COMMENTARY: One of the most cited benefits by advocates of higher minimum wage laws is a phenomenon known to economists as “Efficiency Wages.” This theory states, in simplest terms, that workers who are paid more will be more productive. Many companies large and small utilize this theory in their business model; for instance, Costco has long paid their entry-level employees well above the minimum wage.
Courtesy photo
Zachary Fort
There is a flip side to this coin, however. Advocates of government mandated efficiency wages neglect to tell you that employers demand a higher level of productivity from their employees in return for higher wages. For many employees, this isn’t an issue. Given the opportunity, they can rise to the occasion and take on the challenge of greater responsibility for greater reward.
But for low-skilled employees and those who have a disability or other handicap, whether physical or mental, the result could be disappointingly different. This worker demographic may not be able to meet the new standard of productivity demanded of them. In effect, some of them will be regulated out of the labor market as a direct consequence of government interference.
The Employment Policies Institute, a nonprofit think tank specializing in minimum wage policies, states: “60 years of economic research, including recent studies, has shown that low-wage, low-skilled employees are the most likely to lose their jobs after a mandated wage hike.” This is an especially alarming prospect for New Mexico, where we have the lowest high school graduation rate of any state in the nation.
More specifically, an impact in employment among low-skill workers would disproportionately affect younger workers. Someone who dropped out of high school 20 years ago, but has been working since, has 20 years of on the job training and experience. Whereas younger workers do not have this experience to fall back on, and are therefore more exposed to fluctuations in labor markets.
Studies that support this claim go even further to warn that the impact felt by younger low-skill workers is not only short-term, but long-term as well. If younger individuals fail to find employment shortly after leaving school, their training and work opportunities dry up. The resulting combination of a lack of skills and training, paired with prolonged unemployment, will only make it harder for them to compete in the labor market well into the future.
Under the Fair Labor Standard Act, employers can pay certain disabled workers less than the federally mandated minimum wage. But this rule only applies to a select set of workers who meet federal guidelines of disability.
Many individuals who have some type of disability do not meet these guidelines, but at current minimum-wage levels they can find employment. However, a shock to the labor market induced by government regulation could push them out of the workforce and further into government dependency.
Empirical research from the Goldwater Institute in Arizona support this claim. They found that the minimum wage increase in Arizona actually increased, not decreased, the cost of social services programs for disabled individuals there. This came from just a modest increase in the Arizona minimum wage.
Unless advocates of a higher minimum wage include the costs of training workers to help them compete in the labor market and increased public social services support for those displaced from the workforce, they are misleading you on the true costs of such an increase. Further, 23 percent of employment in our state is through the public sector, placing a sizable portion of the wage increase burden on taxpayers.
Ultimately, the costs of heavy government intervention into the labor markets could add up quickly in New Mexico.
Instituting a much higher minimum wage, as has been proposed, could force vulnerable New Mexicans out of the labor market and make it harder for those who want to join. This would make our labor markets less inclusive and deny our residents the dignity of work. A large government-mandated minimum wage increase is a ham-fisted way to address cost of living and wage growth issues. Blindly following national rhetoric on minimum wage increases could have numerous unfavorable consequences for New Mexico.
Instead, we should seek new solutions, with New Mexico’s specific challenges in mind to alleviate wage stagnation.
Zachary Fort is a CPA working and living in Albuquerque, while also pursuing his master’s degree in applied economics. The views expressed in this article are his alone, and do not reflect the views of his current employer or past employers. Agree with his opinion? Disagree? NMPolitics.net welcomes your views. Learn about submitting your own commentary here.