Some economic fallacies never die. They just go into hiding for a while, then suddenly come roaring back to plague us again.
Take the minimum wage.
The newly-elected Democratic congress has announced that one of its top priorities is to dramatically increase the federal minimum wage. Prominent Republicans -- including the president -- agree.
It's a wretched idea, however. An increase in the minimum wage will inevitably cause harm to huge numbers of the very low-income workers it is supposed to help. It will destroy many entry-level jobs, cause significant unemployment and poverty, and have many other negative effects.
This used to be the common wisdom. Indeed, a 1978 survey taken by the American Economic Review found that fully 90% of economists agreed or partly agreed with the statement, "a minimum wage increases unemployment among young and unskilled workers."
In 1987 even the liberal New York Times called for the total abolition of the minimum wage, declaring, "There's a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market."
However, the minimum wage fallacy was snatched from the graveyard of dead political ideas in the 1990s by two highly controversial studies that claimed to find little or no job displacement from the minimum wage. Those studies relied on "fantastically faulty methodology," according to a new study by the non-profit Employment Policies Institute. (See links below for more on this study.) But that was enough to revive the idea politically.
Hoover Institution economist David Henderson, an expert on the minimum wage, recently summed up the fundamental arguments against it in the Wall Street Journal:
According to Henderson, the proposed increase from $5.15 to $7.25 -- a 40% increase -- could mean the loss of up to 1.6 million jobs, especially entry-level jobs that allow young people to gain valuable work skills that let them move on to better-paying jobs.
Recent history bears this out. 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 percent.
Other studies indicate that employers, faced with having to pay more for labor, cut back benefits such as health insurance or on-the-job training. Others cut back hours, force employees to work harder, replace workers with automation, or simply eliminate jobs altogether. (Remember movie ushers, elevator operators, and gas station attendants?)
Is there a better way to help low-wage workers -- without harming so many of them? Yes, says Jim Cox, author of the booklet "Minimum Wage, Maximum Damage," published by the Advocates. [www.theadvocates.org] De-tax them!
The working poor are hit with taxes everywhere they turn, including taxes on such essentials as food, clothing, housing and transportation. They must also pay Social Security and Medicare taxes. Free these workers from this government-imposed burden. Let them keep the full wages they earn. This would benefit them far more than the minimum wage -- without the minimum wage's disastrous effects.
Take the minimum wage.
The newly-elected Democratic congress has announced that one of its top priorities is to dramatically increase the federal minimum wage. Prominent Republicans -- including the president -- agree.
It's a wretched idea, however. An increase in the minimum wage will inevitably cause harm to huge numbers of the very low-income workers it is supposed to help. It will destroy many entry-level jobs, cause significant unemployment and poverty, and have many other negative effects.
This used to be the common wisdom. Indeed, a 1978 survey taken by the American Economic Review found that fully 90% of economists agreed or partly agreed with the statement, "a minimum wage increases unemployment among young and unskilled workers."
In 1987 even the liberal New York Times called for the total abolition of the minimum wage, declaring, "There's a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market."
However, the minimum wage fallacy was snatched from the graveyard of dead political ideas in the 1990s by two highly controversial studies that claimed to find little or no job displacement from the minimum wage. Those studies relied on "fantastically faulty methodology," according to a new study by the non-profit Employment Policies Institute. (See links below for more on this study.) But that was enough to revive the idea politically.
Hoover Institution economist David Henderson, an expert on the minimum wage, recently summed up the fundamental arguments against it in the Wall Street Journal:
"In raising the minimum wage, the government doesn't guarantee jobs. It guarantees only that those who get jobs will be paid at least that minimum. But precisely by requiring this, the government destroys jobs. Someone to whom an employer was willing to pay only the current minimum wage of $5.15 might not produce enough to be worth paying, say, $7.25."Raising the minimum wage, Henderson says, "will help only a subset of the people it is thought to help, and will help them only a little -- while hurting some of them a lot."
According to Henderson, the proposed increase from $5.15 to $7.25 -- a 40% increase -- could mean the loss of up to 1.6 million jobs, especially entry-level jobs that allow young people to gain valuable work skills that let them move on to better-paying jobs.
Recent history bears this out. 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 percent.
Other studies indicate that employers, faced with having to pay more for labor, cut back benefits such as health insurance or on-the-job training. Others cut back hours, force employees to work harder, replace workers with automation, or simply eliminate jobs altogether. (Remember movie ushers, elevator operators, and gas station attendants?)
Is there a better way to help low-wage workers -- without harming so many of them? Yes, says Jim Cox, author of the booklet "Minimum Wage, Maximum Damage," published by the Advocates. [www.theadvocates.org] De-tax them!
The working poor are hit with taxes everywhere they turn, including taxes on such essentials as food, clothing, housing and transportation. They must also pay Social Security and Medicare taxes. Free these workers from this government-imposed burden. Let them keep the full wages they earn. This would benefit them far more than the minimum wage -- without the minimum wage's disastrous effects.
Sources:
David Henderson, "If Only Most Americans Understood," Wall Street Journal (subscription required): http://users1.wsj.com/lmda/do/checkLogin?mg=wsj-users1&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB115439870173323067.html
Employment Policies Institute: http://www.epionline.org/news_detail.cfm?rid=72#
NCAC: http://www.ncpa.org/pub/ba/ba550/
Columnist Stephen Chapman: http://www.chicagotribune.com/news/columnists/chi-0610220346oct22,1,7142202.column?coll=chi-news-col
"Minimum Wage, Maximum Damage," by Jim Cox: http://www.theadvocates.org/mw.html
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