UNCOMMON SENSE 10 © Revised March 1998

By Robert Cherry, Professor of Economics, Brooklyn College of the City University of New York

The most interesting question is why every few years we battle over the minimum wage, when it would be far simpler just to index the minimum wage to inflation, and then forget about it? We could decide once and for all what the purchasing power of the minimum wage ought to be, and then let it move in tandem with prices.

Robert B. Reich, “A Better Way to Raise the Minimum Wage,” The Electronic Policy Network, February 23, 1998, also available at: http://www.sfgate.com

Seems sensible, so what gives? Reich lets us in on the dirty little secret of Washington.

In his 1992 campaign, President Clinton pledged to help the working poor by raising the minimum wage. He waited until his State of the Union Address in 1995 to propose legislation increasing the minimum wage from $4.25 to $5.15 an hour over two years, pointing out the serious erosion of its purchasing power. Since its peak in 1968, the minimum wage has declined in value by about 40 percent. As a result, a full-time job is not sufficient to escape poverty: the minimum wage provided 85 percent of the official poverty line for a family of four in 1968 but only 58 percent in 1994. If it is not increased, in 1996 the minimum wage will reach its lowest real level in 40 years.

A broad range of workers now earns too little to support a family. For example, the hourly wage of one in three working women is so low that even a woman employed full-time all year (and many are not) can’t support a family of four at the official poverty level. And this is really a destitution level. Black and Latina women are even worse off. Nearly 4 out of 10 black working women and about half of Latinas earn poverty level wages. Male workers earn more than women, but between 1979 and 1993, the share of men employed at poverty wages escalated from 13 to 21 percent.¹ Young men with modest education have been especially hard hit.

The effects aren’t limited to workers actually receiving the minimum wage. Part of the decline in real earnings of the average full-time worker results from this erosion. That is, a sinking wage floor supports the general low-wage strategy of U.S. employers.² Minimum wage workers in the United States earn the lowest pay relative to average earnings in the Western industrial world, so that it is no surprise that we also lead in income inequality.³ Reviewing several studies of the relationship of the minimum wage to inequality, a distinguished labor economist concludes that maintaining the earlier historical relation between the minimum and the average wage would have helped prevent the drastic decline in wages of low income workers.⁴ If the minimum wage  were at roughly 50 percent of the average wage of production workers, as it was most of the time between 1956 and 1980, it would now be about $6 an hour. Were it at its value in 1968, it would be about $7 in 1996 dollars.

Despite this serious worsening of income distribution and erosion of purchasing power, opposition to an increase in the minimum wage is powerful. Though critics agree that it would be a good thing to raise the incomes of the working poor, they contend that the minimum wage is not an effective policy and in fact, actually harms the working poor. Let’s look at the reality of their arguments.

Criticisms by Opponents of the Minimum Wage

Criticism #1: The Minimum Wage Causes Substantial Employment Losses

One argument of critics is that some of the lowest-paid workers would lose their jobs. For example, in criticizing 1987 proposals which would have increased the minimum wage from $3.35 to $4.65 an hour, the Chamber of Commerce predicted that in the long run, almost 2 million low-wage jobs out of roughly 8 million would be lost. This argument was politically effective despite economic studies which estimated that the  upper limit of job losses would be less than 100 thousand.⁵

If few jobs are lost, then this means that the vast majority of low-wage workers directly benefit from a minimum wage increase. Even the few who initially lose jobs may benefit, too. For example, at $3.35 an hour, a full-time worker would be employed 2080 hours for yearly wages of $6968. After the minimum wage increase to $4.25 in 1991, that worker needed to work only 1640 hours, 41 weeks, to obtain the same yearly income. If laid-off workers find employment within 11 weeks, the minimum wage hike increases their income. Because of a high rate of job changing in the low-wage sector, few laid-off workers experience long-term unemployment and so they, too, generally benefit from a higher minimum wage.

