Antony Davies & James Harrigan: Minimum-wage myths |
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Antony Davies & James Harrigan: Minimum-wage myths

Antony Davies and James Harrigan

Gov. Tom Wolf has put Pennsylvania’s minimum wage front and center in the news again, as he tries to raise it to $12 an hour. This is music to the ears of people earning $7.25 an hour, but it won’t be a happy tune for everyone.

Politicians would rather you not think about that, but as luck would have it, economists do. While they disagree about the specific ramifications of specific minimum wage hikes, economists agree about the effects in general. In a 2015 survey by the Employment Policies Institute, 83 percent of economists polled said raising the federal minimum wage to $15 an hour would reduce youth employment, and 76 percent said that it would reduce the total number of jobs available.

That some non-economists disagree is due to popular minimum wage myths. It does us well to think about them without the politicians in the room.

Myth: The minimum wage regulates how much employers pay.

The minimum wage actually regulates whom employers will hire. In effect, the minimum wage prohibits people from working at all unless they can find an employer willing to pay them the minimum. But how much an employer is willing to pay depends on how much value the worker contributes. And a minimum wage doesn’t make workers more valuable; it makes them more expensive. A worker whose skills only add $10 an hour to a company’s bottom line will find himself jobless when the minimum wage goes to $12.

Myth: Raising the minimum wage stimulates the economy by putting more money in workers’ pockets.

This argument ignores the fact that every additional dollar workers receive must come from one of three places: customers paying higher prices, business owners earning less profit, or other workers being laid off, losing work hours or losing benefits. Raising the minimum wage causes customers, business owners and unemployed workers to spend less, and this exactly offsets the increased spending by workers whose wages rose.

Myth: The minimum wage protects workers from employers who would pay them as little as possible.

If this were true, all jobs would pay exactly the minimum wage, as there is no law requiring employers to pay more. Yet, 99 percent of Pennsylvania workers earn more than the minimum wage. The force preventing employers from paying workers as little as possible isn’t the minimum wage, but the value workers can contribute. The more value a worker can contribute, the higher the wage he can command. This means that the key to increasing workers’ wages is not legislating the wage rate but helping workers acquire skills, experiences and education that make their labor more valuable.

Myth: There is no evidence that increasing the minimum wage increases unemployment.

A minimum wage hike mostly affects low-skilled labor. Looking at the overall unemployment rate drowns out the effect on low-skilled labor, making it appear that raising the minimum wage has no unemployment effects. But examining unemployment among low-skilled workers separately from other workers reveals significant unemployment effects.

A higher minimum wage is good for workers who keep their jobs. But that benefit comes at the expense of lesser-skilled workers whose jobs disappear. And those are the workers in greatest need — ones whom politicians like Wolf claim to want to help.

Antony Davies is an associate professor of economics at Duquesne University. James Harrigan teaches in the department of Political Economy and Moral Science at the University of Arizona. They host the weekly podcast Words and Numbers.

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