Senate's wage bill still exempts Samoa
By Charles Hurt
THE WASHINGTON TIMES
January 23, 2007
The Democrat-controlled Senate took up a bill yesterday
that would raise the minimum wage across the United States and its territories
but exempt American Samoa, where tuna canneries pay workers $3.26 an hour.
House Speaker Nancy Pelosi told reporters
less than two weeks ago that she would close the loophole after coming
under criticism from Republicans for what they termed a "fishy favor" to
StarKist Tuna. StarKist has lobbied for years against raising the minimum
wage in American Samoa, and its parent, Del Monte Corp., is based in Mrs.
Pelosi's San Francisco district.
"I have asked the education and labor
committee as they go forward with the legislation to make sure that all
of the territories have to comply with U.S. law on the minimum wage," Mrs.
Pelosi said earlier this month.
The House, however, passed the minimum-wage
bill with the American Samoa exemption. And yesterday, Senate Democrats
were moving ahead with the original legislation, which for the first time
would enforce the minimum wage on the Northern Mariana Islands, another
territory in the Pacific with a similarly low minimum wage.
That bill is co-sponsored by several
dozen Democrats, including Sens. Dianne Feinstein and Barbara Boxer of
California.
In addition to San Francisco-based
StarKist, San Diego-based Chicken of the Sea also has a cannery in American
Samoa. Together, the California companies employ about 75 percent of the
Samoan work force.
Democrats said they are imposing the
wage increase on the Northern Marianas -- a proposal long blocked by former
Majority Leader Tom DeLay, Texas Republican -- because of the harsh labor
conditions there.
Delegate Eni F.H. Faleomavaega, a
nonvoting Democrat representing American Samoa, opposes extending the minimum
wage to that territory.
A "decrease in production or departure
of one or both of the two canneries in American Samoa could devastate the
local economy, resulting in massive layoffs and insurmountable financial
difficulties," he said, echoing the arguments of conservatives against
applying the wage to poorer regions of the U.S.
"The truth is the global tuna industry
is so competitive that it is no longer possible for the federal government
to demand mainland minimum-wage rates for American Samoa without causing
the collapse of our economy and making us welfare wards of the federal
government," Mr. Faleomavaega said.
.
How to Make the Poor Poorer
By GARY S. BECKER and RICHARD A. POSNER
January 26, 2007; Page A11
The strong bipartisan support for increasing the federal minimum wage to $7.25 an hour from the current $5.15 -- a 40% increase -- is a sad example of how interest-group politics and the public's ignorance of economics can combine to give us laws that manage to be both inefficient and inegalitarian.
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.
[Illustration]
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. Examples are retirees living on Social Security or private pensions who want to get out of the house part of the day and earn pin money, stay-at-home spouses who want to supplement their spouse's earnings, and teenagers working after school. An increase in the minimum wage will thus provide a windfall to many workers who are not poor.
Some economists deny that a minimum wage reduces employment, though most disagree. And because most increases in the minimum wage have been slight, their effects are difficult to disentangle from other factors that affect employment. But a 40% increase would be too large to have no employment effect; about a tenth of the work force makes less than $7.25 an hour. Even defenders of minimum-wage laws must believe that beyond some point a higher minimum would cause unemployment. Otherwise why don't they propose $10, or $15, or an even higher figure?
A number of countries, including France, have conducted such experiments; the ratio of the minimum wage to the average wage is much higher in these countries than in the U.S. Economists Guy Laroque and Bernard Salanie find that the high minimum wage in France explains a significant part of the low employment rate of married women. Mr. Salanie has argued that the minimum wage also contributes to the dismal employment prospects of young persons in France, including Muslim youths, an estimated 40% of whom are unemployed.
As a means of raising people from poverty or near poverty, the minimum wage is inferior to the Earned Income Tax Credit, which compensates for low wages without interfering with the labor market or conferring windfalls on the nonpoor. EITC is not completely devoid of effects on efficient resource allocation, because like any other government spending it is defrayed out of taxes, and it has been abused by underreporting of income and overreporting of dependents. But it is a more efficient tax than the minimum wage as well as being more effective in redistributing income to the poor.
So why push to increase the minimum wage rather than the EITC? For one thing, unions strongly favor the minimum wage because it reduces competition from low-wage workers (who, partly because most of them work part time, tend not to be unionized) and thus enhances unions' bargaining power and so their appeal to workers. For another, increasing the EITC would mean an increase in government spending, which might require higher taxes; there is no public support for explicit tax increases and most people don't understand that regulatory laws can have the same effect as taxes.
Moreover, poor people tend not to vote; and the number of nonpoor who'd be directly benefited by an increase in the minimum wage, when combined with the number of nonpoor workers whose incomes would rise because of reduced competition from minimum-wage workers, probably exceeds the number of nonpoor who would lose jobs. Teenagers would be among the hardest hit -- and few of them are voters (if under 18, they're ineligible). While workers who receive a wage increase when the minimum wage is hiked realize they've benefited from the hike, many hurt by the hike don't realize it; teenagers and retirees who have trouble finding a job are unlikely to realize that it's because there are fewer jobs in the economy for minimum-wage workers.
