Feeling confident after his re-election, President Obama outlined an ambitious liberal agenda in his State of the Union speech on Tuesday. And no such speech would be complete without the old liberal standby of calling for a hike of the minimum wage.
Obama's proposal to raise the minimum wage to $9 per hour would bring it to the highest level, adjusted for inflation, since the Carter era. He hailed it as a necessary step to boosting the income of the working poor. But a preponderance of economic evidence suggests that raising the minimum wage hurts the very communities it's aimed at helping. The added factors of high unemployment and the implementation of Obama's health care law make this a particularly dangerous time to introduce such a policy.
Classic economic theory holds that a rise in the price of a good or service reduces demand for that good or service. When the government sets a minimum wage above the rate that would otherwise prevail in the free market, this tends to lead to lower employment.
To counter this view, liberals typically cite a 1994 study conducted by economists David Card and Alan B. Krueger (currently the chairman of Obama's Council of Economic Advisers) that challenged classical economic thinking. In the study, Card and Krueger surveyed fast-food restaurants in New Jersey before and after a state minimum wage increase and compared employment growth with fast-food restaurants in neighboring Pennsylvania, which did not change its minimum wage. The results found "no evidence that the rise in New Jersey's minimum wage reduced employment at fast-food restaurants in the state," and among teenagers, the authors found a relative increase in employment in New Jersey.
But the conclusions of the Card-Krueger study were undermined by subsequent research. In 2000, economists David Neumark (then at Michigan State University) and William Wascher (a member of the Federal Reserve's Board of Governors) revisited the study using actual payroll data from fast-food restaurants in Pennsylvania and New Jersey, rather than relying on telephone surveys, as Card and Krueger had. They got the opposite results. "[T]he payroll data," they wrote, "are generally consistent with the prediction that raising the minimum wage reduces the demand for low-wage workers."
In fact, in 2007, Neumark and Wascher looked at 102 different studies on the minimum wage since the early 1990s and found two-thirds of them provided evidence that raising the minimum wage would negatively effect employment, and just eight said it would positively effect employment.
In addition, their review found that studies were more likely to find positive effects on employment if they analyzed data over short periods and relied on case studies in a single industry in a given state. Neumark and Wascher suggested this raised questions as to whether the negative effects of a hike in the minimum wage can take a bit longer to develop. They note as well that such studies are specific factors in a given industry or state that aren't more broadly applicable.
Obama's proposed minimum wage would be higher than all but one state (Washington), meaning it could have a particularly disruptive impact because it wouldn't take into account the differences among local labor markets.
If unemployment were quite low, the economy were expanding rapidly, and employers were having trouble finding workers, then an increase in the minimum wage might not do as much damage. But this is less likely under current circumstances, with the economy growing slowly and unemployment at 7.9 percent.
Also, next year, the major provisions of the national health care law will be implemented. Already, fast-food and chain restaurants have been announcing plans to cut back worker hours to avoid the federal penalty for not providing government-approved health insurance. To them, an increase in the minimum wage on top of the health care mandate would be another incentive to cut back on their workforce.
It's generally inadvisable for the federal government to dictate wages to workers and employers, but to do so now would be particularly dangerous.
Philip Klein (email@example.com) is a senior editorial writer for The Washington Examiner. Follow him on Twitter at @philipaklein.