Topic: Miller College of Business

February 8, 2010

Increasing the minimum wage was meant to raise the living standards of millions of Americans holding unskilled, entry level positions. But it may have led to the elimination of 550,000 jobs — opening the possibility that such wage levels should be revised, suggests a new study from Ball State University.

A study of part-time workers monitored by the Bureau of Labor Statistics from 1999 to 2009 found that raising the minimum wage to its current level of $7.25 during the recent recession caused some businesses to scale back on filling vacant positions or eliminate jobs altogether, said Michael Hicks, director of Ball State's Center for Business and Economic Research (CBER).

The study may be found at CBER's Web site, CBER is the research arm for Ball State's Miller College of Business.

"Minimum wage legislation has long been popular precisely because it holds the promise of helping low wage workers without an associated cost," Hicks said. "The truth has largely been that it has not helped workers because the United States had gone for two generations with the minimum wage largely trailing the hourly compensation of unskilled, entry level workers."

The federal minimum wage increased to $7.25 per hour in 2009. In the final step of a three-stage increase passed in 2007 when the minimum wage was only $5.15. 

Minimum wage increases before 2007 had a negligible impact on employment because few workers were employed at the minimum wage, Hicks said. 

"But when the minimum wage for unskilled workers surpassed what companies were able to pay during the recession, employers started cutting back," he confined. "Instead of hiring a dozen teens to work a popular summer restaurant or theme park, a company would hire six or less. Instead of filling positions that required no skills, companies were making due with what they had. In the long run, this hurt young, unskilled workers."

The study classified minimum wage workers into four groups: restaurant wait staffs who are usually paid less than the minimum wage and rely primarily on tips, the physically and mentally disabled, adult workers and teenage workers. 

The study also reported that:

  • About 67 percent of teenagers and young adult minimum wage workers live in households with incomes at least twice the poverty level (for example $44,000 for a family of four). 
  • Adult workers toiling at minimum wage have limited skill.
  • About two-thirds of all adult minimum wage workers have a high school degree or less.
  • One benefit of the minimum wage keeping some of these workers out the labor market is that it forces them to obtain additional education and training in the workforce development network.

Hicks said that creating lower minimum wages for students and new hires could preserve jobs. The student minimum wage would permit employers to hire seasonal workers without bearing the full cost of adult employment. 

Also, introducing a tenure scaled minimum wage would remove the disincentive for employers to hire unskilled workers. Unskilled workers could be hired at lower wages but be paid more after 90 to 120 days of employment. 

Such a policy would allow more seasonal employment by youths and permit employers not to go through the expense of training unskilled workers, Hicks said. 

"Both of these policy recommendations would create different tiers of workers," he said. "While this is not typically a desirable outcome of legislation, it is a vast improvement on the current legislation, which has its own tiers of workers: those with jobs at the minimum wage, and those without jobs who would be willing to work at wages beneath the current federal minimum wage."