President Obama recently delivered his State of the Union address to lay out his policies for building a stronger future for the country. One of his proposals included raising the minimum wage to $9 an hour from its current $7.25 an hour.
The supporters of the change in minimum wage believe $7.25 an hour is too low for any person to live on and elevating it would provide a higher income to workers, increasing their purchasing powerand economic opportunity.
After all, working 40 hours a week, 50 weeks a year at an hourly wage of $7.25 provides a meager income of $14,500. Therefore, a simple way to reduce poverty is through a hike in the minimum wage.
So, if reducing poverty is as easy as passing a law, then why is there so much opposition toward the minimum wage or an increase in its rate?
That question can be answered in any introductory microeconomics course, which demonstrates that a government-imposed minimum wage creates unemployment through its effects on supply and demand. Since the demand for labor falls as wages rise, fewer workers will be employed at a higher price.
What this really means is that firms are unwilling to pay a worker more than their productivity merits.
Since businesses aren’t in business for charity, they usually avoid paying a worker more than they are contributing to output and look toward alternative means of increasing production.
One way businesses respond to the minimum wage is through substituting capital for labor. It is well-documented that a large contributor toward the evaporation of low-end jobs is due to this process. For instance, grocery stores continue to replace cashiers with self scanners.
Businesses also bypass the minimum wage by hiring skilled workers over unskilled. Instead of paying two workers the new minimum wage of $9 an hour, they could potentially pay one skilled worker to produce a similar level of output, but for a price that’s lower than $18 an hour (the cost of hiring two unskilled workers at the new minimum wage).
In other words, the minimum wage disproportionately harms the individuals the law intends to help, and that is predominantly low educated and skilled individuals.
Just look at the unemployment rate of teenagers, which stands at a sky-high rate of 23 percent. Economic research done by University of Chicago economist Milton Friedman showed that the inception of the minimum wage was responsible for the large disparity in employment levels among teens and adults.
Many of our youth, particularly those who live in the inner cities, find entry-level employment nearly impossible. The greatest cost of not having your first job is not the loss of income, but the lack of opportunity to acquire the necessary skills and responsibilities that promote a good work ethic, the basis of a successful career.
According to a recent editorial in the Wall Street Journal, which cites Census Bureau data, 60 percent of people who were in poverty last year weren’t employed. There’s no doubt that the minimum wage is partly responsible for such a staggering statistic. Almost every economic study has confirmed the direct connection between higher minimum wages and lower employment. Obviously, an individual is worse off making $0 an hour than $5 or $6.
Think of it this way: if the minimum wage is such a good idea, then why not raise it to, say, $25 an hour?
That’s because governments can’t legislate prosperity. Simply passing a law making it illegal for businesses to hire workers below a certain wage does nothing to improve economic outcomes, but undermines the very individuals that have the least.
Obama’s call for a $9 an hour minimum wage ignores the most basic laws of economics: supply and demand. For the sake of the low-skilled worker, the minimum wage should be abolished, not increased.