However, some recent studies have found that there may not even be a job loss from a higher minimum wage. A study of employment in Texas fast-food restaurants found no effect after the increase to $4.25.⁶ If fast-food restaurants in low-wage states do not change their employment decisions, the authors argue, it is unlikely that other firms whose labor costs are less sensitive to wage changes would do so. These findings were duplicated by a study of the response to changes in state minimum wages in California and New Jersey.⁷ While conservative critics have questioned these results, the overwhelming evidence indicates that job losses are at most quite small and short term.  Restaurants and other service establishments, which employ most minimum wage workers,  are, at least, not subject to global competition, and cannot threaten to move to Taiwan. In any case, should some unemployment result, this is an effect amenable to public job creation.

Criticism #2: Disproportionate Adverse Effect on Afro-American Youth

Some critics have argued that, even if the impact on low-wage employment is negligible, black youth will suffer. They offer two reasons: because black youth are presumed to be less skilled than white youth, they will be laid off first; and a labor surplus will encourage discrimination in hiring. These arguments have appealed to a range of political positions. Citing the potential damage to black youth, both President Reagan and The New York Times editorials recommended during the 1980s that the minimum wage be repealed. (The Times has since changed its position, and now supports the minimum wage.)

While these arguments seem reasonable, there is little evidence to support them. A comprehensive survey of the research found as many studies indicating that black youth experience smaller job loss than white youth as studies showing the reverse.  The authors conclude that any contention that black youth are differentially affected must rest on theoretical rather than empirical grounds.⁸ (However, as the education gap between white and black youth has diminished while the unemployment gap remains, various forms of discrimination are still a factor in employment.)

Criticism #3: Not Focused on Poor Households

Finally, critics claim that most workers earning the minimum wage are not living in poor households. For 1988, the Labor Department estimated that of the 2.5 million hourly workers paid at or below the minimum wage, only 415 thousand (16.6%) were members of poor households. After its increase in 1991, one study estimated that only 17 percent of the benefits went to the working poor and another 14 percent to the near-poor, those with household incomes between $13,000 and $20,000.⁹ If the objective is to help poor families obtain a living wage, these critics conclude, using other, more focused government policies is preferable: in particular, the Earned Income Tax Credit (EITC).

Minimum wage proponents consider these figures to be underestimates, partly because they include only workers paid at an hourly rate. Some estimates of the number of low-wage workers are as high as 15.4 million, with about 1 in 4 of these workers living in poverty: ten times the Labor Department estimate.¹⁰ Indeed, if all workers whose pay was below the minimum are included (including those not currently covered by the law), an estimated 33 percent of the minimum-wage increase would have gone to the working poor, with an additional 16 percent to the near-poor.¹¹

As for the EITC,  it is certainly valuable for heads of households employed in the low-wage labor market. Thus for 1995, each hour worked at a full-time minimum wage job by a parent with two dependent children would yield a total of $5.75: $4.25 from the employer and $1.50 from the government. However, the EITC is negligible for poor households without dependent children: for them, maximum yearly benefits are only $314, and are phased out completely when earnings rise above $9230. More than 40 percent of the working poor and more than 60 percent of households with incomes between $10,000 and $15,000 do not have dependent children.¹² For these households, increases in the minimum wage, not the EITC, are more valuable.

A majority of those earning the minimum wage or less are women (62 percent).¹³ A higher minimum would  especially benefit women who are heads of households and would help to ease the transition from welfare to work for those affected by increasingly restrictive welfare rules, especially given the political vulnerability of the EITC.

Though critics of the minimum wage argue that teens and other young workers, who tend to live with parents, don’t need a higher wage,  even these workers deserve a raise. The decline in wages has been most serious for young workers. More than half of those earning the minimum wage or less are under 25 years old; nearly two-thirds are under 30. Many of  these workers currently have no prospects for better-paying jobs, and may never have. Even young minimum-wage workers from middle-class families may benefit significantly from a higher minimum. Many are working to cover college expenses at a time when the Congress is cutting student aid programs and tuition continues to rise.¹⁴The Politics of the Minimum Wage

If an increase in the minimum wage adversely affects at most only few workers, if its effects do not fall disproportionately on any group, and if a substantial portion of poor and near-poor households benefit, why then is there such reluctance to support it? Why was Congress in 1993 willing to support doubling government expenditures on the EITC program and unwilling to raise the minimum wage, which has no government costs? The answer to these questions must reflect the influence of the business community on government policy decisions and the weakness of labor and working people in the present-day political process.

