Raising the Minimum Wage May Actually Harm Poor Workers

My college economics professor recently asked our class how many of us are in favor of increasing the minimum wage, and several hands, including mine, went up. Increasing the minimum wage ensures that workers who earn hourly wages benefit by bringing more money home. Raising the minimum wage makes sense, right?

Surprisingly, our professor said that raising the minimum wage actually hurts many workers, especially non-college bound, younger people who need work experience for career growth. When the minimum wage increases, employers lay off workers in order to balance expenditure on employee salaries. These workers then turn to what is known as the “uncovered labor market,” where jobs have no minimum wage levels. As more workers pour into the uncovered labor market, the already low salaries get driven down even more.

If this is the American situation, what is happening around the world? Another surprise —even if Obama’s proposal in the State of the Union to increase the minimum wage to $9 from $7.25 goes through, it would still leave us behind many other countries. According to the Huffington Post and the OECD, Canada’s minimum wage is $8.04, followed by the United Kingdom’s $8.53, New Zealand's $8.63, Belgium's $9.52, Australia's $9.54, France's $10.02, the Netherlands'$10.23, Ireland's $10.81, and the tiny nation of Luxembourg at #1 with $11.36 as minimum wage.

After Obama’s proposal, it might be interesting to look at how Europe has handled minimum wage. While it varies from country to country — Germany does not have a minimum wage, while France has a considerably high one — the United States can learn a lot about how the minimum wage affects employment and productivity from Europe. In France, for example, President Francois Hollande increased the minimum wage despite a joint European effort to implement austerity measures in the face of the recent economic crisis. On the other hand, political opponents of Hollande contend that the increase — the minimum wage, after two increases is now $12.64 — is not enough to help the working poor. In England, the situation remains quite unchanged. In Germany, Chancellor Merkel’s political opponents plan to use minimum wage  to unseat her in the next election, suggesting that while unemployment is low, there are issues of exploitation and inequality. Unfortunately, minimum wage policies do not do what economists say is needed for Europe’s recovery: increase productivity.

How do Asian countries fare in this regard? In India, Pakistan, Indonesia, and Vietnam, there are different minimum wages, determined locally and regionally. Countries also use industry levels, sector levels, and skills to determine how much a minimum wage should be. There are certain groups who have special minimum wage protections, including domestic workers, piece-rate workers, workers on probation, and disabled workers. Asian countries also have uncovered labor groups: public servants and domestic workers in Indonesia, the disabled in India, and unskilled workers in Pakistan. While the United States uses a national minimum wage system unlike Asian countries, the U.S. might want to examine how different countries ensure the sustainability of their working poor.