Let's hope that if Congress passes a stiff increase in the federal minimum wage, George Bush will emulate Mayor Richard Daley and veto it. Several months ago the Chicago City Council, by a lopsided but not veto-proof vote, passed an ordinance requiring companies that have more than $1 billion in annual sales, and own stores in Chicago having at least 90,000 square feet of floor space, to pay Chicago employees a minimum wage of $9.25 an hour plus $1.50 an hour in fringe benefits, respectively rising to $10 and $3 by 2010. About 40 stores would have been affected.
The ordinance was surpassingly foolish. The retailers that would have been most affected, such as Wal-Mart, Target and Home Depot, are at best only marginally interested in placing stores in large cities because space for large stores and for the parking they require is much more expensive than in suburbs and smaller towns. Moreover, these companies could offset much of the effect of the ordinance by opening more stores in suburbs within easy reach of Chicago, or by holding their floor space to just below 90,000 square feet. Fewer jobs would be available to low-skilled workers in the city, and families with modest incomes who seek low prices rather than elaborate service would be hurt more than the affluent by the increase in prices and reduced availability of big box outlets.
Who would favor such a bad ordinance? Conventional supermarket chains and clothing stores, of course, and unions -- the latter not only for the usual reasons but also because big box companies oppose unions; the ordinance sent a signal that unions have enough political clout to make life difficult for large nonunion retailers. The absence of opposition to the ordinance from low-income consumers is not surprising because they are not organized to exert political pressure. The aggressive support of the ordinance by most of the council's black members is more difficult to understand, but the explanation may be that they are allied with unions. They may have realized that their constituents would be harmed by the ordinance, but believed that in return for taking this hit they would get the support of unions for measures that would help low-income families.
The failure of the Chicago ordinance and related local measures helps to explain the push to raise the federal minimum wage. The ordinance would have been particularly destructive -- hence Mayor Daley's veto of it -- because the smaller the scope of a minimum-wage increase, the more easily it is evaded, though possibly at great social cost. A federal increase would have a smaller social cost per worker covered, but presumably a larger overall social cost. Chicago's "big box" ordinance is evidence, if any is needed, that politics can override economic sanity. One can only hope that this lesson will not be repeated on the national stage.
Mr. Becker, the 1992 Nobel economics laureate, is professor
of economics at the University of Chicago and senior fellow at the Hoover
Institution. Mr. Posner is a federal circuit judge and a senior lecturer
at the University of Chicago Law School.
Who Cares About The Poor?
By ARTHUR C. BROOKS
January 24, 2007; Page A13
When control of the U.S. Congress changed hands earlier this month, it was clear that a raised minimum wage would be high on the legislative agenda. And indeed, an increase to $7.25 from $5.15 per hour raced through the House and is unlikely to face much substantive opposition in the Senate.
The Democrats have two reasons for focusing on the minimum wage. The first is poverty: $5.15 an hour is insufficient to support a family -- according to the Congressional Budget Office, about 18% of workers in 2005 making between $5.15 and the new minimum wage lived below the poverty line. Democrats believe raising the legal minimum will help solve this problem.
The Democrats' second reason for a minimum wage hike is relative (not absolute) deprivation: They hope that raising the minimum will lower income inequality, which has been a concern of the political left for generations. The Democratic National Committee defended the hike by charging, "The federal minimum wage is so disgracefully low that now, during a period of extraordinary prosperity for the nation's corporations and wealthiest families, the average CEO earns as much in just a few hours on the first workday of the year as a full-time minimum wage worker earns the entire year." The economic chasm between the CEO and the minimum wage worker, in this view, is evidence of an unjust society.
While just about everybody -- left and right -- agrees that poverty is unacceptable (although policy makers disagree as to whether a minimum wage hike would help or hurt the working poor), conservatives do not share liberals' concern about income inequality. According to the 2005 Maxwell Poll on Civic Engagement and Inequality, self-described liberals are more than twice as likely as conservatives to say income inequality in America is a "serious problem." And while 84% of liberals think the government should do more to reduce inequality, only 25% of conservatives agree.
This is empirical substantiation for the old cliché that conservatives just don't care about the poor, right? Wrong. In fact, the data do not tell us that conservatives are uncaring; they actually tell us that conservatives are optimists. Conservatives are relatively untroubled by inequality, and unsupportive of government income redistribution, because they believe the American economy provides private opportunities to succeed. Liberals are far more pessimistic than conservatives about the possibility of a better future for Americans of modest means.
Consider the evidence. While 92% of conservatives believe that hard work and perseverance can help a person overcome disadvantage, only 65% of liberals think so. This difference of opinion, contrary to the convention, is not because conservatives earn more money. In fact, lower-income conservatives are about twice as likely as upper-income liberals to say they think there's "a lot" of upward mobility in America. If a liberal and a conservative are exactly identical in income, education, sex, family situation, and race, the conservative will be 20 percentage points more likely than the liberal to say that hard work leads to success among the disadvantaged.
Naturally, well-to-do liberals must be amazed at the gullibility of the millions of poorer conservatives who still cling to the idea of America's promise of a better future through hard work and perseverance. Sunny conservatives of all economic classes may very well prefer to see things their way about America. Are conservatives naïve, or are liberals unjustifiably dour? Reasonable people disagree on this question. One thing that is clear, however, is that conservatives' lack of anxiety about income inequality -- and perhaps even their opposition to redistributive government policies -- is evidence of a light heart, not a hard one.
Mr. Brooks, a professor of public administration at Syracuse
University's Maxwell School of Public Affairs, is the author of "Who Really
Cares: The Surprising Truth About Compassionate Conservatism" (Basic Books,
2006).
