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Yes, minimum wage increases reduce employment and hurt low-skilled workers

12/11/2014

Earlier this year, the Congressional Budget Office released an analysis on effects of raising the minimum wage to $10.10 per hour, a proposal supported by President Barack Obama and many Democrats on Capitol Hill. The nonpartisan fiscal research arm of Congress estimated that this artificial increase would result in as many as 1 million workers losing their jobs, a finding that was disputed by the White House and economists more interested in advocacy for a cause than the consequences of bad policy.

There is real world evidence, however, that an increase in the federal minimum wage increase will have a negative impact on employment. Economists from the University of California-San Diego recently released a study showing that the 2007 federal minimum wage hike reduced national employment.

In 2007, the Fair Minimum Wage Act was included as a rider on an emergency appropriations bill to continue funding for the Iraq War. President George W. Bush, who insisted on and got tax incentives to offset the impact of the hike, signed the measure into law. The Fair Minimum Wage act mandated that the federal minimum wage in three steps, from $5.15 to $5.85 per hour in July 2007 to $6.55 in July 2008 to $7.25 in July 2009, where it stands today.

Jeffrey Clemens, an economics professor at University of California-San Diego, and Michael Wither, a grad student at the school, found that the federal minimum wage hikes "had significant, negative effects on the employment and income growth of targeted workers" from December 2006 to December 2012, a period which covers the Great Recession and subsequent economic recovery. The study did not estimate the impact in states with minimum wage laws that were greater than the federal rate.

"Our best estimate is that this period’s minimum wage increases resulted in a 0.7 percentage point decline in the national employment-to-population ratio for adults aged 16 to 64," write Clemens and Wither. "This accounts for 14 percent of the total decline in the employment-to-population ratio over this time period." Overall, the employment-to-population ratio during this time period covered by the study fell from 63.4 percent to 58.6 percent.

The study found that the minimum wage hike "increased the likelihood that targeted individuals work without pay," gaining experience through internships. The authors note that "[t]his novel effect is concentrated among individuals with at least some college education."

Clemens and Wither also point out that low-skilled workers are the hardest hit by minimum wage increases. "Our estimates," the economists explain, "provide evidence that binding minimum wage increases reduced the employment, average income, and income growth of low-skilled workers over short and medium-run time horizons."

Like the CBO analysis of the proposed $10.10 minimum wage, the Clemens-Wither study serves as a warning for what'll happen if Congress artificially increases wages. It'll reduce employment, hurting low-skilled, already low-income workers -- the very people whom advocates say it's intended to help -- the most.