THE BLOG
04/23/2014 03:04 pm ET Updated Jun 10, 2014

Popular Does Not Mean Practical: The Case Against the Federal Minimum Wage

An astounding 71 percent of Americans believe that the federal government should raise the minimum wage to $10.10, including 87 percent of Democrats, 68 percent of independents and 50 percent of Republicans, according to Pew Research's most recent polls. Raising the minimum wage is so popular, in fact, that President Obama chose to make it the central issue in his 2014 State of the Union Address. In a national trip aimed at promoting his minimum wage, President Obama told audiences, "I am choosing this to be a year of action because too many Americans are working harder than ever just to get by, much less get ahead." Unfortunately, Obama's minimum wage will do just the opposite: it will make it even more difficult for hard working Americans to find employment.

Economics 101 helps us understand the problem. When employers face higher labor prices, they have to cut costs. Labor often being the most expensive factor in production, companies will lay-off workers. When asked for a counter-narrative, most minimum wage advocates stare blankly, or argue that increased spending by minimum wage earners will stimulate the economy. The former is not an explanation, and the latter is non-responsive. By definition, minimum wage earners will spend more money, but if workers are fired, the number of minimum wage earners will decline, and the net effect would be economic contraction.

Alternatively, liberal economists argue that because the labor market is uncompetitive, firms wield disproportionate power and are therefore able to exploit workers. Since labor-demand is inelastic (McDonalds needs someone to flip burgers, no matter the cost), firms will have to keep the same number of employees and pay for their higher wages by reducing their own profits. For a few specific companies (a number of fast-food and retail giants come to mind), this may be accurate. For the 28 million small businesses in America however, who collectively employ more than 50 percent of the American population, a 40 percent spike in labor costs cannot simply be compensated for by cutting profits. In fact, even among larger companies, I suspect that few firms are earning enough profit to make full-employment at higher wages a feasible option.

Indeed, economists who have crunched historical minimum wage data have found that raising the minimum wage generally has negative effects on employment. A meta-analysis of 102 minimum wage studies conducted by the National Bureau of Economic Research found that 67 percent of studies found negative employment effects, 25 percent found no effect, and only 8 percent found a positive employment effect. Of the 33 most robust studies, 85 percent of these point to negative employment effects. Surveys of businesses tell the same story. According to the Wall Street Journal a $10 minimum wage would cause 54 percent of employers to reduce hiring and 34 percent to begin immediate layoffs. Overall, the Congressional Budget Office (CBO) finds that this would cost the US between five hundred thousand and one million existing jobs, while the American Action Forum estimates its would cost the US 2.3 millions new jobs per year. It's no wonder then that economists David Newmark, Mark Schweitzer and William Wascher found that a higher minimum wage results in a net increase in the proportion of poor families, with the "losers" outnumbering the "winners."

Young people, especially African Americans, are hit the hardest. Economists William Even and David Macpherson find that each 10 percent increase in the minimum wage decreases employment by 2.5 percent, 1.2 percent, and 6.5 percent for white, Hispanic and black males ages 16-24, respectively. Meanwhile, the minimum wage encourages students to dropout of high school in pursuit of higher paying jobs (that don't exist), according to the Economic Policy Institute. Overall, a Michigan State University study showed that a higher minimum wage would increase the number of idle teens -- those who neither work nor attend school -- by as much as 20 percent. These young adults who are unable to find meaningful employment turn to crime. According to a study published in the American Sociological Review, a 1-percentage point decrease in youth unemployment causes 1 to a 5 percent decline in property crime such as burglary, larceny, and auto theft.

Raising the minimum wage is an enticing proposition because it is a tool intended to help the working poor. Logic and hard facts, however, demonstrate that raising the minimum wage would be counterproductive because it forces companies to lay-off their workers, making it even harder for hard working Americans to make ends meat. Solutions such as the earned income tax credit, by contrast, could help lift millions of Americans out of poverty without threatening their jobs. Pragmatism, not populism, will help create a more equal America.