AMERICAN IDLES
------------------------------------------------------------------------
The increase in the federal minimum wage Congress passed
by a vote of
315-116 is a triumph of feelings over facts. Sounds
great.
The deserving working poor are finally going to be paid
a living
wage. Except that it isn't true, says columnist
Mona Charen.
o Fewer than one in five minimum-wage
workers lives in a family
with income below
the poverty line.
o More than 82 percent of minimum-wage
workers have no
dependents, according
to the Bureau of Labor Statistics (BLS).
o Minimum-wage workers tend
to be young (under 25) and single
(often they are
students working part time), and a full 40
percent come from
homes with an annual income of $60,000 and
higher.
o Never-married workers are
more likely than married workers to
be paid minimum
wage.
One of the Democrats who extolled an increase in the
minimum wage
reminded listeners that these workers "had not gotten
a raise in
12 years." Well, that's misleading, says Charen:
o The BLS reports that 63 percent
of minimum-wage workers
receive a raise
after the first year of employment.
o Only 15 percent are still
receiving the lowest wage after
three years on the
job.
o The BLS also found that part-time
workers are far more likely
to be paid minimum
wage than full-time employees; only 1.2
percent of full-time,
year-round employees earned $5.15 an
hour or less in
2005.
Fighting poverty by raising the minimum wage is way off
target.
Among the poor, the problem is not so much one of low
wages as of
non-work -- call it the American Idle. The Census
Bureau finds
that 63.2 percent of individuals aged 16 or above living
in poverty did
not work at all in the year preceding the survey.
Raising the
minimum wage obviously does nothing for those who aren't
working, says
Charen.
Source: Mona Charen, "Minimum-wage hike a feel-good measure,"
Toledo Blade, January 22, 2007; and "Characteristics
of Minimum
Wage Workers: 2005," U.S. Department of Bureau of Labor
Statistics, May 19, 2006.
For text:
http://toledoblade.com/apps/pbcs.dll/article?AID=/20070122/OPINION02/70122003
For BLS study:
http://www.bls.gov/cps/minwage2005.htm
For more on Economic Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=17
Cafeteria Catholicism and the Minimum Wage
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By Stephen Bainbridge : BIO| 19 Jan 2007
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When liberal Catholic politicians support abortion rights, conservatives are quick to accuse them of being cafeteria Catholics. When conservative Catholic politicians oppose increasing the minimum wage, liberals are quick to hurl the same accusation.
The metaphor is an apt one. Many Catholics stroll past the array of teachings offered by the Church, choosing to obey those that appeal to them personally and rejecting those that do not. Unfortunately for cafeteria Catholics, however, the Church makes clear that the cafeteria approach is not an authentic form of Catholicism. To the contrary, the faithful "have the duty of observing the constitutions and decrees conveyed by the legitimate authority of the Church." (Catechism ¶ 2037.)
At the same time, however, the Church encourages lay initiative "especially when the matter involves discovering or inventing the means for permeating social, political, and economic realities with the demands of Christian doctrine and life." (Catechism ¶ 2037.) Clearly, there areas that the Church leaves to the prudential judgment of the faithful.
How do we distinguish between those areas in which faithful Catholics may properly disagree with pronouncements by the Pope or a bishop and those as to which faithful Catholics must give their assent even if their personal judgment is to the contrary?
We begin with the Magisterium or the teachings of the Church. Catholic doctrine divides Church teaching into two basic categories. The sacred Magisterium encompasses the infallible teachings of the Church as pronounced by the Pope acting ex cathedra or by the Pope and Bishops acting together in an Ecumenical Council. "When the Church through its supreme Magisterium proposes a doctrine 'for belief as being divinely revealed,' and as the teaching of Christ, the definitions 'must be adhered to with the obedience of faith.'" (Catechism ¶ 891) Contrary to what many non-Catholics believe, there are relatively few infallible teachings. Indeed, much of the sacred Magisterium is captured in the Nicene Creed. Another well-known example is the promulgation of the dogma of the Assumption of Mary by Pope Pius XII in 1950.
The vast bulk of Church teaching does not rise to the level of the sacred Magisterium. Instead, it consists of the ordinary Magisterium:
Divine assistance is also given to the successors of the apostles, teaching in communion with the successor of Peter, and, in a particular way, to the bishop of Rome, pastor of the whole Church, when, without arriving at an infallible definition and without pronouncing in a "definitive manner," they propose in the exercise of the ordinary Magisterium a teaching that leads to better understanding of Revelation in matters of faith and morals. To this ordinary teaching the faithful "are to adhere to it with religious assent" which, though distinct from the assent of faith, is nonetheless an extension of it. (Catechism ¶ 892.)
The distinction between "obedience of faith" and "religious assent" is an obscure one, which I think we can safely leave to the professional theologians. The Dogmatic Constitution on the Church (Lumen Gentium) teaches that religious assent requires we acknowledge the teachings "with reverence" and "sincerely" adhere thereto.
The difficulty is that Church documents frequently fail to specify whether the teaching in question is to be regarded as part of the sacred Magisterium or the ordinary Magisterium, or something as to which faithful Catholics may properly exercise prudential judgment. There is an old saying in the Church: "When it is not necessary for the Bishop to speak, it is necessary that the Bishop not speak." Unfortunately, the hierarchy honors that wise advice mostly in the breach.
