Economics Nobel Laureate Gary Becker and Judge Richard Posner have a co-authored op-ed in today's Wall Street Journal (subscribers-only link). In their article, titled "How to Make the Poor Poorer," Becker and Posner explain why raising the federal minimum wage is a supremely bad idea.
An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor. Producers adjust both by substituting capital inputs and/or high-skilled labor for minimum-wage workers and, because the substitutes are more costly (otherwise the substitutions would have been made already), by raising prices. The higher prices reduce the producers' output and thus their demand for labor. The adjustments to the hike in the minimum wage are inefficient because they are motivated not by a higher real cost of low-skilled labor but by a government-mandated increase in the price of that labor. That increase has the same misallocative effect as monopoly pricing.They further note that while some economists do not believe minimum wage increases have a significant effect, this view is in the minority, and few are likely to contend that a substantial increase, such as the 40 percent increase currently before Congress, would not have a negative employment effect.
Although some workers benefit — those who were paid the old minimum wage but are worth the new, higher one to the employers — others are pushed into unemployment, the underground economy or crime. The losers are therefore likely to lose more than the gainers gain; they are also likely to be poorer people. And poor families are disproportionately hurt by the rise in the price of fast foods and other goods produced with low-skilled labor because these families spend a relatively large fraction of their incomes on such goods. And many, maybe most, of the gainers from a higher minimum wage are not poor. Most minimum-wage workers are part time, and for the majority their minimum-wage income supplements an income derived from other sources.
If politicians want to help the poor, Becker and Posner argue that the Earned-Income Tax Credit (EITC) is a more efficient (or, really, less inefficient) means of achieving this end. The EITC is more effective means of redistributing wealth to the poor and produces fewer unwanted side effects.
UPDATE: I agree with those commentators who argue that it is important to consider the available empirical evidence. The bulk of this evidence shows, however, that the minimum wage generally has those effects that economic theory would predict (although the effects are often quite small). A recent summary of the empirical evidence can be found on Greg Mankiw's blog here.