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Minimum Wage

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July 14, 2009 – Comments (30)

Many posters will arrive at the conclusion that raising minimum wage costs jobs. The theory goes like this: The USA raises minimum wage, then the employers costs go up, then the employer raises prices, then the price increase costs customers and the employers business declines, then the employer lays off an employee.

Uh huh.

The contrarian in me challenges this theory with one of my own: The USA raises minimum wage, then more people have extra money, then more people spend money, then business increases, then business hirers more employees.

And another: The USA raises minimum wage, there is no competitive advantage to one business over another, it doesn't matter.

Fortunately this is a science project. With controls.

In the USA there are States that set their minimum wage higher than the Federal minimum. Because Federal minimum wage does not affect States with higher minimums they can serve as a control.

In the USA there are States with no minimum wage except the Federal minimum. These States can serve as the test group to see how Federally mandated minimum wage changes affected their unemployment rates.

Then, we can compare.

Here is a wiki page showing States with minimum wages that are higher, lower, or the same as the Federal minimum.

http://en.wikipedia.org/wiki/File:USA_minimum_wage.gif 

Here is a chart of Federal minimum wage changes. Over time the changes have applied to more and more of the economy until, in 1978, the law became most similar to what exists today.

http://www.dol.gov/ESA/minwage/chart.htm 

Here is a chart of State unemployment since 1990 covering minimum wage increases in 1990 and 91, 1996,and 97, and 2007/8/9. On the left you can select for whichever individual States you choose.

I selected Texas, a State that matches the Federal minimum wage and is affected by its changes, and NY, a State with a higher than Federal minimum wage and  is unaffected by changes in the Federal minimum, and compared their unemployment rate side by side.

http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&idim=state:ST480000&q=texas+unemployment+rate+chart#met=unemployment_rate&idim=state:ST480000:ST360000 

During the 1990/91 wage increase, a time of rising unemployment for both States, NY, which was unaffected by the Federal minimum increase did worse than Texas which was affected by the increase.

During the 1996/97 wage increase, a time of falling unemployment for both States, NY except for having a worse 2yr bump as the Fed Gov was raising the Texas wage performed the same.

During the 2007/8 wage increase, unemployment in Texas has done much better then NY. The effect of the upcoming 2009 increase is as yet unknown.

Now I hope many of you are saying to yourselves this is a lousy science experiment because of the volume of uncrontrolled variables. If you are, I agree with you. If you aren't, please don't vote.

I realize this comparison is only slightly better than pulling answers out of your a**. But it is slightly better, and based upon the comparison of Texas and NY you cannot possibly conclude that raising minimum wage increases unemployment. If anything, the data says just the opposite.

For the most part the data shows that unemployment in Texas and NY has been the same, regardless of the difference in minimum wage, and even with the comparitive advantage, Texas unemployment has failed to outperform, except when and immediately after they have been forced to raise the minimum.

30 Comments – Post Your Own

#1) On July 14, 2009 at 12:53 PM, JTShideler (77.40) wrote:

Interesting experiment but I don't think that the price of minimum wage has as much impact as the arbitrary increase.

For example if NY has Minimum Wage at $2 above Federal and Texas just has the Federal Wage and both keep that wage as a floor for two years then I think you could reach the conclusion that unemployment is unaffected.

I think that makes sense because like you said companies price in that higher cost over time and plan for it with their growth.

However, I think it would be interesting for you to compare what happens immediately following a change in the minimum wage.

That is to show unemployment monthly before and after an increase and see what happens to the number of new unemployment claims?

Businesses can and will adjust to the costs over time so a higher price in NY then TX is not a good comparison but a change in unemployment between NY and NY or TX and TX after an increase might be more telling.

