Among the many referendums and initiatives on the ballot, Amendment 42, raising the minimum wage, is one of the most contentious. Minimum wages may be good politics, but they are simply poor economics. Activist groups and politicians pander to the poor, advocating higher incomes through higher minimum wages while abandoning sound economic theory.
Colorado’s current minimum wage is still at the same level as the national minimum wage of $5.15 an hour, but if Amendment 42 passes, the wage will go up to $6.85 an hour and will be adjusted annually for inflation. Also, for those who work for less than minimum wage and receive tips, the hourly wage will increase to $3.83 an hour from $2.13. Looking at this from an economic standpoint, it brings up many different issues that need to be addressed.
There could be many negative impacts on the economy due to the increase of the minimum wage. A study done by the Joint Economic Committee shows that an increase in the minimum wage would hurt the poor by diminishing low-skilled jobs, keeping people on welfare, and encouraging high school students to drop out.
The simplest of economic theory shows that placing a “floor” on wages will result in businesses paying their workers more, and in turn not being able to hire more workers. The employer has a decision to make in that the employer could either lose profits by keeping the same amount of employees or retain the same profit level by laying-off employees.
The low-skilled and inexperienced workers would then have less opportunity to get into the job market, resulting in more unemployment throughout Colorado. If there was an increase in the minimum wage, there could be a flood of people into the labor market. This enables employers to choose the most highly skilled worker over those who are less skilled. The job market would be highly competitive and be difficult for those with little or no education.
An increase in the minimum wage would keep people on welfare longer than not increasing the minimum wage. Another study done by the Joint Economic Committee explains that mothers on welfare, in areas where the minimum wage was increased, remained on welfare 44 percent longer than mothers that lived in places where the minimum wage stayed constant. Possible explanations for this could include: Low-skilled single mothers being laid off, and economy-wide slowdowns due to higher overall unemployment, affecting everyone.
High school dropout rates would also rise because of an increase in the minimum wage. This would happen because some students are near-sighted in that they look for the best benefit right away. In their eyes, working at a higher wage would be more enticing than continuing their education. This would ultimately hurt these students because if they would continue their education into the future it would allow them to make above the minimum wage. The average annual earnings for a high school drop out is $25,000 a year while a high school graduate earns $35,000 a year. Annual earnings jump even more when one attains a college degree.
The minimum wage is a blunt tool in alleviating poverty. Hard work, skill development, and education are the best remedy to low wages. But government programs such as the Earned Income Tax Credit are other, more precise alternatives. You, as the voter, have a decision to make. A “yes” vote on Amendment 42 could, in the end, actually hurt those you are trying to help. You decide.
Written by Ryan Olivett, Reed Hilton, and Erik Lundberg of the Society of Emerging Economists.