Bluegrass Beacon: Not all minimum-wage hikes are created equal

By JIM WATERS
Bluegrass Institute for Public Policy Solutions

Strow, Ph.D., notes that minimum-wage workers comprise 6.3 percent of the workforce in the East South Central Census region, where Kentucky is located, but only 1.5 percent of Pacific Region employees.

That’s why the $10.10 minimum wage proposed by the Obama administration would have a bigger and more-negative effect on the commonwealth’s business community than a similar increase in, say, Washington state, where a much-smaller percentage of the workforce earns the minimum wage

“The states that see the largest escalation in unemployment from a minimum-wage increase are those with the lowest wages, which is why Kentucky’s unemployment rate spikes relative to the U.S. rate when the federal minimum wage is increased,” Strow writes.

And if Washington should not do it because of the harm it would cause states like ours, then surely our own state Senate should stop the Kentucky House’s plan to raise the commonwealth’s minimum wage to $10.10.

Not understanding the difference in the impact minimum-wage increases have on various regions exposes economic illiterates like Louisville Metro Council member Attica Scott who, during the recent debate about raising her city’s minimum wage, spurned Mayor Greg Fischer’s compromise offer of $8.75 as keeping low-wage workers “economically enslaved.”

Scott suggests that $10.10 still wouldn’t be nearly enough – pointing to Seattle’s $15 minimum wage.

But government-forced wage hikes don’t affect all areas equally; nowhere do they occur in a vacuum.

Which workers, for instance, does Scott think are the first let go when a company shrinks payroll in order to stay in business? It’s those lowest on the totem pole.

“Workers in a market economy are not paid above their marginal-revenue product for extended periods of time,” Strow teaches. “The employers will only hire employees if their wages (plus benefits) are less per hour than the company brings in per hour in new revenue generated by the employees’ presence. Employers will not pay someone $10.10 hourly to bring in $8 an hour of new revenue.”

Strow explains that a person “whose skill set combined with the circumstances of time and place allows them to bring in $8 an hour of extra revenue to a firm will be hired if the minimum wage is $7.25 an hour but will lose said job in many businesses if the minimum wage is increased above $8 an hour.

That’s because businesses adjust in myriad ways to government-forced wage hikes, including reducing employees, cutting current workers’ hours, automation (remember when a human being used to check your bags at the airport?) or closing their doors.

Neither are all demographic groups equally affected by minimum-wage hikes.

According to the Census, for example, more than half of minimum-wage workers are between 16 and 24 years old.

Strow argues that young people looking for work were most affected by past minimum-wage increases – a trend he believes would only worsen with another hike now. Youth employment fell between March 1990 and July 2014 from 47.1 percent to 27.1 percent; youth employment is barely more than half what it was 25 years ago.

He doesn’t believe it’s a coincidence that such a sharp drop in youth employment occurred during a period of steep increases in the minimum wage, which rose 40 percent – from $3.35 to today’s $7.25 per hour.

“Youth employment is almost half of what it was 25 years ago,” Strow said. “A climb up the income ladder begins by placing one’s foot on the lowest bar. If society truly wants more people moving up the income ladder, it must stop removing the lowest rungs of that ladder.”

Jim Waters is president of the Bluegrass Institute, Kentucky’s free-market think tank. Reach him at jwaters@freedomkentucky.com. Read previously published columns at www.bipps.org.

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