By Michael Tanner
Tuesday, September 03, 2013
On August 19, the Cato Institute released a study by me
and Charles Hughes, The Work vs. Welfare Trade-Off, 2013: An Analysis of the
Total Level of Welfare Benefits by State, showing that a family collecting
welfare benefits from seven common programs – Temporary assistance for Needy
Families (TANF), food stamps, Medicaid, WIC, public housing assistance,
utilities assistance (LIHEAP) and free commodities – could receive more than
what a minimum wage job would pay in 35 states. Critics responded: so raise the
minimum wage.
Making work pay better, including the sort of entry level
jobs that people leaving welfare can expect to find, is a terrific goal.
Unfortunately, government has very little ability to force such increases.
Attempts to simply mandate that businesses pay more, through increased minimum
wages or living wage laws, as well as attempts to mandate employee benefits
like health insurance (see Obamacare), primarily result in fewer jobs.
The amount of compensation a worker receives is more or
less a function of his or her productivity. As Greg Mankiw, Chairman and
Professor of Economics at Harvard University explains, “Economic theory says
that the wage a worker earns, measured in units of output, equals the amount of
output the worker can produce.” This somewhat oversimplifies, of course. There
are other factors involved. But one can’t just arbitrarily declare a worker’s
value.
The academic evidence on this point is pretty clear. A
comprehensive review of more than 100 studies on the minimum wage by David
Neumark and William Wascher for the National Bureau of Economic Research found
that 85 percent of the studies they reviewed found negative employment effects.
Newmark and Wascher concluded, “the preponderance of the evidence points to
disemployment effects… [and] studies that focus on the least-skilled groups
provide relatively overwhelming evidence of stronger disemployment effects for
these groups.”
Indeed, evidence of employment losses goes all the way
back to 1938 and first federally imposed minimum wage. The U.S. Department of
Labor concluded that that first 25-cent minimum wage resulted in the loss of
30,000 to 50,000 jobs, or 10 to 13 percent of the 300,000 workers affected by
the increase.
More recently, Michael Hicks of Ball State University
looked at the impact of the July 2008 minimum wage increase on unemployment
rates in the United States and concluded that a 10 percent increase in the minimum
wage results in a roughly 0.19 percent increase in unemployment, meaning the
loss of about 160,000 jobs.
And, a study by Joseph Sabia and Richard Burkhauser for
the Employment Policy Institute concluded that an increase in the federal
minimum wage to $9.50 would result in the loss of 1.3 million jobs, primarily
low-skilled jobs. Moreover, Sabia and Burjhauser concluded that there would be
very little gain in exchange for this pain. According to their research, state
and federal minimum wage increases between 2003 and 2007 had no effect on state
poverty rates.
Or simply look at how Obamacare’s employer mandate is
causing businesses to shift workers to part time or to reduce hiring in
response to higher labor costs.
We should understand that for most low skilled workers,
such as the hypothetical mother in our welfare study, a minimum wage job is a
starting point, not a destination. Nearly two-thirds of minimum wage workers
receive a raise within one year, with the median hike for full-time workers
about 14 percent. Indeed, we know that just 2.6 percent of full-time workers
(including minimum wage workers) live in poverty.
That is not to say we shouldn’t try to increase entry
level wages. But the best way to accomplish that goal is to create a climate
that leads to greater economic growth overall. Greater prosperity eventually
finds its way into higher wages for workers, including those at the bottom of
the ladder. That means reducing taxes and regulations to encourage people to
invest and expand their businesses.
Somehow, I don’t think that is what most critics of our
study have in mind.
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