Have you ever wondered why poor areas have more empty lots than rich areas? Why unemployment is much higher in poor areas than in rich areas? Why minorities, especially blacks, high school drop outs and those with the least amount of skills have a harder time finding a job than others? A lot of the reason for all of this is the minimum wage, and that is what I want to write about today.
Before I go on, we have to ask who is on the minimum wage? If you look at government stats (see here, here and here) you will see that most of the people that are on minimum wage are part time workers and a full four-fifths of all minimum wage workers are not poor. People like, stay-at-home moms who want to supplement their full-time spouse's earnings, teenagers working after school, and other students. These are students that tend to live in good neighborhoods, are relatively well educated, and are already doing okay, being that mommy and daddy pays most of their bills. Of course there are some 'single mothers of four' and other truly poor people living on the minimum wage but they are an extremely small percentage, by far the bulk of people on the minimum wage are young college kids starting their working lives. In addition, most people on the minimum wage are on there for a relatively short amount of time. In other words, the minimum wage is only their first step in a long road ahead of higher wages and more opportunities. The minimum wage in this respect is the gate way, the entry point, where an employer takes on a relatively small risk to hire you and see what you can do, after all, a teenager fresh into the work force has little to no work experience to be evaluated on.
Okay, so what happens if the minimum wage starts to increase? While economists may disagree on the magnitude of the effects of the minimum wage, here are a few things that economists universally would agree, and all things that primarily affect minorities.
1. The minimum wage harms the least productive most
What politicians won't tell you but what ALL economists know is that the people who are most likely to lose their job due to an increase in the minimum wage are the least educated, the ones with the least skills, and the ones that are likely to keep their jobs are the more educated, the ones with the most skills. For example, if you had to lay someone off, with all things being equal would you rather lay off someone with or without a high school diploma? With or without the ability to speak english? With or without a criminal record? Remember, as the minimum wage goes up the market becomes an employers market (supply increases and demand drops) so that employer now has more people to choose from.
So being that minorities are the ones that tend to be less educated either because of a poor public school system, or the lack of english speaking parents at home, it is primarily poor minorities that feel the brunt of the minimum wage - while middle class white students reap most of the rewards.
Free exchange, a blog provided by the Economist magazine, explains it this way:
It seems very likely to me that the small number of people made redundant as a result of a modest minimum wage hike are very likely to be the worst off of the poor: convicted felons, recovering drug addicts, welfare mothers, the cognitively disabled, high school dropouts, those whose backgrounds were too chaotic to impart good work habits. The well-connected, well-socialised middle class teenaged and twenty-something students, on the other hand, seem disproportionately likely to keep their jobs.In short, the minimum wage is a subsidy to relatively affluent workers at the expense of poor, less educated workers.
2. The minimum wage harms poor areas over rich areas
In addition to harming primarily poor people, the minimum wage harms primarily poor areas. Think of it this way, lets say that you were a person looking to open up a new business and you were looking for communities to open that business in. Well, if you wanted to open up that business in a poor neighborhood you would have alot of things working against you - you would tend to have a lower educated work force, customers with less buying power, and sometimes an area with a high crime rate (higher security risks and costs etc). Well, if you were able to pay whatever you wanted, you could pay your employees lower wages to compensate for some of those disadvantages but a minimum wage takes that option away. So now, especially for those companies that are not extremely profitable, your choices are more limited. You can't, even if you wanted to, open up in a poor neighborhood because your costs will exceed your profits. So what is that poor community left with? Nothing - with less companies opening up shop there. Have you ever wondered why poor neighborhoods have so many empty lots? Well the minimum wage is a big reason for that...and of course the neighborhoods that benefit are those neighborhoods with more educated citizens, with less crime, and with more disposable income. In short, the minimum wage harms the poor communities to the benefit of the richer communities.
