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Minimum Wage, Maximum Trouble

Supporters of the latest minimum-wage hike have the best of intentions. They want the higher minimum wage to lift low-income families out of poverty — but that doesn’t change where the road paved with good intentions leads. The increase will actually harm the very workers it’s intended to help.

Raising the minimum wage seems an obvious way to help low-income workers. Their wages go up and they earn more money. How could raising the minimum wage possibly hurt them?

Because the workers who will earn the new minimum wage after it rises are not the same workers who earned the old minimum wage before it went up. Since it costs more to hire workers, employers will hire fewer of them. And they will change who they hire for the positions they keep.

If the government forces companies to pay higher wages, more skilled and productive workers will apply for their positions. Given the choice between hiring an unskilled worker and one with more experience, companies virtually always hire the more productive employee. Employers will replace many of the unskilled workers who work for the minimum wage today with more skilled workers who would have earned more than $5.15 an hour regardless.

Many economic studies demonstrate that employers respond in exactly this manner. Outside the dry world of academic journals, this means that welfare recipients trying to get off the dole, new immigrants who speak little English, and inner-city minority teenagers from disadvantaged backgrounds have a much harder time finding jobs. These workers tend to lack jobs skills that make them attractive employees.

Given a choice between hiring a middle-class college student or a minority teenager who goes to an inner-city public school, employers will hire the college student if both will work for the same wage. Raising the minimum wage by 50 percent also raises the probability that teenage African-American high-school dropouts will lose their jobs by over 25 percent.

As a result, research consistently shows that higher minimum wages do not reduce poverty. Most of the benefits go to suburban teenagers or college students, not those who actually need help. While some low-income workers get a raise, many others lose their jobs.

Putting unskilled employees out of work hardly helps them. Worse, though, is the way the lack of job opportunities makes it harder for these employees to gain the skills necessary to get ahead in the market place.

Minimum-wage jobs are entry-level positions. Few workers who start out at minimum wage stay there. Over time, they demonstrate their reliability and gain valuable skills such as how to interact productively with customers, or accept direction from the boss. This makes them more valuable and earns them raises. Two-thirds of minimum-wage workers earn a raise within a year.

When the minimum wage rises, it saws off the bottom rung of the career ladder for many unskilled workers. They become less attractive to hire at the higher wages, so they miss the opportunity to gain valuable work skills and earn raises. A policy designed to help them leaves them in poverty. Past increases in the minimum wage have hurt the earnings and job prospects of unskilled workers over a decade after they passed for precisely this reason. Many unskilled workers were denied the ability to get on-the-job-training with a minimum-wage job and were left playing catch-up when they finally did find an entry-level job.

They may mean well. But supporters of the new minimum-wage hike have hurt the low-income workers they wanted to help.

James Sherk is a policy analyst in the Center for Data Analysis at The Heritage Foundation.