You can get month over month comparisons at the Bureau of Labor Statistics

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#2) On July 14, 2009 at 1:04 PM, davejh23 (< 20) wrote:

This is a nice experiment, but others have referenced extensive studies that show modest increases in unemployment following minimum wage increases...not during severe recessions.  In any case, the results of the current increase will likely be very different than previous increases.  We have many small businesses that are barely holding on right now.  Small businesses employ the majority of Americans.  Of course, everyone is expecting unemployment to continue increasing, so we'll probably never know the exact effect of the increase.  Let's hope you're right...but let's try another experiement:

FACTS:

- Government never does anything right.

- Government is increasing the minimum wage during a severe recession.

CONCLUSION:

- Increasing the minimum wage during a severe recession isn't right.

That was easy!  Acutally, if we're going to maintain a minimum wage, we probably should be increasing it, but there will likely be unintended consequences by doing so at this point.

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#3) On July 14, 2009 at 1:08 PM, wrparks (69.40) wrote:

I agree with you that raising the minimum wage has minimal impact, but for different reasons.  It's really quite simple.  Nobody works for minimum wage for long periods of time, other than college kids or others who just want spending money.  In my state, migrant (read hispanic) farm laborers will not even work in the fields for minimum wage.  This is the lowest of low skilled jobs, requiring basically no training.  They require $7 per hour just to show up. The people it hurts are the restaurants and the kids who work there.  I believe minimum wages lag so far behind prevailing actual market determined wages that they are in effect useless.

http://www.bls.gov/cps/minwage2004.htm seems to back up my claims somewhat.

 

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#4) On July 14, 2009 at 1:36 PM, cthomas1017 (98.42) wrote:

Great post.  Using your theory, we should raise the minium wage to $500/hr. and before you know it, the economy will be booming.  Brilliant!

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#5) On July 14, 2009 at 1:53 PM, jstegma (29.44) wrote:

Interesting argument.  I think there is a major logical flaw that needs further examination:  If increasing the minimum wage by a little doesn't hurt employment but actually helps, why don't we just keep increasing it every two months or so?  Why not $20 an hour?  Or $50?

There is obviously some force working to prevent that $50 an hour scenario from working to decrease unemployment, and I don't just mean Republican stupidity.  There must be some proper time to increase the min wage to a certain level to make it work correctly. 

The idea of raising min wage during a major recession where official unemployment is nearing 10% and the hours of many employees are decreasing suggests that we might like to know more about the proper timing for min wage increases.  It seems like it might not be the best time to do it.

Or then again it might work great.  Min wage rises tends to be inflationary, and inflation is clearly the goal at the moment.

I have to say, as a heartless Republican, I like the min wage increase better than the health care reform thing.  But I'd really just prefer that the government hand out cash to taxpayers until we get the desired inflation effect. 

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#6) On July 14, 2009 at 1:54 PM, devoish (96.28) wrote:

Jt,

However, I think it would be interesting for you to compare what happens immediately following a change in the minimum wage.

For the most part the data shows that unemployment in Texas and NY has been the same, regardless of the difference in minimum wage, and even with the comparitive advantage, Texas unemployment has failed to outperform, except when and immediately after they have been forced to raise the minimum.

(once with unemployment going up, fast, once going down steadily, and today)

Dave,

 :-)

wrparks,

I agree with you   !?!  I got it, just about the minimal impact part.

Other States may be different than yours, 2009 may turn out different than 2004.

http://news.bbc.co.uk/2/shared/spl/hi/picture_gallery/05/americas_florida_tomato_picker/html/1.stm 

I agree with you, that minimum wage has lagged so far behind maximum wage that is useless. A minimum closer to $20 should have been in place for he last decade.

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#7) On July 14, 2009 at 1:59 PM, devoish (96.28) wrote:

I also want to say that the post was inspired by the number of times I have read that "increasing minimum wage costs jobs" on CAPS. Not by the number of times I have read minimum wage is to low to matter and effectively below subsistance unless it comes with good healthcare, which it does not.