Consider, for example, the recent controversy over the execution of Saddam Hussein. Before Saddam's execution, Cardinal Renato Martino, president of the Pontifical Council for Justice and Peace, opined that it is not morally licit for anyone, "even the state," to kill another person. Is this Magisterial teaching? Arguably not.
The Catechism of the Catholic Church states, in pertinent part, that:
The traditional teaching of the Church does not exclude, presupposing full ascertainment of the identity and responsibility of the offender, recourse to the death penalty, when this is the only practicable way to defend the lives of human beings effectively against the aggressor.
"If, instead, bloodless means are sufficient to defend against the aggressor and to protect the safety of persons, public authority should limit itself to such means, because they better correspond to the concrete conditions of the common good and are more in conformity to the dignity of the human person.
"Today, in fact, given the means at the State's disposal to effectively repress crime by rendering inoffensive the one who has committed it, without depriving him definitively of the possibility of redeeming himself, cases of absolute necessity for suppression of the offender 'today ... are very rare, if not practically non-existent.'" (Catechism ¶ 2267.)
A fair interpretation of that teaching, especially when it is read against Pope John Paul II's writings on the death penalty, is that the Catholic Church as a matter of ordinary magisterial teaching strongly disfavors the death penalty. Specifically, as a matter of ordinary magisterial teaching, the Church commands that the death penalty not be used if imprisonment (or other punishments) adequately protect society against the wrongdoer. Faithful Catholics should give this teaching religious assent.
Notice, however, that the Catechism does not ban the death penalty per se. Instead, it leaves open room for the exercise of prudential judgment with respect to the question of whether, in a particular case, "bloodless means" will not be "sufficient to defend against the aggressor and to protect the safety of persons." Cardinal Renato's pronouncements on Saddam's execution reflect his own prudential judgment, but they need not be regarded as Magisterial teachings to which the faithful are obliged to give religious assent. Instead, faithful Catholics may exercise their own prudential judgment on that issue.
The hierarchy could help the faithful by doing a better job of categorizing specific pronouncements. In the meanwhile, faithful Catholics must exercise discernment in attempting to determine whether a specific pronouncement by Church leaders is something to which they must give assent or something as to which the faithful laity may exercise prudential judgment.
A case in point is provided by Bishop Nicholas DiMarzio, chairman of the US Conference of Catholic Bishops' Domestic Policy Committee, who recent pronounced that the Bishops have "supported the minimum wage since its inception as a just means to protect the human rights and dignity of workers" and, accordingly, that the Bishops have renewed their "support for an increase in the minimum wage." As such, he called on Congress to raise the minimum wage.
Is support for a minimum wage part of the ordinary Magisterium
to which faithful Catholics must give religious assent, even if they believe
it is bad economic or social policy? Is Bishops' support for an increase
in the minimum wage something that requires religious assent? I'll address
those questions in next week's column.
Minimum Wage Effects in the Post-welfare Reform Era
Overview http://www.epionline.org/study_detail.cfm?sid=103
Minimum wage laws remain a subject of considerable debate at all levels of government despite years of research on their costs and benefits. At the national level, there have been frequent proposals in recent years to increase the federal minimum wage. Many states have followed suit, attempting (and sometimes succeeding) to raise their minimum wages above the federal level. At the present time, 21 states and the District of Columbia have minimum wages that exceed the federal wage floor, while 6 others recently passed ballot initiatives to raise theirs as well. Additionally, city-wide minimum wages have been enacted in a handful of cities, and living wages which typically set a higher minimum wage for a subset of workers in an area have spread to scores of other cities.
A major drawback of much of the existing minimum wage research is that it was performed using data that extends through the mid-1990s at the latest. Since then, the low-wage labor market has undergone substantial changes. Welfare reform, expansions of the federal Earned Income Tax Credit (EITC), and the growth of state EITCs have changed work incentives faced by the poor and thus the types of individuals competing for entry-level jobs. These reforms may have altered the effects of minimum wages as well. Therefore, evidence from earlier research is likely less applicable to the evaluation of recent or future increases in state and federal minimum wages. In this study, Dr. David Neumark of the University of California at Irvine focuses on the effects of state-level minimum wages in the post-welfare reform era. Specifically, he estimates the effect of the minimum wage on employment levels, wages, and earnings of teenagers and young adults (aged 16-24) for a wide variety of demographic and skill groups over the 1997-2005 period. Additionally, he estimates the effects of other policy changes and investigates potential interaction effects. The author finds, consistent with earlier research, that the most negative minimum wage employment effects are felt by at-risk groups, such as the less-skilled and young minority males. He also finds that there may be positive minimum wage effects on the employment of young minority women aged 20-24 when combined with EITC policies. However, this benefit comes at a substantial cost to other groups. Among those who pay the highest costs are minority males and female high school dropouts. Minority males and high school dropouts often serve as “poster children” for increases in the minimum wage, yet experience the strongest disemployment effects as well as decreased earnings which are magnified by higher state EITC levels.
Welfare Reform and the EITC
In his analysis of the post-welfare reform era, the author considers EITC expansions and the 1996 Personal Responsibility and Work Opportunity Reconciliation Act (PROWRA) legislation that replaced the Aid to Families with Dependent Children (AFDC) program with Temporary Assistance to Needy Families (TANF). TANF made welfare funds available to states under the condition that they introduce policies designed to move recipients off welfare by encouraging self-sufficiency. Such policies have included specific legislation requiring welfare recipients to work, as well as limits on the number of months that families can receive welfare payments. Although the author specifically included these time limits and work requirements, he was unable to find any interaction between them and the minimum wage regarding their effect on employment.
