(Springfield, Ill.) First introduced in 1938 as part of the Fair Labor Standards Act (FLSA), the minimum wage was originally meant to act as a price floor regulation for supply and demand of labor markets.  Overtime, though, as states kept pace with federal wage law requirements [See Figure 1.], there have been unequal and oftentimes far-reaching differences emerge amongst the states with regards to implementation. 

Seventeen states (AK, CA, CT, DE, FL, HI, IL, ME, MA, MN, NJ, NY, OR, RI, VT, WA, WI) have opted to raise their minimum wage above the national average claiming that it would reduce low-paid work, induce fairness and stimulate economic growth by increasing the purchasing power of workers.  On the other hand, twenty-five states (AR, CO, GA, ID, IN, IA, KY, MD, MI, MO, MT, NE, NV, NH, NM, NC, ND, OK, PA, SD, TX, UT, VA, WV, WY) have kept their minimum wage laws on par with federal mandates, believing that raising the wage any higher would curb economic growth, increase the cost of labor, create higher unemployment, increase the cost of government and provide disincentives for low-skilled workers to acquire new skills. Accordingly, two states (KS, OH) have a minimum wage that is lower than the federal while six (AL, AZ, LA, MS, SC, TN) currently have no minimum wage laws.

Prior to January 1, 2003, Illinois' minimum wage rates were equal to Federal government standards at $5.15 per hour.  However, starting in 2003, pursuant to the provisions of the first phase of Senate Bill 600, Illinois' minimum wage was increased 30 cents from $5.15 to $5.50.  Under the second phase, beginning on January 1, 2004, the wage again raised from $5.50 to $6.50-- bringing the state's minimum wage a whole $1.35 above its pre-2003 rate.  At the time of the last increase, Illinois was the only Midwestern state to have surpassed the national minimum wage, but just last year Wisconsin followed suit by raising their rate to $5.70. [See Figure 2.]

Immediately after winning the Democratic primary on March 21, 2006, Governor Blagojevich, in what his challenger Judy Baar Topinka deemed an "irresponsible political stunt," decided to call for another increase in the state's minimum wage.[i]  Blagojevich's proposed $1.00 increase, if passed, would place Illinois' minimum wage at $7.50-- the second highest in the country behind only the state of Washington at $7.63.[ii]  Compared to its border states (Indiana $5.15, Iowa $5.15, Kentucky $5.15, Missouri $5.15, and Wisconsin $5.70), Illinois' current wage rate stands far above the regional average, and were it to increase to $7.50, as has been proposed by the governor, the state would stick out as an oasis of high wages in a sea of its more reserved Midwestern counterparts.         

Advocates supporting a raise in the state's minimum wage put forth the argument that an increase would assist the working poor by raising their standard of living.  While nobody can argue against helping low income families, it is certainly debatable whether such a policy even works.  In fact, under certain circumstances such increases may even be counter-productive to that particular end.  Simply put, this age-old argument can be summed up as noble for its aim, but naïve for its neglect of the facts. 

Before proceeding to analyze the governor's most recent proposal, we must first dispel several myths regarding the minimum wage and examine its adverse effects on both labor and the economy.  That said, the central questions become 1.) Who are these minimum wage workers? 2.) Who are the minimum wage employers? 3.) Who, if anyone, is harmed by an increase in the minimum wage? and 4.) Why is the minimum wage important?

Who Are Minimum Wage Workers?
Far too often minimum wage advocates operate in fiction rather than fact.  For instance, when discussing low-wage workers, minimum wage advocates put forth the image of a single parent household with several children trying to get by on an income of $10,000.00 or less.  In reality, though, this deceptive imagery is not supported by the facts.  Indeed, U.S. Census Bureau data provides that a mere (8 percent) of minimum wage workers are single parents, whereas the majority (53 percent) are students who live in households that make, on average, $52,893- a far cry from the demographic that proponents haphazardly call to mind.[iii]

Careful analysis provides that age and education are the two most fundamental determinants of wage amongst workers.  Generally, workers under the age of 25 lack experience and skill and thus are unable to compete for higher wages.  Accordingly, workers who lack a basic education are at a similar disadvantage regardless of their age.  Taken together, then, the majority of minimum wage workers have been found to be under the age of 25 and to have limited education.[iv]

Who Are Minimum Wage Employers?
Another myth that governs the debate surrounding the minimum wage is that most employers who employ low-wage workers are large corporations.  This flawed theory holds that the only effect of an increased minimum wage would be to marginally reduce corporate profits.  In reality, however, the Small Business Association (SBA) found that small businesses, not large corporations, constitute the employing entity of most minimum wage workers.[v]

In particular, 54 percent of all minimum wage workers were found to be working in businesses that employ less than 100 employees, while two-thirds work in those with fewer than 500 employees.[vi]  For most workers, small businesses are the mechanism by which they enter the labor force.  In fact, workers who are poor, young, uneducated or belong to a minority group are the most likely to enter the workforce in a small business capacity.  What's more, the Bureau of Labor Statistics has found that a worker with less than a high school diploma is almost twice as likely to work in a small business as opposed to a large one.[vii]  Although small businesses create the 75 percent of new jobs, they also account for the most job losses on an annual basis.  Thus, when contemplating minimum wage increases, we must be reticent of the extraordinary financial burdens that we place on small businesses, which are both the largest employer of low-wage workers and the most fragile employment sector.  Be not mistaken, for small businesses there could be no greater threat than minimum wage hikes. 

