During last night’s State of the Union address, President Obama called for a 24 percent increase to the minimum wage to $9 per hour, and to tie future increases to changes in the Consumer Price Index. The President’s goal is to help those in poverty, but his policy would do just the opposite.
The economics aren’t tough to understand. Businesses around the country that hire entry-level employees and pay them minimum wage—restaurants or grocery stores, for example—keep 2-3 cents in profit from each sales dollar, and can’t just absorb the 24 percent increase. Raising prices on cost-conscious customers typically isn’t an option, because sales fall as a result. Businesses are instead forced to provide the same product with less service—that means more self-service, and fewer job opportunities for entry-level and low-skill workers.
Look to an earlier proposal by the President to raise the federal minimum wage: Research published in the Southern Economic Journal, from economists at Cornell and American Universities, estimated that Obama’s previous proposal would have eliminated at least 467,000 jobs. The study also found that the higher minimum wage would not reduce poverty, as a majority of beneficiaries live in households with incomes around the poverty level.
It’s no wonder that eighty-five percent of the most credible economic research on the minimum wage from the last two decades points to job loss following a wage hike.
If our Chief Executive wants to reduce poverty and boost the economy, a minimum wage hike is not the answer.