Negative effects of the minimum wage

Various U.S. state legislators and interest groups are pushing for increases in the minimum wage, says economist David R. Henderson. In California, for example, even Gov. Arnold Schwarzenegger (R) advocates raising the state minimum wage from its current $6.75 an hour to $7.75 by July 2007.

Because a legislated increase in the price of labour does not increase workers' productivity, some of the least productive workers will lose their jobs – mostly teenagers and young adults. A comprehensive survey of minimum wage studies found that a 10 per cent increase in the minimum wage reduces employment of young workers by 1 per cent to 2 per cent. To put that into perspective:

Gov. Schwarzenegger's proposed 15 per cent increase in the state minimum wage would destroy about 35,000 to 70,000 jobs in the unskilled labour market – putting 1.5 to 3 per cent of young Californians out of work.

Overall, the proposed minimum wage increase in California would eliminate about 70,000 to 140,000 jobs.

A 15 per cent increase in the minimum wage nationwide would destroy about 290,000 to 590,000 young people's jobs, and about 400,000 to 800,000 jobs overall.

Only a relatively small percentage of the workers directly affected are the sole breadwinner in a family with children. A study by the Employment Policies Institute shows that in California, for example, only 20 per cent of the workers who would have been directly affected by a proposed 2004 minimum-wage increase were supporting a family on a single, minimum-wage income.

A 1997 National Bureau of Economic Research study estimated that the federal minimum-wage hike of 1996 and 1997 actually increased the number of poor families by 4.5 per cent.

Source: David R. Henderson, The Negative Effects of the Minimum Wage, National Center for Policy Analysis, Brief Analysis No. 550, May 4, 2006.

For text: http://www.ncpa.org/pub/ba/ba550/

For more on Economy: http://www.ncpa.org/iss/eco/

FMF Policy Bulletin/ 09 May 2006