IEI Insight: Who pays for a higher minimum wage?

This week’s IEI Insight is provided by Renato Morais, a Gail Werner-Robertson Fellow and author of a forthcoming paper on the Nebraska minimum wage.

When we think of increasing the minimum wage, many people believe it is going to help the workers most in need — that it is going to provide them a “living wage.” But who needs more help: those workers who already have a job but earn a low wage, or those who do not have a job at all? A minimum wage increase does not help the worst off of the worst off. It does not even help all of the minimum wage earners.

Who earns the minimum wage? Half of minimum wage employees are between the ages of 16 and 24. Of these, 79 percent are part-time high school students, college students, and entry-level workers — they are not the primary breadwinners of their household. Their average family income is $65,900, and only 22 percent of them live at or below the poverty line. The other half of workers earning the minimum wage — those 25 and older — have an average family income of $42,500, and only a quarter of them live at or below the poverty line. Thus, raising the minimum wage only “helps” a tiny portion of those who the public believes it is intended to help.

Increases in minimum wage are not primarily targeted at helping the worst off of the worst off. Minimum wage laws more directly impact middle class families than families at or below the poverty line. But what does increasing the minimum wage do in terms of employment? A regional economic analysis to determine the impact of an increase on minimum wage on the size of the leisure and hospitality industry, a low income industry, shows that an increase in the minimum wage results in a shrinkage of that industry, meaning that fewer people would be employed in related jobs. So what happens to all the people that worked in this industry? Did they just change to a better and more rewarding industry? Probably not.

Because it is already a low-income industry, the people working in it are less likely to have the qualifications for a job in a better-paying industry, otherwise they would likely not be working there in the first place. So what happened to them? They may have lost their jobs because their employer no longer had adequate resources to support them. But why? If you owned a factory in 2015, and you had a hundred employees receiving Nebraska’s minimum wage — at the time $8 an hour — you would be paying $800 an hour to those hundred employees. When the new minimum wage of $9 was implemented in January 2016, you would have been required to pay $900 to those same hundred employees. Now, the productivity of these hundred employees did not increase, thus, you incur greater expenses with no increase in revenue to compensate for them, which might lead to a layoff or a hiring freeze. If the minimum wage did not rise, and you spent $900 in wages on workers with similar skills, you could hire 12.5 additional employees.

Which is better: giving jobs to unemployed workers or mandating a higher wage for those who are already employed? While there are 2.561 million minimum wage earners in the United State, there are 7.904 million unemployed. Is raising the minimum wage helping the ones that need the most? When minimum wage laws make it more difficult for those who do not have a job to land one,  we might be increasing the number of workers who are unemployed, by putting some of those earning the current minimum wage out of work.