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#8) On July 14, 2009 at 2:25 PM, wrparks (69.40) wrote:

Actually, tomatoes typically go for ~50 cents per bucket for the picker.  It is quite easy (easy is a relative term, if you have ever harvested produce, I have) to pick tomatoes at a rate of $10 per hour, even when the crop is slightly below average.  Really bad years, maybe not so much, but on average that's a good estimate. Of course, it requires hard work, but that's nothing new in farm labor.

The bigger problem is what has become effectively slavery or indentured servitude.  Due to the large numbers of people required to harvest (often hundreds in a single field) and the lack of proper legal documentation for many of the workers and the risks in hiring illegals, they tend to be hired through other contractors who are essentially slave lords.  The contractor sets the pay rate for everybody.  He gets his cut off the top and charges the workers for rent, transportation, food, etc.  Then he disperses the rest to the workers.  Often, I believe the contractor acts as a coyote to bring them over illegally and requires them to pay off their debts to him first.  This is the ugly side, and frankly it is disgusting and underreported.  This is likely what the BBC expose is alluding to.

BTW, I do belive that a $20 minimum wage would cause unemployment at rates that we wouldn't believe.  But, that is neither here nor there and is essentially an impossible argument.

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#9) On July 14, 2009 at 2:32 PM, whereaminow (< 20) wrote:

Why do employers hire labor? 

David in Qatar

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#10) On July 14, 2009 at 3:36 PM, devoish (96.28) wrote:

 Great post.  Using your theory, we should raise the minium wage to $500/hr. and before you know it, the economy will be booming.  Brilliant!

cthomas,

Raising minimum wage from a level that cannot afford Doctors to higher than any other is not the idea here, but you know that.

Interesting argument.  I think there is a major logical flaw that needs further examination:  If increasing the minimum wage by a little doesn't hurt employment but actually helps, why don't we just keep increasing it every two months or so?  Why not $20 an hour?  Or $50?

How about leaving minimum wage where it is, but providing healthcare through progressive taxes (H.R.676) rather than insurance payments?

There is obviously some force working to prevent that $50 an hour scenario from working to decrease unemployment, and I don't just mean Republican stupidity.  There must be some proper time to increase the min wage to a certain level to make it work correctly.

Never underestimate Republican stupidity again.

Why do employers hire labor?

Because they see customers who can afford their products. One guy with $100mil will not buy as many cars as 10,000 guys with $10,000.

It is about finding a balance, better and faster than free markets ever will.

BTW, you should not be asking me questions until you have an answer for mine.

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#11) On July 14, 2009 at 3:53 PM, whereaminow (< 20) wrote:

Why do employers hire labor?

Because they see customers who can afford their products.

So let's say that I own a restaurant. I am the only person working there.  It gets popular, and I am busy.  The dishes are piling up.  I hire someone to wash the dishes, mop, and wipe the table.  Did I hire them so they can buy my food?  Or do I hire them so I am free to tackle other tasks?

If you don't understand why businesses hire labor in the first place, how can you possibly dictate to them what the wages for that labor should be?

David in Qatar

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#12) On July 14, 2009 at 3:54 PM, iamnik77 (95.48) wrote:

I think one question we should ask when trying to find out if raising the minimum wage contributes to inflation is, "What percent of American company payrolls consists of wages paid out at the minimum wage?" If it is 90%, then a 10% hike in minimum wage would increase the total payrolls by 9% which I believe could result in noticeable inflation. However, if the percent of American company payrolls that consisted of wages paid out at the minimum wage was only 10%, then a 10% hike in the minimum wage would increase payrolls by 1% and I don't see that translating into very noticeable inflation.

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#13) On July 14, 2009 at 4:24 PM, JTShideler (77.40) wrote:

wrparks,  Minimum wage matters because many Union Contracts are tied to minimum wage rates so while you are right that no one makes minimum wage the fact that it influences the wages of other jobs makes a difference.  The truth is usually more then one way that employers can get the job done.