Therefore, the analysis focuses primarily on the EITC. At the federal level, the EITC increased sharply during the 1990s, rising to a 40 percent earned income tax credit (with two children) in 1996, where it has remained since. Additionally, a number of states introduced their own EITC programs, which typically specify a percentage supplement to the federal EITC. Currently, 20 states plus the District of Columbia have their own EITC programs. In most cases, state-level EITCs are refundable, generally fully so, but since the results did not differ based on refundability, this distinction is ignored.
Employment
Minimum wages have strongly negative effects on the employment of teenagers and minorities (African American, Hispanic, or both). The author finds that a 10% increase in the minimum wage will decrease minority employment by 3.9%, with the majority of the burden falling on minority teenagers (6.6%). Although the size of the disemployment effects for African Americans is quite large -2.8% (and even larger for African American teenagers, -8.4%), it is the statistically significant effect for Hispanics (-4.9%) that is driving these results. This supports earlier research which found that minimum wages have the largest negative effects on low-skilled employees, such as teens and minority teens.
Most of these negative results appear to be due to the impact that minimum wages have had on male employment in the post-welfare era. The author finds uniformly negative effects on males, particularly minorities. For every 10% increase in the minimum wage, African American or Hispanic males aged 16-24 and 20-24 experienced decreased employment of 6.3% and 5.5% respectively during this period. While minimum wages appear to have had less of a negative impact on women’s employment, there is still very strong evidence of disemployment effects among the least-skilled (i.e., high school dropouts). For these vulnerable individuals, a 10% increase in the minimum wage led to an 8% decrease in employment. Moreover, the relatively favorable results for females are tempered by evidence that for some women a high minimum wage coupled with an EITC reduces their employment prospects.
Wages and Earnings
For the most part, the author finds positive effects on wages from minimum wage hikes. This includes the wages of the least skilled, both male and female. The minimum wage has a particularly positive impact on the earnings of 20-24 year-old African American or Hispanic women, increasing their earnings by 8% for each 10% increase in the minimum wage. This is not surprising, since the wage effect for this group was one of the highest and the employment effect was small but positive. However, at the same time, the EITC reduces wages for 16-24 and 20-24 year-old minority men and women.
The evidence reveals policy effects on earnings that differ substantially across different groups. The EITC boosts minority women’s earnings, and coupling the EITC with a higher minimum wage appears to enhance this positive effect. In contrast, higher minimum wages reduce the earnings of minority men, particularly when the EITC is high (for those aged 16-24, a 10% increase in the minimum wage coupled with a 25% state EITC supplement is associated with a 19.8% decrease in earnings). This policy combination also hurts female teenagers and 20-24 year-old high school dropouts.
Conclusion
In considering the post-welfare reform era, the author finds that the disemployment effects of minimum wages are concentrated on young minority men; for young white men, the estimated effects are negative but smaller and not statistically significant. For young women, in contrast, there is little evidence of minimum wage effects on employment, with the exception of high school dropouts.
The effect of mixing minimum wage policies with EITCs varies quite sharply between men and women. Higher minimum wages reduce the earnings of minority men, more so when the EITC is high. In contrast, the EITC boosts minority women’s employment and earnings. With the negative effects of coupling minimum wage hikes with EITC policies concentrated on already vulnerable groups (particularly young minority men and the least-skilled), governments should exhibit extreme caution in trying to enhance the EITC with higher minimum wages, which have been shown to affect many individuals who are not in low-income families.
PDF VersionDownload the full study in .pdf format
PELOSI'S TUNA SURPRISE
------------------------------------------------------------------------
Economists of every political stripe agree that a higher
minimum wage
will cost some low-skill workers their jobs, says the
Wall Street
Journal.
Even Speaker Nancy Pelosi seems to understand this.
Despite
leading efforts to pass minimum wage increases, she granted
a reprieve
to American Samoa, which has a big fish and tuna canning
industry,
specifically operations run by StarKist and Chicken of
the Sea.
Both companies are headquartered in California, and StarKist's
parent
is located in none other than Speaker Pelosi's own San
Francisco
district. Democrats rediscovered the eternal economic
truth that
a higher minimum wage can cost jobs and granted Samoa
its reprieve:
o In 2004, according to the
Department of Labor, Samoan
canneries directly
employed some 4,800 people, or nearly 40
percent of the work
force.
o StarKist and Chicken of the
Sea would have plenty of other
low-wage locations
to do their canning; the average hourly
wage for the American
Samoan canneries in 2004 was about
$3.60.
o In contrast, the average cannery
wage in Thailand was 67
cents an hour and
in the Philippines 66 cents.
You don't have to go as far as American Samoa to discover
other
liberals who understand this -- at least when they do
the hiring, says
the Journal:
o In 1995, the union-financed
lobby, Acorn, sued California
seeking exemption
from the state's then-$4.25 minimum wage.
o Acorn argued in its court
brief that the more they must pay
each individual
outreach worker -- either because of minimum
wage or overtime
requirements -- the fewer outreach workers it
will be able to
hire.
None of this insight will do American Samoa much good,
however.
