Mandating a minimum wage increase is a bad idea. It sounds good on the surface. It puts more money in the hands of the poor — in theory. Minimum wage will not support a family, and it only affects about 2 percent of the workforce, maybe less, so in the grand scheme of things it is not much more than a political fairy tale.
What can actually happen is a different story. First, let’s look at the numbers.
According to the Bureau of Labor Statistics, the industry most impacted by federal minimum wages or below is leisure and hospitality (no surprise) at 22 percent, primarily in food services. In fact, one in four in food preparation and serving related occupations is paid at or below the federal minimum wage, which is currently $7.25 per hour.
However, we cannot overlook the fact that some of this number work for tips and the minimum wage is a secondary source of income.
The three states with highest percentage of hourly employees at minimum wage or lower are Georgia (9.6 percent), Mississippi (8.5 percent) and Texas (8 percent). On the surface that might hint at a great number of low-wage jobs, which is no doubt true, but there are exemptions to the Fair Labor Standards Act that determine who must get paid that minimum. Among the exemptions affecting these states are tipped employees, full-time students, workers with disabilities and small farm agricultural workers.
The three states with the lowest percentage are California, Oregon and Washington, all under 2 percent. They are among the eight states that have minimum wage laws exceeding the federal minimum already. These three and the northeastern states have the nation’s highest costs of living and have strong union representation. The state of Washington is reported to be raising its minimum wage again this year from its existing $9 an hour.
Over the years the percentage of hourly labor at or below the minimum wage dropped from 15 percent in the recessionary years of 1980-81 to 2.2 percent by 2006. Since the financial crisis that percentage has risen, and in 2011 it was 6 percent. The most affected demographic is between the ages of 16-19 in part-time jobs with 22.8 percent of the hourly workforce in that category.
OK, statistics are behind us. So why is raising the minimum wage a bad idea? Unemployment rates will increase because more people on the sidelines enter the job market attracted by better pay. Costs to employers go up and, therefore, either consumer prices increase or fewer people are hired, which also results in a negative impact on employment.
Over time, technology speeds up to supersede higher costs of labor and replaces those new hires anyway. Marginally productive units of a business can be shuttered, costing yet more jobs.
In fairness however, higher minimum wages do not translate into failed businesses. In fact, in one study small business activity actually increased significantly over a four-year period following an increase in the minimum wage. But no one has determined that the increase in wages is directly causal to the increase in business activity.
That period was 1997 through 2001, and there was an enormous boom in some businesses for much of that time (the dot-com boom). Consequently, this outcome is counterintuitive and should be considered suspect until economists can link the relationship between increased business activity and increased minimum wages.
Better applicants are a relief for the consumer standing in line at the fast-food joint, but the more marginal youngsters now working those kitchens and counters are passed over for more qualified workers newly on the job market. That risks denying opportunities for minorities and disadvantaged kids to learn the soft skills, better preparing them for life as working adults.
So I guess the bottom line on this thing is that Washington is making political hay on a subject that primarily affects young, part-time workers, in an economy where low-skill jobs and the percentage of those affected has been steadily shrinking. Then it removes from the workforce those who most need skills.
What am I missing?
Russ Wigh is a professor of business. Email him at rdwigh@bellsouth.net.