1.  They can hire a lot of cheap unskilled workers

2.  They can hire more expensive skilled workers that require advanced training to operate

3.  They can use capital to automate their process and reduce their manpower

4.  They can move their business to a place with a lower wage rate exists

If you assume that businesses exist to create profit and not as many democrats believe to create jobs, then increasing the cost of the unskilled labor makes it more economical for the employer to use skilled workers or automate.  If you believe me that some Union Contracts are tied to minimum wage then option number 2 increases as well.  So that leaves companies with the option of spending capital on automation or moving their business over seas.  This means that the effort of helping workers actually hurts more then it helps.

There should never be a need for minimum wage as employers should always pay the price based on supply and demand.  If there is a shortage of workers like there was in 2007 then wages increase if there is an oversupply of workers then wages fall.  However, if there is a wage floor then employers will not hire more workers then what they can make a profit, resulting in less jobs being created if there was no floor.  Less jobs means less spending, less spending means greater inventories which means less need for production less production means less jobs which means less spending and makes the whole process spiral down.

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#14) On July 14, 2009 at 4:31 PM, jstegma (29.44) wrote:

I assume that you are not saying "Republican stupidity" is the only argument against raising the wage to $50.   Maybe unemployment would increase?  Just maybe?

As for iamnik's calculations, they are rather simplistic.  If the min wage increases, then other wages will also increase at the lower end of the scale anyway.  It is ridiculous to think that increasing the min wage just means that the lowest workers pull even with those just above them. 

You work at McD's for 3 years and get a few small raises and are making more than the guys being hired.  Then the min wage increases one day and you're all back to dead even.  Would you like fries with that calculation?

 

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#15) On July 14, 2009 at 5:21 PM, devoish (96.28) wrote:

jstegma,

Read three lines below the fun answer. In your McD example no-one lost a job. Are you promoting seniority based as opposed to performance based wages? That is a different discussion about unions and seniority based payscales. New untrained employees perform like new untrained employees regardless of their pay. 

Wheraminow,

Have you seen a business hire people without customers, or the expectation of customers, for their product?

In the mystery land?

iamnik,

It is certainly reasonable to consider inflation, by which I take you to mean price increases.

JTshideler,

Thanks for the touch of the real world concerning union contracts linked to minimum wage. All of your issues, 1,2,3,are all business decisions that are unaffected by minimum wage if your competitors have the same cost.

Number 4 could be controlled by import tarriffs. There is avery small market for swimming pools in low wage Darfur. No customers.

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#16) On July 14, 2009 at 6:01 PM, jstegma (29.44) wrote:

It is about finding a balance, better and faster than free markets ever will.

Sounds like something out of a communist manifesto. 

The minimum wage is about finding a balance, better and faster than free markets ever will.  The people's government can do it better and faster than free markets ever will.  No more shall the people suffer from market-determined wages set by their capitalist-pig employers.  We will bury them!  (pound shoe on podium for emphasis) Long live the revolution!

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#17) On July 14, 2009 at 6:37 PM, toopersent (81.09) wrote:

The reason why minimum wage has not reached massive levels, (like $50/hr or even $500/hr like a previous poster said) is because it would cause inflation like crazy. 

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#18) On July 14, 2009 at 10:42 PM, devoish (96.28) wrote:

Toopersent,

Minimum wage will never exceed the next lowest wage, no worries there.

jstegma,

The difference is the voting and the reality. I copied your communist manifesto exageration an pasted it into google.

The first result mocked you right back. I enjoyed it though and it sure demonstrates what a salespitch mises has going.

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#19) On July 14, 2009 at 11:06 PM, billddrummer (44.79) wrote:

To devoish,

I'm trying this again.  Apparently my post was eaten by a goat.

Thank you for posting on my blog.  My daughter is doing much better, and looks to become eligible for 'normal school' shortly.