Who is Hurt By Minimum Wage Increases?
Under the economic principle of price theory, it is conventional wisdom that any minimum wage increase will cause there to be fewer jobs than there would otherwise be.  If this were not true, there would be no reason not to raise the wage to $10, $1,000, or even $10,000.   

Consequently, academic research has consistently determined that minimum wage increases are detrimental to labor markets and individual workers on a number of levels.  First, the minimum wage has been found to reduce employment (Currie and Falick 1993), increase joblessness amongst teenagers (Neumark and Wascher 1992) and to disproportionately increase unemployment among black teenage males (Al-Salam, Quester, and Welch 1981).  Moreover, it has been found to punish low-wage workers (Gordon 1981), hurt the unskilled (Krumm 1981), increase job turnover (Hall 1982) and reduce the average earnings of younger workers (Meyer and Wise 1983).  What's more, research indicates that the minimum wage can lead employers to install labor-saving devices (Trapani and Moroney 1981) and cut back on fringe benefits offered to employees (McKenzie 1980). 

Maybe most importantly, and definitely contrary to the beliefs of minimum wage advocates, multiple studies have found the minimum wage to increase the number of people on welfare (Brandon 1995), hurt the poor generally (Stigler 1946), increase crime rates among teens (Hashimoto 1987) and do little to reduce poverty (Bonilla 1992).  Along this line, the NFIB, an advocate for small businesses, states, "Mandatory minimum wage increases end up reducing employment levels for people with the lowest skills."[viii]  These well-established phenomena, moreover, are often times neglected by minimum wage advocates who according to Donald J. Boudreaux, "focus exclusively on wages" and conclude that an "increase in the minimum wage definitely makes workers better off."[ix]  This naiveté on behalf of the living wage lobby seriously undermines its efficacy and speaks to it ulterior motives.

Although minimum wage increases have been found to punish low-skilled workers and stifle business, they continue to be popular, even on the international level.  In 2006, England's minimum wage raised to £5.35, or rather $8.80 an hour.  After the increase, a survey of employers conducted by the Low Pay Commission (a governmental entity in the UK that lobbies for a higher minimum wage), showed that 37 percent cut staffing levels, while 4 only percent raised them; 31 percent reduced business hours, while just 3 percent raised them; 28 percent cut overtime hours; 81 percent reported profit losses; and 63 percent claimed to have raised prices.[x]  One wonders how a policy that is bad for both labor and business can be so widely heralded.

Even in rare situations where the minimum wage is not found to have a substantial impact on unemployment statistics, it still imposes a major burden on individual workers who risk having their hours cut, loosing their jobs and having to pay more for goods and services than they would have under previous circumstances.  Not surprisingly, such unfavorable results do little to deter minimum wage advocates and their crusade for legislative enactment of their "living-wage" agenda.  In reality, the so-called "living wage" campaign is nothing more than a smoke and mirrors pseudonym for redistributive socialism.

Why is the Minimum Wage Important?
Reckless tampering with minimum wage laws tends to disregard the importance of minimum wage jobs, which are by no means insignificant.  For most workers, minimum wage employment serves as their entrance into the job market.  In these jobs, workers learn the most basic skills such as timeliness, the ability to follow instructions and interaction with fellow co-workers.  Low-wage workers who stay with their jobs most generally experience rapid salary growth.  In fact, around 90 percent of workers hired at minimum wage earn more than the minimum after one year, as they are rewarded by employers on a merit based system.  Likewise, according to the Employment Policies Institute (EPI), the average annual wage growth for low-wage workers is six times that of workers making a higher wage.[xi]  Hence, pecuniary compensation rates for low-wage employees are by no means stagnant or permanent as minimum wage advocates would have us to believe.

[FIGURE 3.]

What About Illinois?
During a nationwide economic recovery that began in 2003, Illinois has significantly lagged behind other states.  In fact, figures from the U.S. Department of Labor found that from January 2003 to February 2006, Illinois has had a job growth rate of just (.7) percent, ranking it 46th out of the 50 states.[xii]  Compared to surrounding states (Iowa 3.9 percent, Wisconsin 3.2 percent, Kentucky 2.8 percent, Missouri 2.3 percent, and Indiana 2.2 percent), Illinois' job creation has been dismal at best.[xiii]  Consider, for instance, the fact that Iowa, which has one-fourth as many people as Illinois, created 16,000 more jobs than Illinois in the past three years alone.  Given such a desperate state of affairs in Illinois, it's no wonder that the Department of Commerce & Economic Opportunity was taken to task in a recent statewide audit for making questionable job creation claims.

