February 6, 2005
Democratic lawmakers announced in Flint that they want to raise Michigan's minimum wage by 40 percent over the next two years to $7.15 an hour, and The Flint Journal quickly endorsed the proposal ["Michigan should follow other states in granting raise," Opinion, Jan. 25, Page A12].
Minimum wage laws demonstrate perfectly how we are deceived by our emotions and natural instincts. Our intuition, along with our sense of humanitarian concern, tells us that increasing the minimum wage will help unskilled workers. Raising the minimum wage certainly helps some unskilled workers who manage to find or keep a job after the artificial wage increase. Unfortunately, increases in the minimum wage always destroy thousands of jobs and significantly reduce employment opportunities for unskilled workers.
When government artificially sets a price higher than the true market price, it guarantees that there will be a surplus. That is exactly the inevitable result of an artificially high minimum wage - a surplus of young (unemployed) workers, which is reflected already in the current 16 percent unemployment rate for teenagers. And that is why the minimum wage law is bad legislation: It hurts the very workers that it is designed to help - the young, unskilled workers who need work experience the most.
From history and economics, we know that increasing the minimum wage leads to three certain outcomes:
No amount of wishful thinking or compassion by lawmakers or unions will change the basic realities of the labor market that result in these certain outcomes, just like no amount of wishful thinking by politicians can change the law of gravity.
Politicians can artificially increase wages for unskilled workers, but minimum wage laws cannot force Michigan business owners to hire workers at those wages. We can hope that employers ignore the laws of economics, but experience tells us that they won't. At the artificially high wage, fewer unskilled workers will be hired by Michigan's businesses that provide entry-level jobs.
Economic studies show that for every 10 percent increase in the minimum wage, employers typically respond by reducing demand for labor by 1 percent. Therefore, a 40 percent increase in Michigan's minimum wage would reduce the demand for labor by 4 percent over the next two years, which represents thousands of lost jobs in a state that already has the country's highest unemployment rate (7.3 percent).
Research also shows that black teenagers are especially hurt by the minimum wage. Between 1949 and 1955, the unemployment rate for black teenagers (13 percent) was about the same as for white teenagers (12 percent). As Congress increased the federal minimum wage over the years, black teenage unemployment crept up to its current level of 31 percent.
On the other hand, white teenage unemployment has remained constant over the years at between 12 and 14 percent. And during periods when the minimum wage stayed constant (1981 to 1990, for example), black teenage unemployment fell as inflation made the real cost of the government-mandated wage easier for businesses to afford.
Raising the minimum wage will hurt Michigan's struggling economy and the already fragile labor market, especially the displaced workers who will be priced out of the labor market by artificially high wages. How can the thousands of unemployed, unskilled Michigan workers be better off without a $7.15-an-hour job than they would be with a job that pays $5.15 an hour?
The real problem facing the workers affected by the minimum wage is not that they are underpaid, but that they are under-skilled. Unskilled workers in Michigan don't need our intuition and humanitarian intentions. They need employment so they can gain valuable work skills.
To truly help our unskilled workers, maximize employment opportunities, and help Michigan's struggling economy now and in the future, lawmakers in Lansing shouldn't increase the minimum wage; they should repeal it once and for all, or at least refrain from raising it.
(Mark J. Perry is a finance and economics professor at the University of Michigan-Flint.)