Minimum Wage Doesn’t Help The Poor

  • Author: Kristen Lopez Eastlick

  • Publication Date: December 2009

  • Newspaper: Waterbury Republican-American

  • Topics: Minimum Wage, Teen Unemployment

Friday, Connecticut’s minimum wage will increase to $8.25 per hour, making it the third highest in the nation and $1 an hour higher than the new federal rate. This increase, which passed after lawmakers overrode a veto by Gov. M. Jodi Rell in 2008, comes at a particularly damaging time for the state’s entry-level work force.

In passing the higher wage, well-intentioned politicians hoped this policy would benefit low-income workers, spur job creation and “help families that are really struggling.” But decades of economic data show the opposite is true. Minimum-wage increases make it harder to find employment, particularly for the most vulnerable job-seekers.

How is it that a higher wage would hurt low-wage workers? 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 increase of 25 cents an hour translates to $10,000 in annual costs for a business with 20 minimum-wage employees.

Businesses with small profit margins need to increase sales by hundreds of thousands of dollars to generate the profit to pay those costs.

When businesses can’t make up those costs in increased sales, a real challenge in today’s anemic economy, they find other ways to cut expenses.

They are forced to eliminate jobs or reduce 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 their higher salaries. This move effectively shuts low-wage and entry-level employees out of the labor market. These workers may lack tangible on-the-job training or have a lower level of literacy, and are most in need of the employment and experience.

According to research from the University of California-Irvine, the negative effects of minimum-wage increases are overwhelmingly concentrated among the most vulnerable employees, particularly young minorities and high-school dropouts. In a weakened economy, and in a state where the 8.8 percent unemployment rate represents a 44 percent jump from a year ago, these vulnerable Connecticut job-seekers will have even fewer employment opportunities.

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

When the legislation was introduced, an Employment Policies Institute analysis of Bureau of Labor Statistics data showed 85 percent of those who would benefit from Connecticut’s minimum-wage increase had no dependents and either lived with their parents or another relative or lived alone.

And almost half of the expected beneficiaries lived in families with incomes exceeding $75,000 a year, given that the minimum-wage employee is generally not the primary family wage earner.

Historically, the idea that a minimum-wage increase helps to lift poor families out of poverty hasn’t been supported by results.

Research from economists at American University and Cornell University in 2008 showed the many state minimum-wage increases between 2003 and 2007 did nothing to reduce poverty rates. And economists at Ohio University found the federal minimum wage didn’t decrease poverty, and may actually have increased poverty for certain subgroups.

This is because the negative effects hit the low-skilled, and the majority of benefits go to families that aren’t poor.

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

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