Nobel Prize-winning economist Milton Friedman once said, “…one of the great mistakes is to judge policies and programs by their intentions rather than their results.” The federal minimum wage is no exception to Friedman’s maxim.
Last month, President Obama signed an executive order to increase the minimum wage to $10.10 per hour for federal contract workers. This move followed the President’s January State of the Union Address, where he stated his willingness to make national economic policy decisions with or without the approval of Congress.
The President and many of his liberal allies are firm believers that an increase in the federal minimum wage would stimulate the economic recovery our country needs. According to the Obama Administration, raising the minimum wage is an important step towards ensuring working families stay out of poverty and helping lower-income workers “keep up in the future.”
The Harkin-Miller Bill, also known as the Fair Minimum Wage Act of 2013, was introduced in the House last March and will soon be brought back to the floor for debate. This bill would increase the federal minimum wage for all workers nationwide in three steps, reaching $10.10 two years after the bill’s passage and indexed for inflation into the future.
Unfortunately, even these positive intentions are unlikely to bring about the desired results. First, 54% of current minimum wage workers are between the ages of 16-24 and part of families with an average annual income of $65,000. These minimum wage workers are rarely the primary wage earners for their families. Second, three-quarters of older minimum wage workers are already earning an average family income of $42,500 which is well above the federal poverty line of $23,050 for a family of four.
The inflationary impact of the minimum wage on prices could quickly cut into the value of the mandated higher wages.
According to the Congressional Budget Office, an increase in the federal minimum wage to $10.10 would also translate to an estimated loss of approximately 500,000 to 1 million jobs nationwide in the second half of 2016. As employers are forced to increase the wages of those employees whom they previously paid less than $10.10, business owners must turn to options like cutting down on the size of their workforce to decrease these imposed costs.
Entry-level positions within industries are a majority of the jobs that are paid the minimum wage and would likely take the biggest hit. When New York increased the state minimum wage from $5.15 to $6.75, employment of young and less-educated workers decreased by approximately 21%. This elimination of entry-level jobs not only forced many lesser-skilled workers out of the jobs they currently held, but also impaired their future job prospects by obstructing opportunity to gain the experience required to compete for higher level positions.
If employers are unable to reduce their number of employees, they will pass the increased costs on to consumers. The inflationary impact of the minimum wage on prices could quickly cut into the value of the mandated higher wages.
Our politicians would be wise to pursue policies that support growing wages for the American worker. However, ignoring economic fundamentals and market realities by forcing a heavy-handed government mandate on the market is just a bureaucratic mistake of judging by a good intention rather than a proven result.
Bradley Tipper, an intern with the Alabama Policy Institute, attends the University of Alabama where his focus of study is Economics and Political Science. Bradley may be reached at Alabama Policy Institute, 402 Office Park Drive, Suite 300, Birmingham, AL 35223; by phone at 205-870-9900; or by email at [email protected].
Note: This column is a copyrighted feature distributed free of charge by the Alabama Policy Institute (API). Permission to reprint in whole or in part is hereby granted, provided the author(s) and API are properly cited.
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