Red-faced after her tuna surprise was discovered, Speaker
Pelosi
announced that she was to re-examine whether the bill
also should apply
to the Pacific island.
Source: Editorial, "Pelosi's Tuna Surprise," Wall Street
Journal, January 16, 2007.
For text:
http://online.wsj.com/article/SB116891896808477346.html
For more on Minimum Wage:
http://www.ncpa.org/sub/dpd/?Article_Category=24
Pelosi's Tuna Surprise
January 16, 2007; Page A20
Economists of every political stripe agree that a higher minimum wage will cost some low-skill workers their jobs. But don't believe us; just ask Democratic Speaker Nancy Pelosi.
The House last week whooped through an increase in the minimum wage to $7.25, by a vote of 315-116. But, lo, included as part of this boon to the working man was a loophole: The new, higher wage floor applied to all of these United States and its territories -- save for the Pacific outpost of American Samoa. In the immortal words of Congressman Patrick McHenry (R., N.C.), "There's something fishy going on here."
It turns out that American Samoa has a big fish and tuna canning industry, specifically operations run by StarKist and Chicken of the Sea. Both companies are headquartered in California, and StarKist's parent is located in none other than Ms. Pelosi's own San Francisco district. So faster than you can say "middle class squeeze," Democrats rediscovered the eternal economic truth that a higher minimum wage can cost jobs and granted Samoa its reprieve.
They have a good point. In 2004, according to the Department of Labor, Samoan canneries directly employed some 4,800 people, or nearly 40% of the work force. StarKist and Chicken of the Sea would have plenty of other low-wage locations to do their canning. The average hourly wage for the American Samoan canneries in 2004 was about $3.60. In contrast, the average cannery wage in Thailand was 67 cents an hour and in the Philippines 66 cents.
You don't have to go as far as American Samoa to discover other liberals who understand this -- at least when they do the hiring. In 1995, the union-financed lobby, Acorn, sued California seeking exemption from the state's then-$4.25 minimum wage. Acorn argued in its court brief that, "The more that Acorn must pay each individual outreach worker -- either because of minimum wage or overtime requirements -- the fewer outreach workers it will be able to hire." As liberal economist Joseph Stiglitz once wrote: "A higher minimum wage does not seem a particularly useful way to help the poor."
None of this insight will do American Samoa much good,
however. Red-faced after her tuna surprise was discovered, Speaker Pelosi
announced late last week that she was directing her cannery compadre, California's
George Miller, to re-examine whether the bill also should apply to the
Pacific island. Maybe the poor Samoan workers who lose their canning jobs
can relocate to Thailand.
Minimum Wage Employment Impact Study: How To Cook The
Numbers 101
David Hogberg examines a study the left often cites as
proof that increasing the federal minimum wage won't harm employment:
http://www.nationalcenter.org/Z90701minimumwageemploymentimpact.html
House Majority Leader Steny Hoyer, in a speech supporting an increase in the minimum wage, claimed,
According to one recent study small business employment grew more between 1997 and 2003 in states with a higher minimum wage than in those adhering to the federal minimum wage. In other words, in those states that were paying above the $5.15 an hour their economies grew more and they created more jobs than did those states which had frozen their minimum wage at the federal minimum wage.
That "study" (pdf) http://www.fiscalpolicy.org/FPISmallBusinessMinWage.pdf was conducted by the liberal Fiscal Policy Institute. It is a textbook case in cooking the data. Specifically, the authors find every way to measure employment in a way so as to avoid looking specifically at those industries most affected by an increase in the minimum wage.
First, the authors of the study compare total employment in the ten states and D.C. that had a minimum wage higher than the federal minimum to the other 40 states (see page 8). That means the roughly 2 million minimum wage jobs get mixed in with the other 150 million other jobs in the nation. So that tells us next to nothing.
Next (page 9), they look at retail trade jobs, which, they claim, "tend to pay the lowest wages among all industries in the economy, and thus are more likely to be affected by the minimum wage than other industries." But this leaves out the accommodation and food industries. Indeed, the restaurant industry is one of the industries most affected by a hike in the minimum wage. So, in their attempt to look at industries most affected by a hike in the minimum wage, they conveniently leave out industries most affected by a hike in the minimum wage.
Finally, the authors look at all small businesses, defined as those businesses with 50 or fewer employees (see page 10). Not those small businesses most likely to be affected by a minimum wage, but all small businesses. So if you are a law firm with 40 people, or a think-tank like the National Center for Public Policy Research, you are assumed to be affected by a hike in the minimum wage just as much as if you a running a mom-and-pop diner. Sounds like good research to me!
Regrettably, a hike in the minimum
wage now seems very likely. With the likes of Hoyer able to propagandize
using garbage posing as serious research, it's little wonder.
GOP hits Pelosi's 'hypocrisy' on wage bill
By Charles Hurt
THE WASHINGTON TIMES
January 12, 2007
By Charles Hurt
THE WASHINGTON TIMES
Published January 12, 2007
Advertisement
House Republicans yesterday declared "something fishy"
about the major tuna company in House Speaker Nancy Pelosi's San Francisco
district being exempted from the minimum-wage increase that Democrats approved
this week.
"I am shocked," said Rep. Eric Cantor,
Virginia Republican and his party's chief deputy whip, noting that Mrs.
Pelosi campaigned heavily on promises of honest government. "Now we find
out that she is exempting hometown companies from minimum wage. This is
exactly the hypocrisy and double talk that we have come to expect from
the Democrats."
