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Raising Kentucky’s minimum wage:

Low-skilled workers need not apply

By Brian Balfour

Many will hail the minimum-wage increase approved by legislators in Frankfort as a victory for low-skilled workers. Sound economic research says otherwise.

Although well-intentioned, the current plan to raise the commonwealth’s minimum wage from the current $5.15 an hour to $7.25 by July 2009 equates to a tax on Kentucky businesses willing to hire low-skilled – often younger – workers. It denies these workers the most dependable path to a better life: job experience.

This was affirmed by James P. Ziliak, director of the University of Kentucky Center for Poverty Research, who recently evaluated potential effects of a higher minimum wage on the commonwealth.

Ziliak estimated that roughly 4,500 Kentucky workers would find themselves unemployed after a mandatory wage hike to $6.50 an hour1. Using Ziliak’s calculations, raising the rate to $7 could push that number to around 6,800. He says, “there is ‘no free lunch’ to an increase in the minimum wage”.

“Raising the minimum wage actually increases the number of poor families in a state through lost jobs, fewer hours or difficulty in finding work.”        

Advocates opine about how a higher minimum wage constitutes a “raise” for Kentucky workers who need it the most. But ignoring market forces likely will result in fewer workers benefiting from this misguided wage mandate.

One of those principles – the law of supply and demand – holds that when the cost of something increases, the demand for it shrinks. When the price of hiring low-skilled, inexperienced workers climbs, demand for those workers diminishes.

Judging from the near-unanimous approval of House Bill 305 in the 2007 General Assembly, an overwhelming majority of Frankfort’s politicians erroneously believe that employers have an unlimited stash of cash to lavish upon workers. However, when faced with artificially inflated labor costs, employers often take a cleaver to all sorts of business costs, including firing workers, cutting hours or reducing training. Also, they are less likely to create new jobs for low-skilled workers.

Another misnomer is that a higher minimum wage is an effective tool to combat poverty.

David Nuemark, economics professor at the University of California, Irvine and senior fellow at the Public Policy Institute of California, found minimum-wage hikes actually do more harm than good for those mired in poverty.

Nuemark’s recent study, “The Economic Effects of Minimum Wages,”2 shows that raising the minimum wage actually increases the number of poor families in a state through lost jobs, fewer hours or difficulty in finding work.

Adding insight on this issue is a 2004 study by the Employment Policies Institute, which discovered that mothers in states where lawmakers hiked the minimum wage above the federal limit stayed on public assistance 44-percent longer than similar mothers in states that kept their minimum wage at the federal minimum.3

Minimum-wage increases can also mean more sparse benefits, leaving more workers dependent on taxpayer-funded welfare programs. In the end, society is not merely robbed of the valuable services and productivity these workers would provide. Your tax dollars must also support those left with fewer tools to get that all-important first job.

Neumark’s study also found that young workers from poor families suffer most of the negative effects of a minimum-wage increase. Since a large share of minimum-wage workers are young people from high-income families, a higher mandatory wage means poor breadwinners must compete with teenagers from upper-income families for fewer jobs at the higher wage.

Also, many workers will be deprived of on-the-job training programs typically financed through lower wages. Studies find that, on average, adults exposed to higher minimum wages as teenagers or young adults have lower earnings as their careers advance4. As a result, many younger Kentuckians may be unable to secure the skill levels needed to advance their careers.

Few deny the good intentions of those advocating a higher minimum wage. The unfortunate reality is that the very people this law is designed to help – low-skilled and low-wage workers – are hurt the most.

The most reliable way for workers to increase earnings is through work experience and training. With a higher minimum wage, there will be fewer low-skilled employment opportunities, cutting off the first rung of the career ladder for many inexperienced workers.

This is most likely to happen in the fast-food industry, which employs a significant share of Kentucky’s low-skilled workers. A recent case study published in the American Economic Review calculated that increasing the minimum wage by 10 percent would result in a .10 to .25 of a percentage point increase in the unemployment rate in the fast-food industry.5

The higher minimum wage that some in Frankfort want to dictate will destroy opportunity for many young and poor Kentuckians looking for work. As Tom Foulkes, vice president of state relations at the National Restaurant Association recently said, by voting to increase the minimum wage, state lawmakers “may be voting workers right into the unemployment line, particularly the least-skilled – the very people wage hikes are supposed to help.”

– Brian Balfour is a policy analyst in Washington and an adjunct scholar for the Bluegrass Institute, Kentucky’s free-market think tank.

Sources:

1 “Rhetoric and Reality of the Minimum Wage: Implications for Kentucky” by James P. Ziliak, University of Kentucky Center for Poverty Research.

2 “The Economic Effects of Minimum Wages: What Might Missouri Expect From Passage of Proposition B?” by David Nuemark, Show-Me Institute, October 2006.

3 “Why Raising the Minimum Wage is a Poor Way to Help the Working Poor” by R. Burkhauser and J. Sabia, Employment Policies Institute Study, July 2004.

4 “Who Pays for the Minimum Wage?” by Mark Steckbeck, Mackinac Center for Public Policy, March 2006.

5 “Minimum Wages and Employment: A Case Study of the Fast-food Industry in New Jersey and Pennsylvania: Comment” by David Neumark and William Waschner, American Economic Review, Vol. 90, No. 5, December 2000. (registration required).

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