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Higher minimum wage may not be good thing

Published: Monday, Aug. 20 2012 8:10 p.m. MDT

The current federal minimum wage is $7.25 per hour. For an employee working 40 hours per week for 52 weeks, that amounts to an annual before-tax income of $15,080.

By comparison, the official poverty level for a family of two is $15,130 or $23,050 for a family of four. The minimum wage does not support a high standard of living by any stretch of the imagination. However, just imagine how bad things would be for workers without the minimum wage.

Just this week a friend wrote and asked me about minimum wage laws. She asked if the government didn't impose minimum wage regulation, couldn't businessmen take advantage and exploit workers by offering a low wage?

Wouldn't that keep workers economically oppressed?

The language used when discussing minimum wage laws is highly value-laden and reflects a viewpoint rooted in Marxist class struggle.

Exploited and oppressed workers of the world must unite! This is not to disparage my friend in any way; this is just the language we use. Everyone uses it, even if they disagree with the underlying premise that workers are exploited.

Language matters, however, and the terminology is misleading.

Imagine, if you will, a case where the sellers of gasoline, not labor services, faced a minimum price floor. If I stated that without the price floor customers would take advantage and exploit gas stations by offering low prices for gasoline and that by doing so we would be keeping gas station owners economically oppressed, most people would see this statement as patently ridiculous.

But, fundamentally there is no difference between these two cases. In both cases a price floor is established that may or may not force the price of the gasoline or labor services above the price that clears the market.

Minimum wage laws do one of two things. First, they may do nothing if the minimum wage is below the market wage. For example, a law requiring at least one cent per hour worked would make no difference. Second, if the minimum wage is binding, this benefits those who have jobs and hurts others who are looking for jobs but don't get them.

If I am willing to work for $5 per hour but the minimum wage is $7.25, then I may end up unemployed. If I do get a job I'm better off than I would be at $5 per hour. But if I don't get a job I'm a lot worse off.

Minimum wage laws primarily affect that portion of the population that is affected by the law, which is workers with low levels of productivity, usually due to poor job skills. This group tends to be dominated by young workers who have not yet developed any job skills. Hence the laws tend to push up unemployment of low-skilled or unskilled workers with the natural side-effect of high unemployment for teenage workers.

Minimum wage jobs are important as stepping stones to higher paying jobs. I worked in fast food during high school for minimum wage and rarely felt exploited (and even when I did it was not justified).

A 15-hour-per-week worker earning the minimum wage earns around $475 per month, not enough to support a family but certainly a nice bit of pocket money. Low-paying entry-level jobs help young workers learn necessary skills that translate into better paying jobs in the future.

What would happen if the minimum wage were reduced or eliminated?

More young workers would find jobs and begin building human capital earlier. Some of these workers would be worse off, i.e. the ones who already have jobs. But other workers who would like to work and cannot find jobs would be better off. On net overall, the welfare of low skill workers would rise if the minimum wage were lower.

Kerk Phillips is an associate professor of economics at BYU.

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