Minimum wage hike hurts Maine and low-income workers

  • Author: Kristen Lopez Eastlick

  • Publication Date: October 2009

  • Newspaper: Portland Press-Herald

  • Topics: Minimum Wage, Teen Unemployment

Maine’s minimum wage increased to $7.50 per hour this month, making it the eighth highest in the nation and 25 cents higher than the new federal rate. This increase – passed last spring as the recession was beginning in earnest – comes at a particularly damaging time for Maine’s entry-level work force.

In passing the higher wage, well-intentioned politicians hoped this policy would benefit the state’s low-income workers and give earners access to “good–paying jobs and a bright future.” But decades of economic research show the opposite is true: Wage hikes make it harder to find employment – particularly for the most vulnerable jobseekers.

How is it that a higher wage would hurt the low-wage work force? It’s the law of unintended consequences.

The minimum wage affects employers who largely hire from the entry-level work force. This year’s wage hike of 25 cents an hour translates to $10,000 in annual costs for a business with 20 minimum wage employees – on top of the $10,000 imposed by last October’s increase.

Businesses with small profit margins will need to increase sales by hundreds of thousands of dollars to recoup those increased costs.

When businesses can’t make up those costs in increased sales – especially difficult in today’s economy – they find other ways to cut costs: by eliminating jobs or reducing employee hours.

Even if jobs are not cut, companies respond to higher labor costs by shifting their hiring focus to higher skilled employees whose productivity can match the higher salaries. This move effectively shuts unskilled workers out of the labor market.

According to research from the University of California-Irvine, the negative effects of wage hikes are overwhelmingly concentrated on the most vulnerable employees, particularly young minorities and high school dropouts.

In a weakening economy – and in a state where the 8.6 percent unemployment rate represents a 65 percent jump from a year before – these vulnerable employees will have even fewer employment opportunities.

So if minimum wage hikes deprive vulnerable workers of job opportunities, who does benefit?

Our analysis of Bureau of Labor Statistics data indicated that 75 percent of the workers who would benefit from Maine’s wage hike had no dependents and either lived with their parents or another relative or lived alone. In looking at the most recent federal minimum wage hike, the average family who benefited from the wage hike has an income of over $47,000 a year.

Historically, the idea that minimum wage hikes help lift poor families out of poverty simply hasn’t been supported by results.

Research from economists at American University and Cornell University in 2008 showed that the many state minimum wage hikes that took place from 2003-2007 did nothing to reduce poverty rates.

And economists at Ohio University found that the federal minimum wage didn’t decrease poverty – and may actually have increased poverty for certain subgroups. This is because while the negative effects hit the low skilled, the majority of benefits go to families that aren’t poor.

It’s time to face the facts: the minimum wage is no longer an effective anti-poverty tool.

Good intentions don’t outweigh economic realities. The evidence is clear: economists consistently find that minimum wage increases provide little more than symbolic support to the working poor.

Kristen Lopez Eastlick is the senior economic analyst at the Employment Policies Institute, a nonprofit research organization in Washington dedicated to studying public policy issues surrounding entry-level employment.