On Wednesday, the House voted to raise
the minimum wage from $5.15 to $7.25 per hour.
The bill also extends for the first
time the federal minimum wage to the U.S. territory of the Northern Mariana
Islands. However, it exempts American Samoa, another Pacific island territory
that would become the only U.S. territory not subject to federal minimum-wage
laws.
One of the biggest opponents of the
federal minimum wage in Samoa is StarKist Tuna, which owns one of the two
packing plants that together employ more than 5,000 Samoans, or nearly
75 percent of the island's work force. StarKist's parent company, Del Monte
Corp., has headquarters in San Francisco, which is represented by Mrs.
Pelosi. The other plant belongs to California-based Chicken of the Sea.
"There's something fishy going on
here," said Rep. Patrick T. McHenry, North Carolina Republican.
During the House debate yesterday
on stem-cell research, Mr. McHenry raised a parliamentary inquiry as to
whether an amendment could be offered that would exempt American Samoa
from stem-cell research, "just as it was for the minimum-wage bill."
A clearly perturbed Rep. Barney Frank,
the Massachusetts Democrat who was presiding, cut off Mr. McHenry and shouted,
"No, it would not be."
"So, the chair is saying I may not
offer an amendment exempting American Samoa?" Mr. McHenry pressed.
"The gentleman is making a speech
and will sustain," Mr. Frank shouted as he slammed his large wooden gavel
against the rostrum.
Some Republicans who voted in favor
of the minimum-wage bill were particularly irritated to learn yesterday
-- after their vote -- that the legislation did not include American Samoa.
"I was troubled to learn of this exemption,"
said Rep. Mark Steven Kirk, Illinois Republican. "My intention was to raise
the minimum wage for everyone. We shouldn't permit any special favors or
exemptions that are not widely discussed in Congress. This is the problem
with rushing legislation through without full debate."
A spokeswoman for Mrs. Pelosi said
Wednesday that the speaker has not been lobbied in any way by StarKist
or Del Monte.
MINIMUM WAGE HIKE WILL HIT RED STATES HARDER THAN BLUE
STATES
------------------------------------------------------------------------
A proposed increase in the federal minimum wage from $5.15
per hour to
$7.25 will have vastly different effects on workers and
businesses
depending on where people live, according to the National
Center for
Policy Analysis (NCPA). The reason: because the
cost of living
varies so much, $7.25 will buy a lot more in some cities
than it will
in others.
The researchers also note that "red states" and "blue
states" will be affected differently, which may explain
the strong
support for a higher minimum wage among blue state Democrats.
For
example:
o Most large cities on the east
and west coast already have a
minimum wage that
is close to or above the proposal.
o In Speaker Nancy Pelosi's
San Francisco, the minimum wage is
$9.14. And
in Rep. Charlie Rangel's New York City, the
minimum wage is
$7.15.
Comparing a $7.25 wage with the cost-of-living in 50
major metropolitan
areas, the NCPA found that due to differences in the
cost of food,
housing, gasoline and other goods the purchasing power
of the federal
minimum can vary widely depending on where a worker lives.
o $7.25 will buy only 58 percent
as much in San Francisco as it
will in Milwaukee.
o By contrast, the same wage
will buy 12 percent more in Omaha
than in Milwaukee.
"Why should we have one minimum wage that is the same
regardless
of where people live?" asks Robert McTeer, a distinguished
fellow
with the NCPA. "If the goal for all low wage workers
to have
the same, minimum standard of living, we need different
wages for
different cities."
Source: "Minimum Wage Hike Will Hit Red States Harder
Than Blue
States
Impact Varies from State to State Because of Cost of
Living, says
NCPA," National Center for Policy Analysis, January 10,
2006.
For text:
http://www.ncpa.org/prs/rel/2007/20070110.html
For more on Economic Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=17
MINIMUM WAGE HIKE WILL HIT RED STATES HARDER THAN BLUE STATES
Impact Varies from State to State Because of Cost of Living,
Says NCPA
January 10, 2007 http://www.ncpa.org/prs/rel/2007/20070110.html
Media Contacts:
Sean Tuffnell
(972) 308-6481
sean.tuffnell@ncpa.org
DALLAS (January 10, 2007) - A proposed increase in the federal minimum wage from $5.15 per hour to $7.25 will have vastly different effects on workers and businesses, depending on where people live, according to the National Center for Policy Analysis (NCPA). The reason: because the cost of living varies so much, $7.25 will buy a lot more in some cities than it will in others.
The researchers also note that "red states" and "blue states" will be affected differently, which may explain the strong support for a higher minimum wage among blue state Democrats. For example:
* Most large cities on the east and
west coast already have a minimum wage that is close or above the proposal.
* In Speaker Nancy Pelosi's San Francisco,
the minimum wage is $9.14. And in Rep. Charlie Rangel's New York
City, the minimum wage is $7.15.
"The proposed wage hike is a way for business and labor interests in blue states to raise labor costs in the red states with which they compete," said NCPA Distinguished Fellow Robert McTeer. "What business wouldn't relish the thought of raising the costs of its competitors?"
McTeer says that the higher minimum wage will have a negligible effect on most blue state cities on the coasts. "Yet in the interior of the country, there will be predictable bad effects: higher unemployment and higher costs of business."
