President Obama’s big government philosophy has created an economic environment hostile to job growth and economic prosperity. He says he is committed to “shovel ready jobs,” yet onerous regulations from his agencies delay projects from moving forward and shackle businesses with costs that prevent them from expanding. His signature legislation—The Affordable Care Act—has led some employers to slash hours and freeze hiring, and may lead employees to voluntarily reduce their own hours or leave the workforce altogether. Now it appears that the President is doubling down. His newest plan to help Americans is to raise the minimum wage, a proposal that would likely destroy job opportunities for those who need them most. The policies coming from the White House all seem to say the same thing: President Obama does not know how to allow the private sector to create jobs.
Raising the minimum wage will not help. President Obama’s proposed executive order increasing the minimum wage to $10.10 for federal contractors and his call to raise the federal minimum wage for all employees directly oppose his proclaimed emphasis on the importance of economic opportunity and his statement that “the best measure of opportunity is access to a good job.” Increasing the minimum wage is likely to decrease employment opportunities for Americans—especially low-skilled, undereducated youth. The majority of research concludes higher minimum wages have a negative effect on employment levels, and if the President and policymakers are truly interested in expanding employment opportunities, they should not raise the mandated wage floor at either the federal or state levels.
When the government mandates that an employee must be paid more than he or she produces, businesses are forced to respond by decreasing other production costs. Some employers will reduce pay raises to employees who earn more than the minimum wage while others will reduce employees’ hours, non-wage benefits or training. Still more will be spurred to make do with fewer employees and instead invest in labor-saving technologies.
States and municipalities are able to set their minimum wage rates higher than the federal wage floor of $7.25, so rates vary across jurisdictions. Although many economic factors influence unemployment rates, the five states with the lowest unemployment rates have minimum wage rates equal to the federal rate, while the five states with the highest unemployment rates have minimum wage rates above the federal level.
As employers are forced to absorb the higher costs of a minimum wage increase, the impact on low-skilled workers will grow. Increasingly expensive labor incentivizes employers to invest in technologies to replace workers and save on costs. In occupations where most work is repetitive, it is easy for an employer to respond to higher labor costs by substituting technology for employees. Cashiers have been switched out for self-serve checkouts at grocery and convenience stores; ATMs and mobile banking apps have replaced many bank tellers; and gas jockeys have been eliminated in most areas where they are not legally mandated.
During his State of the Union address, President Obama chose to use Costco as an example of a company that pays its employees above the minimum wage. However, the President failed to acknowledge Costco voluntarily sets its wage rates at a higher level because doing so fits their business model and allows them to attract and retain employees. President Obama is putting rhetoric before policy; in his example, free market forces—not government mandates—helped Costco determine the best wages for their employees.
The negative employment effects will disproportionately impact low-skilled, and often young, workers. Even if employers do not decrease overall hiring, they will respond to higher labor costs by replacing the lowest-skilled individuals with more highly skilled employees, which prices inexperienced workers out of the market. Removing job opportunities robs young workers of the crucial workplace experience needed to start careers and earn a higher wage later in life when they are more likely to be supporting families. With the teenage unemployment rate already over a staggering 20 percent, raising the minimum wage would further threaten employment opportunities for our nation’s youth.
Mandates, such as a minimum wage increase, are bad for business, and the President’s latest idea to raise the minimum wage is no more sound than his proposal to overhaul the U.S. healthcare system. Increasing the minimum wage will likely remove job opportunities from Americans who need them the most, leaving them floundering in an already weak economy. Americans need to look outside the White House for sound policy ideas, especially concerning the minimum wage.
Cara Sullivan is director of the American Legislative Exchange Council’s Task Force on Commerce, Insurance and Economic Development. Visit www.alec.org to learn more.