A higher minimum wage raises production costs to firms that hire low-wage workers or buy materials and services from low-wage firms. These business groups have actively sought to undermine support for the minimum wage through campaign contributions and other lobbying activities. They have also financed research antagonistic to the minimum wage. Since the EITC program is paid by taxpayers, these business groups have supported it as an alternative to minimum wage hikes. It is fairer to workers and to taxpayers both to require firms to pay their employees an adequate wage.

In 1995 alone, the average real compensation of chief executives jumped by about 27 percent, compared to a 1.4 percent raise for professionals, a 1.4 percent decline for factory employees,¹⁵ and a 2.8 percent decline for minimum wage workers. The same people who readily accept an increase of millions in their own compensation resist higher wages for workers as an unacceptable cost. However, even the business sector will benefit from a more prosperous and therefore higher-spending population. A higher minimum will  increase consumer spending, since poorer people spend most of their income. More spending means that existing plant is used more fully. This raises firm profits, and eventually encourages a business to invest in more plant and equipment. Higher wages also may decrease employee turnover, and thereby offset part of a firm’s additional wage costs. The economy as a whole will benefit in another way. Businesses facing rising labor costs are pressed to innovate, raising labor productivity, which is a key to rising living standards. In fact, some economists consider the decline in our productivity growth the result of the fall in wages.¹⁶ Communities now strapped for funds will also benefit from a larger tax base. Workers  with adequate income pay more taxes and don’t require food stamps or welfare.

While the increase in the minimum wage currently being proposed is welcome, it still would not provide a livable wage. With high unemployment of unskilled workers and a weakened union movement, a higher minimum wage is the only way that low-wage workers can get a raise. (Full employment, with more job creation for low-wage workers, would also help to raise wages for the working poor. The unemployed benefit neither from the minimum wage nor the EITC.) An adequate minimum wage, and one indexed to average wages, is a fundamental adjunct to a full employment policy. We need not only jobs for all but jobs at a livable wage.

NOTES:

1. Lawrence Mishel and Jared Bernstein, The State of Working America 1994-95, Economic Policy Institute. NY: M.E. Sharpe, 1994, Tables, pp. 126, 130-1.
2. See Uncommon Sense 7,  Full Employment and Affirmative Action., for information on wage decline.  David Howell, “The Skills Myth,” The American Prospect, Summer, 1994,  p. 90
3. Richard Freeman “Minimum Wages, Again!”, International Journal of Manpower 15, 2/3, 1994, Table 1, p. 11
4. Freeman, Labour Market Institutions and Earnings Inequality, Boston Federal Reserve Bank, Nov. 17, 1995, p.16
5. A. Bernstein, “Dispelling Myths About the Higher Minimum Wage.” Business Week, Oct. 19, 1987
6. Lawrence Katz and Allan Krueger, “The Effects of the Minimum Wage on the Fast Food Industry,” Industrial and Labor Relations Review, October, 1992
7. David Card, “Do Minimum Wages Reduce Employment: A Case Study of California, 1987-1989,” Ibid.
8. Charles Brown, Curtis Gilroy, and Andrew Kohn, “The Effects of Minimum Wage on Employment and Unemployment,” Journal of Economic Literature, March 1982
9. Richard Burkhauser and Andrew Glen, “Public Policies for the Working Poor,” The Employment Policies Institute, Washington, Sept. 1993
10. Bruce Klein, “Real Estimates of Poor Minimum Wage Workers,” Challenge, May/June 1992. Klein uses estimates of hourly pay derived by dividing BLS data on total yearly earnings by total annual hours worked for all those working at least half the year.
11. Burkhauser and Glen, op. cit.
12. Saul Hoffman and Laurence Seidman, The Earned Income Tax Credit, Kalamazoo, MI: WE Upjohn Institute, 1990. Estimate by authors.
13. “Characteristics of Minimum Wage Workers: 1994,” Bureau of Labor Statistics
14. Patricia Cohen, “Exploiting Young Workers,” Op-Ed, New York Times, Sept. 23, 1995
15. Calculated from data in Business Week, April 22, 1996.
16. Business Week, May 20, 1996, 42.

Editor: June Zaccone, Economics (Emer.), Hofstra University