The statistics alone may be alarming, but when coupled with the policy initiatives of the Blagojevich administration, Illinois may be a ticking time bomb.  To date, the governor has created a less than friendly business environment, proposed an irresponsible budget that will only drive the state further into debt and perhaps most irresponsibly has raised the minimum wage by $1.35 and calls for another $1.00 increase.  For an administration whose stated aims include the creation of 230,000 jobs over the next four years, it seems quite illogical to suspect that the goal will be met in light of failed policies that have been proven to derail economic prosperity at all levels.

Although Illinois has raised the minimum wage to $6.50 and is on track to raise it to $7.50, the legislature has not altogether discounted the facts provided herein.  In fact, as it stands, Illinois' minimum wage law "guarantees a minimum wage of $6.50 per hour for workers 18 years of age and older."  However, "workers under 18 may be paid $.50 per hour less than the adult minimum wage."[xiv]  This tacit recognition of wage discrepancies and demographics is appreciated, but in no way excuses enactment of bad policy.  Thus, no matter how diluted the poison may be, it is still deadly.

What are the Alternatives?
Most often when government decides to transfer income from one group to another, it is done in a way that affects all taxpaying citizens.  Therefore, in this "normal redistributive process," monies are taken from a general revenue fund and dispersed to the intended parties.  Yet, in stark contrast, minimum wage increases are by no means normal.  In fact, the minimum wage burden is placed on one group in particular, (employers of low-wage workers) not society at large.[xv]  Consider, for instance, that you're a small business owner who employs 10 minimum wage workers.  Then suppose that a statewide minimum wage increase of $1.00 were levied on your business.  While seemingly harmless, that increase will end up costing you $20,000 over the course of a year.  What's more, it is no different than a blatant $20,000 tax increase.  The only discernable difference, then, would be within the political class who can claim to have "not raised taxes" while reaping the political benefits that accompany minimum wage increases.  Sound familiar?  It should, because it has been the modus operandi in Illinois for the past several years.

Punishing small minorities, especially those who hold the key to a state's economic prosperity, is not a wise decision for any government.  All Illinoisans should want to assist low wage workers.   However, we would all be better served by policies that do not discriminately punish single groups at the bequest of a wider constituency.  Other means of transferring wealth and empowering low-wage workers have proved far more beneficial than the minimum wage. 

Take the Earned Income Tax Credit (EITC), for instance, which accomplishes the same goal, but does not levy an unequal burden across society.  The EITC provides a better means of targeting particular groups who are most in need of assistance.  By contrast, the minimum wage is not able to discern between groups.  Therefore, it ultimately assists teenagers living in middle-class families, as opposed to single parent workers who really could use the assistance.  By lowering taxes and increasing incentives to low-wage workers, the EITC does not prohibit upward social mobility, as is the case with wage price controls.  

Above all, an increase in the minimum wage is usually found to reward some low-wage workers while punishing others.  Not only is this bad policy for those working at low-wage, but as heretofore mentioned may inadvertently affect the state in general.  Accordingly, any pronouncement of a wage hike should receive the highest measure of public scrutiny and be carefully considered before implementation.  Nevertheless, until the public begins to realize the pitfalls associated with hikes in the minimum wage and politicians cease to prey on this sentiment, we may be in for more wage hikes and political pandering.

End Notes

[i]  St. Louis Post-Dispatch, "Blagojevich, Topinka come out swinging," Kevin McDermott, March 22, 2006.

[ii]  United States Dept. of Labor, Employment Standards Administration, Minimum Wage Laws in the States, March 1, 2006.

[iii]  TCS Daily: Wage against the Machine, Nico Wirtz, March 29, 2004.

[iv]  National Center for Policy Analysis: "The Minimum Wage is Bad Policy," Bruce Bartlett, February 4, 2005.

[v]  Ibid.

[vi]  Ibid.

[vii]  Ibid.

[viii]  National Federation of Independent Businesses: http://www.nfib.com/object/IO_16303.html.

[ix]  "Money isn't all that matters," Donald J. Boudreaux, April 21, 2006.

[x]  TCS Daily: Wage Against the Machine, Tim Worstall, January 18, 2006.

[xi]  National Center for Policy Analysis: "The Minimum Wage is Bad Policy," Bruce Bartlett, February 4, 2005.

[xii]  U.S. Department of Labor

[xiii]  Ibid.

[xiv]  Illinois Department of Labor: Minimum Wage Law

[xv]  Everyday Economics: The Sins of Wages: The Real Reason to Oppose the Minimum Wage, Steven E. Landsburg, July 9, 2004.