President Barack Obama delivers the State of the Union address at the U.S. Capitol in Washington, D.C. Jan. 28, 2014.

A Higher Minimum Wage Harms the Economy

Public sector intervention won't reduce poverty or boost wages.

President Barack Obama delivers the State of the Union address at the U.S. Capitol in Washington, D.C. Jan. 28, 2014.

A higher minimum wage won't solve the country's economic problems.

By SHARE

As expected, President Obama used part of his State of the Union speech to advocate for a higher federal minimum wage. There is a strong argument that the costs of this policy proposal outweigh the benefits. And that argument is stronger when you take a closer look at the numbers to see who could be directly affected by a higher minimum wage, because it might not be who you think.

Certainly the impact of the recession on the labor market has forced some higher skilled workers into lower paying jobs. However, at this point most of the 8.8 million people making at or near the minimum wage (between $7.25 and $8.25 an hour) are still under the age of 25 and have a high school degree or less. The biggest economic problem for this group is employment of any type. Less than half of this group is even in the labor force and for those that are the unemployment rate is 21.7 percent – well over three times the national average.

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This is an important fact to consider, since raising the minimum wage from $7.25 to $10.10 would be a huge 39 percent increase in hourly wage costs for employers. Common sense dictates that raising the cost of hiring the least skilled workers will prompt employers to reduce employee hours, cut back on staff or replace employees with updated technology such as automated scanners. Further, despite what supporters of a higher minimum wage have said, there is a significant amount of economic research that finds raising the minimum wage by a much more modest amount than what is being proposed only benefits some workers at the expense of jobs for others – particularly the least skilled and experienced workers such as these.

In addition to putting the employment of the least skilled workers at risk, those that stand to benefit from a higher minimum wage aren’t necessarily the neediest. In 2013, there were nearly 24 million wage earners that would be affected by a rise in the minimum wage to $10.10 an hour. Most are single and never married, and only about a quarter of them have children. As the chart below indicates, most are also not the only working members of their households (an individual making $7.25 an hour working full-time would earn approximately $15,000 per year; an individual making $10.10 an hour would earn approximately $21,000 per year). In fact, more than 11 million live in households earning $40,000 or more per year, with nearly 8 million households in that group earning at least $60,000 annually.

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Still, it is understandable that policymakers view a higher minimum wage as a way to help struggling Americans. And it would; but there is a catch. A higher minimum wage would only help those who hold onto their job and current number of hours. Boosting wages, particularly for those who need a pay raise the most, is a laudable goal. But forcing employers to pay more to low-skilled workers could mean job losses for an age group that is already having trouble finding work, and fewer hours for a sector of the labor market that mainly works part-time. And since millions of these lower wage workers live in households earning at – or well above – the national median income, a minimum wage hike would not necessarily provide targeted help to those most in need.

It can be argued that a growing number of low wage earners are people who lost higher paying jobs in the aftermath of the recession and do support families and greatly need the extra income. However, the best way to help those workers is to focus on policies that improve the labor market as a whole and allow the private sector to produce more quality jobs. While public sector intervention is viewed by some as necessary to reduce poverty and boost wages, history has shown that only job gains from a stronger economy can solve the problem.