Thank you for this thread.  It has generated some interesting commentary.

My take on your selection is a bit out of left field.  Perhaps Texas unemployment was affected by the rapid runup in energy prices during 2007-2008, which boosted employment throughout the sector.

And perhaps NY employment was affected by the explosion in financial services jobs during that same period, luring workers looking for an opportunity to make a 'big score' in the financial world.

But as long as higher skilled people seek any sort of job, employers will have a larger pool of well-qualified workers to choose from--no matter what their wages are.

Thanks again for this thread.

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#20) On July 15, 2009 at 8:28 AM, wrparks (69.40) wrote:

"Minimum wage will never exceed the next lowest wage, no worries there."

 

What does that mean?  If wages can be arbitrarily set at a minimum, swallowing the next lowest wage is quite easy.  I must be missing something.....

 BTW, rec from me for an intersting topic.  You have a knack for seeing things from another perspective than most, even when I disagree.

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#21) On July 15, 2009 at 9:14 AM, devoish (96.28) wrote:

Bill,

My family is in better shape than yours financially. Neither of my teens are struggling like your younger daughter. But we are not very different, and your posts reach me in part because I know I could land in your circumstances any day, and I came from similar. In many ways, I was your younger daughter.

wrparks,

Here is what I think you are missed. And thanks for the rec.

min·i·mum Function: noun 

Etymology: Latin, neuter of minimus smallest; akin to Latin minor smaller  Date: 1674

1: the least quantity assignable, admissible, or possible

2: the least of a set of numbers ; specifically : the smallest value assumed by a continuous function defined on a closed interval

3 a: the lowest degree or amount of variation (as of temperature) reached or recorded b: the lowest speed allowed on a highway

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#22) On July 15, 2009 at 10:39 AM, wrparks (69.40) wrote:

I understand minimum quite well.  Lets do a test.  I'll list wages in increasing order, with a mandated minimum @ say $6 for simplicity.

6.00

6.50

7.00

7.10

.

.

.

If the minimum is set @ 6 and the next highest wage is 6.10, an increase of the minimum to 7, by default, exceeds the next lowest wage.  You can argue that the next lowest wage will also increase by $1 too, but there is no evidence for that.  Wages are not set on a margin like interest rates. 

Are you saying you believe that to be the case?  

 

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#23) On July 15, 2009 at 12:30 PM, devoish (96.28) wrote:

The next lowest wage becomes $7.10 the moment the minimum is raised to $7.00

This doesn't change that in Texas, when their minimum wage was increased, their unemployment outperformed NY. Exactly the opposite result of the claim that increasing minimum wage causes job losses.

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#24) On July 15, 2009 at 2:49 PM, wrparks (69.40) wrote:

"The next lowest wage becomes $7.10 the moment the minimum is raised to $7.00"

 

Sorry, but that makes no sense.  Yes, after the wage increase, the next lowest wage will be higher than the minimum (obviously).  But that doesn't change the fact that the minimum was raised above the previous lowest raise and did in fact exceeded the next lowest wage at the time the increase was made.  You can't move the threshold of significance after a test and say "see, told you it works this way".

Plus, it impactes the purchasing power of people who previously made above the minimum wage.  The only way to get around this is to set wages based on the federal/state minimum wages.

As others have pointed out, comparing Texas and NY is probably not the  best comparison.  Wages are set based on cost of living and the ratio between jobs:workers.  A salary of $50,000 goes a long way in some parts of the country.  In others (Miami, Fl for example), $50,000 isn't going to get you a seat at the table. I could almost certainly cherrypick statistics that would say the exact opposite of what you are claiming.

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#25) On July 15, 2009 at 3:54 PM, devoish (96.28) wrote:

So....

About those minimum wage related job losses and the stat that suggest otherwise?

Or will you, like many others, continue repeating the false claim that minimum wage increases cost jobs when there is no data to support that claim and a very little to support the opposite.

