Administrative obstacles to the labor market

Proposals to increase the minimum wage (MW) certainly have their political popularity, as they are seen as a way to increase the incomes of the so-called working poor. However, the main conclusion that economic theory in the United States has reached as a result of its empirical research over the past 70 years is that increases in fixed minimum wages lead to a decrease in employment.

The higher the rate compared to competitive market wage levels, the greater the job losses. While the MRP is theoretically intended to improve the economic well-being of the working poor, the negative effects disproportionately hit the least skilled and the most disadvantaged – including people with disabilities, youth, immigrants and ethnic minorities. Some of the reasons are:

• many poor Americans (63.5%) do not work, and thus have no earned income;
• Even among the working poor, the relationship between low hourly wage earners and those living in poverty is weak. The exact opposite relationship exists. This is because most workers who benefit from the minimum wage increase live in families above the poverty line and most of them are paid above the minimum wage;
• The increase in the minimum wage is indirectly paid for by consumers in the form of higher market prices, which directly harms the poor because they suffer disproportionately from price inflation.

Since 1995, eight studies of the U.S. labor market have examined the relationship between income and increases in the minimum wage. Seven of them found that the increases had no effect on poverty. The last federal minimum wage increase from $5.15 to $7.25 per hour affected only 15.8 percent of workers in the poverty bracket. The statistics show that the planned increase to $9.50, declared as a promise by Obama, will benefit only 11.3 percent of these workers. The studies do report that some low-skilled workers who live in poor families keep their jobs and benefit from the increase in their income. However, the main percentage of workers lose their jobs or have their hours of work significantly reduced per week, which again leads to loss of income and increased poverty.

Source: Bureau of Labor Statistics, Department of Labor, USA

A key argument of the proponents of the minimum wage is that a fixed wage has a positive effect on the incomes of adults working full-time and whose families (with children) are low-income. The data generally do not support this claim. Most workers who earn the minimum wage are young, part-time workers, or from families that do not fall below the poverty line.

According to the Bureau of Labor Statistics of the U.S. Department of Labor, 1.8 million hourly workers received the minimum wage of $7.25 in 2010. They can be divided into two broad groups:

• 51% are aged 25 and over. 29.2% of these workers live in poor or near-poverty families. Only 20.8% of them are full-time working parents;
• 49% are teenagers or young adults under the age of 24. The majority (62.2%) of this group live in families with incomes that are two or more times the official poverty line in the country. In the families of teenage workers receiving the MRL alone, the average income is almost $70,600. Only 16.8% are below the poverty line. It should be noted that the fixed minimum hourly wage applies to workers of all age groups.

In addition to changes in employment, empirical studies document other ways in which entrepreneurs adjust to increased rates in a market economy. In 1995, the Joint Economic Committee of Congress published a detailed 50-year review of academic research on the MRL in the United States. The study identified a wide range of direct and indirect effects that can occur, including:

• increasing the likelihood of longer unemployment periods for low-wage workers, especially during economic downturns;
• encouraging employers to reduce staff training;
• increasing job turnover;
• preventing part-time work and reducing school attendance;
• encouraging employers to reduce social benefits for workers;
• increasing inflationary pressures;
• increase in youth crime as a result of higher unemployment;
• encouraging employers to hire illegally residing foreigners.

On domestic soil, there is another additional constraint on the labor market - the minimum insurance thresholds (MIT), the increase of which is traditionally on the agenda before the beginning of each calendar year. Currently, the minimum amount of insurance income for the main economic activities and qualification groups of professions is determined in the Law on the Budget of the State Social Insurance (SSI). The calculations are based on data provided by the National Classification of Professions and Occupations, developed in accordance with the methodology of the International Standard Classification of Occupations.

Balancing with the minimum insurance thresholds and raising them inevitably increases employers' labor costs. This is also the reason why many entrepreneurs, not only in the current crisis years, are rethinking their hiring policies due to the financial burden they have to bear with paying higher insurance premiums.

From the workers' perspective, in order to have an incentive to insure themselves on their real wages, political will is needed to reform the pension insurance system and reduce the tax and insurance burden. At present, those insured do not see a direct connection between the contributions they make to the state social security system and the size of their future pensions, which logically discourages them from declaring the full amount of their income.

The main effect of artificially increasing the minimum wage and insurance rates is to leave thousands of people unemployed or send them into the informal sector. Statistically, declared average incomes are increasing, which further stimulates the authorities to increase these minimums. There is a vicious circle that further distances the unemployed and the low-skilled from the chance to be adequate participants in the labor market.

Did you like it? Take a minute to support the EKIP on Patreon!