Pro & Con: Does raising the minimum wage help the economy?

NO: Already cutting jobs, some industries will cut more workers. By Don Sabbarese In times of…

Georgia (Aug 11, 2009) — NO: Already cutting jobs, some industries will cut more workers.


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By Don Sabbarese

In times of recession, raising the minimum wage will lead to higher unemployment.

Ever since President Franklin Roosevelt convinced Congress to pass legislation in 1938 setting a minimum wage, the debate over whether a wage floor leads to loss of jobs has never been settled.

Last month, when the minimum wage went up to $7.25 — for the third time since 2007, increasing by more than 40 percent in two years — the debate flared up yet again.

While the new minimum is expected to lift the wages of many of the least skilled laborers and add much needed dollars to the economy, a higher minimum wage presents a set of problems at a time when many industries are facing sharp drops in demand and prices.

Complicating matters is the rise of Georgia’s unemployment rate from 4.5 percent to 10.7 percent in the last 18 months, an obvious indication that Atlanta’s labor market has transitioned from a tight market to one with tremendous excess supply.

Businesses in highly competitive industries such as fast food, restaurants and hotels, typically cut their labor costs to survive a recession; the less fortunate go out of business. These factors have contributed to one of the worst job markets Georgia has seen.

These industries are major employers of the demographic groups with the highest percent of low-wage and low-skill workers in the 16-19 age group and the subgroup of African-American teenagers, which have current unemployment levels of 24 percent and 38 percent, respectively.

The critical policy consideration is whether or not raising the minimum wage for the lowest-paid and least skilled workers can be carried out without diminishing their job opportunities.

Unfortunately, the minimum wage policy is not fine-tuned. There are transitory teenage workers in the 16-19 age group who will move on to higher wages, but there are also permanent low-wage, low-skill workers who unfortunately will not.

The permanent low-wage workers are the most exposed to the loss of jobs through labor substitution. Employers of low-wage workers must calculate whether the cost of labor at the new, higher minimum wage exceeds the hourly value of what these workers produce.

If that’s the case, then employers will have an economic incentive to either substitute that worker with a more productive worker or replace him or her with capital.

In a recession, this inexorable process will ultimately exacerbate the unemployment level for these groups. For teenage workers living at home it is not a pressing issue.

But for single mothers, it can be overwhelming, regardless of subsidies such as the earned income tax credit and food stamps. Setting a price floor for the least skilled labor markets will limit job creation in the long run, which is an unfortunate reality for these workers.

Perhaps policy-makers should consider less market-intrusive policies, such as income subsidies, as an alternative for maintaining a livable wage.


Don Sabbarese, an economist, is director of the Econometric Center at the Michael J. Coles College of Business at Kennesaw State University.


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