Employers may have cut 160,000 jobs last summer when forced to pay more
Topic: Miller College of Business
October 1, 2008
Thousands of Americans have lost their jobs in recent months due to the nation's struggling economy, but a new Ball State University study found that increasing the minimum wage last summer may have eliminated an additional 160,000 low-paying positions.
Mike Hicks, director of Ball State's Bureau of Business Research, said there was a slight increase in the nation's unemployment rate in the weeks after July 1, when more than half the country implemented a new federally mandated minimum wage.
"Nationwide, we estimate roughly 160,000 workers did not have jobs available as a consequence of the minimum wage increase," he said. "This includes both jobs lost and those not created. This is important to note because the labor force grew in July, but new jobs did not expand at the same rate as the supply of workers."
The minimum wage is a tool to increase workers' incomes, but the cost of using this tool is a small loss of employment options for low wage workers. The study reinforces the dominant findings that the responsiveness of employment to a minimum wage increase is small, Hicks said.
"It is clear to me that efforts to mitigate poverty among the working poor could be accomplished at a smaller cost to the economy through the extension of earned income tax credits, or a rebate of employee contributions to payroll taxes, such as Social Security and Medicare, or an alternative income tax, such as a monthly tax rebate," he said.
While not all data have been finalized, it is safe to conclude these job losses are likely clustered in rural areas and among young workers, who represent the bulk of minimum wage employees, Hicks said.
He points out that few workers are paid the minimum wage, with less than 1.5 percent of workers over the age of 25 earning minimum wage. Most of these positions are in the food service industry, where tips comprise a significant part of income.
"The minimum wage law was never designed to boost employment," Hicks said. "Rather, an unstated goal may be to induce low wage workers to remain out of the labor market with the hope that they acquire additional skills which boost their earnings."
The findings are consistent with the standard set in 1981 by the Minimum Wage Study Commission, which found that a 10 percent increase in the minimum wage usually results in a 0.19 percent increase in unemployment, said Hicks, who also teaches economics in Ball State's Miller College of Business. The study may be found at www.bsu.edu/bbr.
The Fair Labor Standards Act mandated an increase in the federal minimum wage to $6.55 an hour in July. The legislation also mandates an increase to $7.25 for the summer of 2009.
The 2008 minimum wage legislation affected 26 states. The remaining 24 states have minimum wages already above the July 2008 federal level.
Of the 26 states, eight had state level minimum wages that were above the July 2007 federal minimum wage. For these states, the new minimum wage rose between 5 cents and 40 cents per hour. Eighteen remaining states saw a July increase of 70 cents per hour, or an almost 12 percent increase.