Minimum-wage delusions
Pennsylvania's Minimum Wage Advisory Board has just released a report prepared for it by the state's Department of Labor and Industry. The study concludes that last year's two-step increase in the minimum wage to $6.25 per hour in January and then to $7.15 in July had little or no negative effect on employment levels or the unemployment rate.
Thus, given the board's finding that the number of Pennsylvania workers earning less than $7.15 per hour was reduced by 132,800 from 2006 to 2007 and no harm was done to the economy, the reader is led to infer that raising the minimum wage was an unalloyed success in assisting workers in the lower pay levels as they struggle to climb out of poverty.
Considering the makeup of the advisory board, the major conclusion of the report should not come as a surprise to anyone. The 10-member board consists of three labor representatives, the executive director of the Allegheny County Democratic Committee, a representative of a community activist group in Philadelphia, a Democrat commissioner of Fayette County, the secretary of the Department of Labor and Industry (who serves as board chair) and three employer representatives.
Basically, it's 7-3 majority on the board heavily in favor of the minimum-wage hikes.
Wrong & contradictory
Predictably, the report is wrong on a number of counts as shown by contradictory information within the report itself and our calculations indicating there has been a significant slowdown in job growth.
Moreover, there are negative consequences to raising the minimum wage not taken into account by the study that could turn out to be quite important when a full analysis is conducted.
Let's examine first the claim that there were little or no negative employment or unemployment rate effects.
By way of background, note that the board's report confirms what many earlier studies have found: Workers with wages at or below the minimum wage are heavily concentrated in the youngest age groups (especially the 16-to-19 range), part-time workers (who account for more than 70 percent of total), the least educated and the never married.
Indeed, while the 16-to-19 age group represent only 5 percent of total employment, it accounts for 33 percent of all workers earning minimum wage or less.
Contradicting the advisory board's principal finding, the report itself shows that employment in the two youngest age groups fell by a combined 25,000 jobs.
Further, the unemployment rate for the 16-to-19 age group climbed 33 percent -- from 7.4 percent in 2006 to 10 percent in 2007.
The 20-to-24 age group also saw an uptick in unemployment -- rising from 5.2 percent to 5.5 percent.
In short, the report contains evidence that the groups most likely to receive the increased minimum wage did suffer a significant negative impact.
More bad news
But it gets worse.
In the first halves of 2005 and 2006, nonfarm jobs grew at an average annual rate of just over 1 percent. However, in the first half of 2007 -- after the minimum wage was raised to $6.25 per hour -- jobs grew at a yearly rate of just 0.4 percent.
In the second halves of 2005 and 2006, employment rose at an average annual rate of 0.9 percent. By comparison, during the second half of 2007 -- following the boost to $7.15 per hour -- nonfarm jobs crept up at a very meager 0.2 percent annualized rate.
Granted, it could be argued that other economic factors caused this abrupt slowing. However, the job losses by groups in line to get a major wage increase suggest that the higher minimum wages did affect overall hiring quite negatively.
Here's the problem:
A mandated wage set higher than the free, competitive marketplace wage is, in essence, a tax. It's a tax levied to redistribute income from employers to employees.
Income also is redistributed from customers to employees to the extent firms are able to pass along the higher costs by raising prices.
Bear in mind, too, that as wages go up, the employer must pay more for the Social Security match and unemployment insurance.
Unsavory consequences
If an employer is unable to pass along all the added costs, the business is faced with five alternatives:
• Endure a net profit decline
• Find other ways to save on production costs
• Reduce the number of employees
• Trim employees' hours of work
• Or some combination of the four.
At this juncture, data have not been gathered to show how many previously full-time workers might have been shifted to part-time, or how many part-timers have seen their hours cut.
Neither has there been any survey to determine the degree to which rising employee wage costs have been offset by reductions in overtime or fringe benefits such as health-care contributions, vacations and sick leave, etc.
Obviously, as any of these happen, the high-minded "rationale" for raising the minimum wage is stripped bare. And what's left is the true and actual motivation for legislating the increase:
It's all political, reflecting the needs and wishes of the powerful, self-absorbed interest groups that care little about the long-term damaging consequences of bad economic policy.
Jake Haulk is president of the Allegheny Institute for Public Policy. Frank Gamrat is a senior policy analyst there.
