Discrimination against low skilled workers

The Cato Institute has published a Policy Analysis by Mark Wilson about Federal minimum wage laws. The complete analysis can be read at this link:

The Negative Effects of Minimum Wage Laws

These are some of the highlights of the analysis:

The competitive model has been most often used for evaluating the minimum wage. This is the basic textbook model that has been taught in university economics courses for decades. The core components of the model are a negatively sloped labor demand curve and a wage rate that clears the market and is not controlled by individual agents. In competitive markets, the imposition of a minimum wage provides a classic example of a government distortion that creates negative side effects in the marketplace.

The graph below shows a hypothetical competitive local labor market. The market demand curve for labor is DD, and the market supply curve is SS. Their intersection determines the competitive wage, Wc, with employment Ec.

If the minimum wage is set at Wm, employment is reduced to Em. The reduction in employment is smaller than the excess supply of labor (the distance AC). The excess supply of labor includes both a reduction in employment (fewer hours and job opportunities, or AB) along with a second component consisting of workers who are drawn into the labor market by the prospect of earning the higher minimum wage (BC). Although some of the workers who are drawn into the labor market (typically those with higher skills) may succeed in finding one of the minimum wage jobs, it comes at the expense of lower skilled workers who are shut out of the labor market. The excess supply of labor in this example is dispersed in several ways: a reduction in hours, fewer job opportunities, and a shift in employment from sectors covered by the wage law to sectors not covered, including the underground economy. The employment effects are typically the most pronounced in labor markets for low-skilled youth.

In the US economy, low wages are usually paid to entry-level workers, but those workers usually do not earn these wages for extended periods of time. Indeed, research indicates that nearly two-thirds of minimum wage workers move above that wage within one year.

Seventy years of empirical research generally finds that the higher the minimum wage increase is relative to the competitive wage level, the greater the loss in employment opportunities. A decision to increase the minimum wage is not cost-free; someone has to pay for it, and the research shows that low-skill youth pay for it by losing their jobs, while consumers also pay for it with higher prices.

While they are often low-paid, entry-level jobs are vitally important for young and low skill workers because they allow people to establish a track record, to learn skills, and to advance over time to a better-paying job. Thus, in trying to fix a perceived problem with minimum wage laws, policymakers cause collateral damage by reducing the number of entry-level jobs. As Milton Friedman noted, “The minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills".