Busting Minimum Wage Myths

Michael Saltsman

The hit television show “Mythbusters” has a pretty simple premise: People have widely held, wildly inaccurate beliefs, and experts perform experiments to demonstrate their mistakes.

What would happen if we applied that formula to the minimum wage debate?

We’d discover that a number of the beliefs that contribute to the political popularity of minimum wage hikes — including the beliefs that such increases boost the economy, lift people out of poverty, and have no effect on employment — are total myths.

Proponents of a wage hike in Massachusetts argue that lifting the minimum wage to $10 an hour will have no negative consequences and many positive consequences for employees who earn the current wage floor.

A frequent argument you hear made — especially in times of economic uncertainty like these — is that a minimum wage increase will inject much-needed money into the economy. The argument is simple: More money in consumer hands means more money being spent means a higher gross domestic product (GDP), right?

This myth was busted last year by Joseph J. Sabia, a labor economist at West Point. His study shows that past increases to the minimum wage did nothing to boost the economy, and actually led to a drop in output in certain industries that rely heavily on minimum wage labor — specifically, a 2 percent to 4 percent drop for each 10 percent wage increase.

Raising the minimum wage might not increase GDP, but at least it will help employees lift themselves out of poverty, right? This argument makes even more sense: If you pay people a higher wage they’ll have more money and be less likely to get stuck in poverty.

Unfortunately, this is another myth, one that has been busted by a number of studies. Consider the award-winning research from labor economists at Cornell and American Universities (published last year in the Southern Economic Journal) that found no reduction in poverty in the 28 states that raised their minimum wage between 2003 and 2007.

Minimum wage increases are poorly targeted poverty-fighting tools. When the minimum wage was last increased at the federal level, in 2009, nearly 40 percent of the beneficiaries were teens or others living with a parent or relative. Only one in five was a single mother.

What about the remaining adults? A study by Dr. Bradley Schiller from the University of Nevada, Reno, found that 94 percent of families with adults who work a job paying at or below the federal minimum wage have a spouse that works as well. Sixty-three percent of these spouses made over $30,000 a year, with nearly half earning more than $40,000 a year.

In short, adult minimum wage earners are frequently providing a small supplement to a spouse earning far more than the minimum.

Would that number be any different now? That same study from Cornell and American University economists found that less than 11 percent of the benefits of a $9.50 minimum wage increase (which President Obama proposed during his campaign) would go to poor households.

The oddest minimum wage myth is that increases won’t hurt teen employment — oddest because it runs completely counter to common sense rules of supply and demand. The latest work we’ve seen propping it up is a study out of the Institute for Research on Labor and Employment Library (IRLE), a progressive outfit at the University of California at Berkeley.

Busting this myth is easy: According to an analysis from the Employment Policies Institute (EPI), IRLE’s study design was so flawed that New York, New Jersey and Pennsylvania could have simultaneously raised their minimum wage to $50 an hour and no job loss related to such an onerous wage mandate would be detected.

But you don’t need to take the results of any one study to bust myths. Labor economists David Neumark and William Wascher surveyed two decades of research, and found that 85 percent of the best studies on the subject agree that minimum wage hikes hurt employment of low-skilled workers, including teens.

Finding that kind of consensus in the economic world is difficult, but considering the national teen unemployment rate of nearly 25 percent, who are we to disagree?

Busting these myths may not be as much fun as figuring out if someone could survive an elevator crash by jumping at the last second or discovering how many balloons it would take to lift a 3-year-old off the ground. But doing so is vitally important if we want to keep Massachusetts legislators from considering harmful policies based on faulty information.

Michael Saltsman, Research fellow for Employment Policies Institute
Copyright 2011 Author retains ownership. All Rights Reserved.

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