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#26) On July 15, 2009 at 7:24 PM, wrparks (69.40) wrote:

You said yourself it was a reeeealy crappily controlled experiment with tons of variables unaccounted for, so.......any conclusions drawn from said experement aren't worth the electrons that transmitted them?

 

Maybe a 1990 increase in the price of oil caused oil rich texas to fare better than finance rich NY  in employment.  In fact, it's possible oil alone accounts for the gains in Texas over the last 10 years.  Hey, it was your idea, you can back it up.

http://en.wikipedia.org/wiki/1990_spike_in_the_price_of_oil

 

Or, equally likley, FIRREA was enacted in 1989.  It's just as likely that the unemployment in NY was due to fallout from increasing regulation of the banking sector.  

 

http://en.wikipedia.org/wiki/FIRREA

 

See how easy it is to cherry pick statistics and data to make anything seem plausible?  You haven't proven that an increase in the minimum wage has a positive impact any more than I can prove it has a negative impact.  I said it can have a negative impact, and if raised high enough it undoubtably will.  But, we are nowhere near that point, plus, raising it at a time of already high unemployment will horribly skew any conclusions that are drawn in the next 5 years.  

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#27) On July 19, 2009 at 12:46 PM, cthomas1017 (98.42) wrote:

What happens when the minumum wage raises the water level for all the ships in the harbor?  Prices inflate.  (But please, basic knowledge of economics knows that price increases are NOT inflation.)  All economics tend back toward equilibrium.

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#28) On July 21, 2009 at 10:16 AM, richlongrun (88.68) wrote:

plain and simple: a working person should be able to make enough money for a decent living. if they do not then the government subsidizes them through food stamps, housing, medicaid, etc which are we paying more for?

secondly any business that cannot increase the wealth of its community has no reason to exist.

third unskilled labor is often not easy labor people should be compensated fairly. go pick a hundred 1/2 bushels of tomatos in the hot sun and see if you don't agree.

fourth everyone thinks that they are worth more than they are paid, but does their contrubution really prove that? I think not.

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#29) On July 21, 2009 at 10:23 AM, richlongrun (88.68) wrote:

minimum wage should be cost indexed to the area people live in by consumer price indexes -- this would solve any inflation problems. also are you aware that companies like Walmart tell prospective employees that by paying them less they can get more from government subsidies. A  really great way for one of the largest corporations in the world to operate don't you think? the taxpayer helps them retain their top market status. capitalism at its best. Everyone needs a place to start and if they cannot even get living wage how can they improve their life situation for themselves and their children. come on people want the dignity of a job and being self-sufficient, not a free ride.

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#30) On July 23, 2009 at 9:46 PM, FleaBagger (28.14) wrote:

What makes an employer want to pay the higher wage, assuming he wants to save ~$100/wk that he knows he will save vs the chance that the extra paycheck will come back to him via higher consumer spending?

What actually happens when minimum wages go up and someone is unable to produce enough to earn it? He isn't hired in the first place. Unemployment statistics do not count teenagers, high school dropouts, and others who are unemployable at the minimum wage level, because they were never employed in the first place, and they do not therefore collect unemployment. Rather, adults without job skills collect food stamps and other government assistanc, as well as help from family and friends, while teens simply do not work in nearly the numbers that they would if they had the job opportunities that minimum wages price them out of.

Do you have a science project that accounts for these unfortunates?

The cruelty here is not the lost paycheck, because, as you so rightly point out, it is not a living wage and is arguably not significant versus government awssistance. What is tragic is the minimum wage's de facto prohibition of developing job skills and a job history that could lead to more lucrative employment in the future.

That your study is sketchy is obvious enough, but numerous surveys of employers have shown that they hire less minimum wage is raised. That employment is usually high in the U.S. and opportunities for the unskilled abound is evidence of what may be the only benefit of inflation: that it renders the minimum wage almost irrelevant.

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