To think of this another way, it is important to note that the minimum wage was first passed at the national level in 1938, around the time of the second wave of the great depression. If you were to look at the voting record of that legislation, one of the things you would discover is that the northern senators voted almost unanimously in favor of the minimum wage and the southern senators voted almost unanimously against the minimum wage. The reason for that is that wages were alot lower in the south, the south being the part of the country with the most ex-slaves. So the minimum wage was basically set at a level above southern wages but below northern wages. The minimum wage was set by the northerners as a way to keep jobs in the north by preventing businesses from moving to the south to take advantage of the lower wages. Who paid for this minimum wage? Unemployment during that time was almost all poor southern workers, primarily black southern workers, who were basically priced out of the labor market (the minimum wage was also used to price women out of the labor market, see here ). In short, the more you raise the minimum wage, the more you harm poor areas at the benefit of rich areas.
Is it a coincidence that the minimum wage is primarily supported by legislators from San Francisco, New Jersey, Massachusetts, and other high cost areas, where the minimum wage is more symbolic than anything else, because wages already have to be high to cover the extremely expensive living costs? I don't think so.
3. The minimum wage makes discrimination less costly, therefore easier to discriminate
Lets talk about racism and how the minimum wage helps racists. Lets say that I was a racist and I wanted to open up a restaurant but I hated Mexicans so much that I refused to hire any in my shop. My shop is to have whites, and whites only. Well one of the first things I will learn, as any restaurant owner will tell you, is that Mexicans are extremely productive at such a cheap price. To put it another way, it is hard to get any other group of people to work so hard for such little money. Try hiring a bunch of middle class white kids to wash dishes, clean tables, sweep the floor, cook the food, all for close to the minimum wage, it just isn't going to happen. So okay, I am a stubborn racist and decide to do it anyway - problem is, to get the same quality of workers I have to now pay them more per hour, say $8, or $10/hour. That is the beauty of the market system, I now have to pay for my racism. Whereas the non-racists are getting the same productivity from their works as I am but at a much lower rate, I have to forego precious profits to support my racist beliefs. Furthermore, in a really competitive market this is enough to put me out of business!
Now, factor in the minimum wage and what happens? Well you have just made it easier for me to be racist. Now I may have to pay $8/hour or $10/hour but you know what, so does everyone else, in other words, you have reduced and spread out the costs I previously had to incur to follow my racist beliefs....and the Mexicans that used to work there? Sure, some of them keep their job but some would surely be replaced. Think of it this way, if you were an employer and you had to pay an employee $10/hour no matter what, would you rather have one that spoke english or one that didn't? One with more education or less? One with a criminal record or one without? In other words, the minimum wage is to the benefit of those who have more skills and makes it less costly to discriminate. For more on this, go here, here, and here.
With the accumulation of the above taken into account, it is easy to understand why the harm of the minimum wage falls primarily on poor, low educated, low skilled, minorities, especially blacks.
David Neumark, professor of economics at UC Irvine and Olena Nizalovaof have a NBER study on the long-run effects of the minimum wage, it states ( here ):
Exposure to minimum wages at young ages may lead to longer-run effects. Among the possible adverse longer-run effects are decreased labor market experience and accumulation of tenure, lower current labor supply because of lower wages, and diminished training and skill acquisition. Beneficial longer-run effects could arise if minimum wages increase skill acquisition, or if short-term wage increases are long-lasting. We estimate the longer-run effects of minimum wages by using information on the minimum wage history that workers have faced since potentially entering the labor market. The evidence indicates that even as individuals reach their late 20's, they work less and earn less the longer they were exposed to a higher minimum wage, especially as a teenager. The adverse longer-run effects of facing high minimum wages as a teenager are stronger for blacks. From a policy perspective, these longer-run effects of minimum wages are likely more significant than the contemporaneous effects of minimum wages on youths that are the focus of most research and policy debate.(emphasis added)The more the minimum wage is lifted, the harder it is for those with less skills, less education, and more barriers to climb (english, racism, etc) to overcome, leading to more and more people being priced out of the labor force, and so it should be no suprise that the minimum wage hits hardest those who are most vulnerable to racism, living in bad areas, and low education.
In addition to all of this, the minimum wage benefits large businesses and harms small businesses, it causes an increase in prices, it increases unemployment and it reduces competition, all in all, things that primarily harm the poor. But hey, it brings in votes, so who cares right? (Originally published 1/24/2007)
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