a hourly minimum wage of $25, some people would be displaced from their jobs. The same is true of a minimum wage of $11.50. Cuomo wants to pass a law saying that if you have skills of less than $11.50 an hour, you are not allowed to work in New York City.

This is positively un-American, and immoral. It discriminates against the poor, who have fewer skills. It discriminates against those who do not fare well in academic settings, and whose only chance at success is to start at the bottom and work up.

In a National Bureau of Economic Research paper published last December, University of California-San Diego professors Jeffrey Clemens and Michael Wither, found that increases in the minimum wage were responsible for 14% of the decline in the percent of the working-age population employed between 2006 and 2012. Minimum wage increases significantly reduced the probability of low-skill workers reaching the middle class.

In 2013 the average unemployment rate for teens in the 27 states with an effective minimum wage of $7.25 an hour was 21%. The rate for teens in the 14 states and Washington, D.C. with minimum wage levels above $8.00 an hour was 25%, 4 percentage points higher.

And people do start at the bottom and work up. Doug McMillon, now CEO of Walmart, spent two summers unloading trucks for the company when he was a teen. Many managers of fast food franchises began flipping hamburgers.

Ninety-three percent of New Yorkers (and 97% of American workers) now make above the minimum wage-not because it is the law, but because employers have to pay higher compensation packages to retain workers.

If people cannot get their first job, they cannot get their second job, nor their third. The reason so few workers in America make the minimum wage or below is that they rapidly move on. Employers do not pay above-minimum wage out of kindness, but because that is the only way they can prevent employees from moving to another job.

Those who would be harmed by increasing the minimum wage are young people. Half of minimum wage workers are under 25, and 24% are teens. This group’s unemployment rates are already higher than the 5.5% average rate. The teen unemployment rate is 17%, and the African American teen unemployment rate is 30%. The youth unemployment rate is 10%.

It is the unemployment rates of these workers that would rise if the hourly minimum wage rose to $11.50.

About 1.8 million Americans aged 16 to 24 worked for the minimum wage in 2012, and many more young Americans coveted those jobs.

Yes, polls show that many Americans support raising the minimum wage. But practically everyone with a heart is in favor of raising wages as long as those higher wages are paid by someone else.

If the minimum wage rises by 31%, as Cuomo wants, people will pay $13.10 for some services for which they pay only $10.00 today. They would not buy as much of the service if the price increased. Small, local businesses are more likely to close if the minimum wage is increased. Small business owners are less-capable of absorbing the increase in the cost of labor than are large corporations.

That is why raising the minimum wage is not cost-free to New York. More low-skill Americans would be out of work. People would buy less of the higher-priced services. Supersizing a wage is not as simple as supersizing a hamburger.

People who take minimum-wage jobs need an entry ramp onto the major highway that is called the job market. Once they are in, they can keep going, or speed up. Raising the minimum wage will reduce job opportunities for those who have no alternative except sitting at home or hanging out on the streets.

 

Diana Furchtgott-Roth is the director of the Economics21 program at the Manhattan Institute for Policy Research. You can follow her on Twitter here

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