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Research Shows Negative Effects of Minimum Wage Laws

Our concern with minimum wage laws has a long history, including its "steroid version," the so-called living wage. For example, we've growled as far back as April 23, 2003 and June 29, 2003; use the Growls search engine to find them.

Now, just last week, the Cato Institute published another in their Policy Analysis series, The Negative Effects of Minimum Wage Laws (No. 701, June 21, 2012; requires Adobe). It is written by Mark Wilson, a former deputy assistant secretary of the U.S. Department of Labor and head of Applied Economic Strategies. Here is the policy analysis' executive summary:

"The federal government has imposed a minimum wage since 1938, and nearly all the states impose their own minimum wages. These laws prevent employers from paying wages below a mandated level. While the aim is to help workers, decades of economic research show that minimum wages usually end up harming workers and the broader economy. Minimum wages particularly stifle job opportunities for low-skill workers, youth, and minorities, which are the groups that policymakers are often trying to help with these policies.

There is no "free lunch" when the government mandates a minimum wage. If the government requires that certain workers be paid higher wages, then businesses make adjustments to pay for the added costs, such as reducing hiring, cutting employee work hours, reducing benefits, and charging higher prices. Some policymakers may believe that companies simply absorb the costs of minimum wage increases through reduced profits, but that's rarely the case. Instead, businesses rationally respond to such mandates by cutting employment and making other decisions to maintain their net earnings. These behavioral responses usually offset the positive labor market results that policymakers are hoping for.

This study reviews the economic models used to understand minimum wage laws and examines the empirical evidence. It describes why most of the academic evidence points to negative effects from minimum wages, and discusses why some studies may produce seemingly positive results.

Some federal and state policymakers are currently considering increases in minimum wages, but such policy changes would be particularly damaging in today's sluggish economy. Instead, federal and state governments should focus on policies that generate faster economic growth, which would generate rising wages and more opportunities for all workers."

The 16-page paper is well-worth reading for American taxpayers interested in economic growth. As Wilson notes in the conclusion, "In the American economy, low wages are usually paid to entry-level workers, but those workers usually do not earn these wages for extended periods . . . Rather than pursuing policies such as minimum wages increases that create winners and losers, policymakers should focus on policies that generate faster economic growth to benefit all workers. While minimum wages may be a well-meaning attempt to help workers, economic research clearly shows somebody must pay the price for any increase, and it is usually the least skilled and least fortunate among us.

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