Raising the minimum wage would boost the wages of some workers, but it also would result in fewer jobs.
Earlier this year, President Obama proposed increasing the federal minimum wage to $10.10 an hour, setting off a vigorous debate about how the minimum wage works in labor markets and what a change would mean for America’s poor. Those who support an increase in the minimum wage insist that it is an inexpensive, effective way to reduce poverty in America.
Raising the minimum wage would boost the wages of some workers, but it also would result in fewer jobs, as employers economize on low-skilled labor in response to their higher costs. We used data from the Bureau of Labor Statistics to determine the number of Wisconsin workers earning under $10.10 an hour and also combed through the academic literature to come up with a consensus estimate of an elasticity of labor demand for low-skilled workers. Our goal was to use this information to estimate how many workers in Wisconsin who are earning below the proposed $10.10 minimum wage could be expected to lose their jobs. In addition, we looked specifically at those workers in major metropolitan areas and across industries.
We found that 475,000 workers earn less than $10.10 an hour in Wisconsin, or roughly 17% of all people currently employed. More than 23% of all workers in the northern Wisconsin area currently earn less than $10.10 an hour, while just 13% of workers in the Madison metropolitan area — which has the highest wages in the state — earn less than that. And while a relatively low proportion of Milwaukee workers earn below $10.10 an hour, there are still 125,000 workers in the Milwaukee area earning below that wage.
Our estimates show that imposing a $10.10 an hour minimum wage would result in between 12,000 and 55,000 workers losing their jobs. A $9 an hour minimum wage would result in somewhat smaller job losses — between 4,000 and 20,000. Our results are broadly consistent with a report published by the nonpartisan Congressional Budget Office earlier this year, which estimated that the minimum wage boost would destroy between 500,000 and 1 million jobs nationwide.
Imposing a dramatically higher minimum wage would do more than merely decrease the employment of low-income workers: It would cloud the future employment prospects for young workers as well. While few can argue about the desirability of helping low-income parents earn more money, a policy that stifles youth employment — and along with it the chance to develop a resume and tangible skills valued by employers — represents a pyrrhic policy victory at best.
What’s more, a minimum wage increase would also likely cause a price increase for products and services produced by minimum wage earners — a burden disproportionately felt by the very low-income workers whom a higher minimum wage is designed to help. Economists estimate that up to 40% of minimum wage costs are passed on to consumers.
The minimum wage is an exceedingly blunt instrument to use to tackle the thorny problem of poverty in America, and more precise tools are at our disposal. For instance, the earned income tax credit can offer the working poor the same wage increase they would receive under a minimum wage, but without destroying jobs. Because the government administers the EITC through the tax code, it can also be targeted directly to the working poor. It may cost the government more, but it costs society much less, a tradeoff we should be happy to accept.