Comparing a $7.25 wage with the cost-of-living in 50 major metropolitan areas (See Full Chart Online Here), the NCPA found that due to differences in the cost of food, housing, gasoline and other goods the purchasing power of the federal minimum can vary widely depending on where a worker lives.
* $7.25 will buy only 58 percent as
much in San Francisco as it will in Milwaukee.
* By contrast, the same wage will
buy 12 percent more in Omaha than in Milwaukee.
"Why should we have one minimum wage that is the same regardless of where people live?" asks McTeer. "If the goal for all low wage workers to have the same, minimum standard of living, we need different wages for different cities."
NCPA researcher found that to achieve the same living standards, the difference between wages paid in coastal cities and interior cities needs to be even greater than it is today. For example:
* In order to meet the same standard
of living achieved by a $7.25 wage in Milwaukee, the minimum wage in San
Francisco would have to be set at $12.49.
* Similarly, to meet the same standard
of living achieved by a $7.25 wage in Milwaukee, the minimum wage in New
York City would have to be set at $14.68.
* On the other hand, the wage in Omaha
would only need to be set at $6.46 to meet the same standard of living
as Milwaukee.
"What is Congress trying to do?" asks McTeer. "If the goal is to punish red state economies, a uniform minimum wage makes sense. But if the goal is to enact a uniform minimum living standard, we need to start by raising wages on the coastal cities and leave the interior cities alone. If minimum wage legislation were left to the individual states, the impact would be easier to discern and competition to raise the ante would soon be revealed as a losing strategy."
The NCPA is an internationally known nonprofit, nonpartisan
research institute with offices in Dallas and Washington, D. C. that advocates
private solutions to public policy problems. We depend on the contributions
of individuals, corporations and foundations that share our mission. The
NCPA accepts no government grants.
AT A MINIMUM
------------------------------------------------------------------------
Knowing that minimum wage legislation will hit a Republican
roadblock
in the Senate, some Democratic senators support attaching
a package of
small-business tax breaks to the Senate's version of
the bill, says
Investor's Business Daily (IBD).
Some of the proposals include:
o Letting businesses with fewer
than 100 employees offer
"association health
care plans" on a nationwide
basis, shielded
from state regulation, which would give small
relief from rising
insurance costs by spreading risk over a
larger pool of employees.
o Repeal of both the Alternative
Minimum Tax and the Estate
Tax, which hurt
small businesses disproportionately.
o Increasing the small-business
expensing limit to $200,000;
it's now at $100,000
but will revert to $25,000 after 2009 if
Congress fails to
act.
o Eliminating the "temporary"
Federal Unemployment
Tax Act unemployment
surtax, passed in 1976, by cutting FUTA
taxes themselves
and scrapping the wasteful federal-state
unemployment insurance
system those taxes pay for so that
responsibility for
unemployment benefits can return to the
states.
Small business has been the engine for the spectacular
job growth under
Bush and the GOP Congress, says IBD, and some Democrats
do realize
this. In Senate Finance Committee hearings, new
panel chairman
Max Baucus (D-Mont.) noted:
o Businesses with fewer than
500 employees represent more than
99.9 percent of
all American businesses.
o They pay nearly half of the
total American private payroll.
o They have generated 60 percent
to 80 percent of the new jobs
annually over the
last decade, and they employ 41 percent of
high-tech workers.
Source: Editorial, "At a minimum," Investor's Business
Daily,
January 11, 2007.
For text:
http://www.investors.com/editorial/editorialcontent.asp?secid=1501&status=article&id=253325115324837
For more on Economic Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=17
A Minimum of Understanding Font Size:
By James D. Miller : BIO| 10 Jan 2007
Discuss This Story! (17) Email
| Print | Bookmark | Save
Democrats want to raise the federal minimum wage from $5.15 to $7.25 an hour. But raising the minimum wage will harm unskilled workers. If the price of gas went up by 40%, people would buy less gas. Similarly, if the wages businesses must pay low skilled workers increased by the proposed 40%, then companies will buy (i.e. hire) fewer workers. Other commentators have already explained how the minimum wage destroys jobs. This article argues that even if raising the minimum wage caused a firm to hire exactly the same number of workers as before, the higher minimum wage could still harm the company's employees.
Fewer Advancement Opportunities
Let's say an unskilled worker, whom I'll call John, is worth $7.25 an hour to an employer. John went to a horrible school that didn't teach him any marketable skills. John, however, is ambitious and hopes to advance in the job market by getting on-the-job training from an employer.
Two firms want to hire John. The first offers him a job that pays $7.25 an hour but provides no useful training. The second pays $5.25 an hour, but offers training and could someday lead to a management position. This training is costly for the firm to provide, but the firm is willing to give John the training since it is paying him only $5.25 an hour.
A $7.25 an hour minimum wage could, however, stop the second employer from giving John his costly on-the-job training. If the business couldn't pay a lower salary in return for providing training, then the firm most likely wouldn't give John the training.
Perhaps, one might argue, the second firm would still provide the on-the-job training to make John a more valuable employee to them. But there is no reason to assume that John would stay at his job after he has received his training. And even if he did stay John would likely demand a higher wage from his employer.
Many firms offer lower wages in return for providing increased training and advancement opportunities. A minimum wage would restrict firms' abilities to offer lower salaries and so would reduce the benefit to firms of providing such benefits to their low skilled workers.
Worse Working Conditions
I predict that if the higher minimum wage is enacted bosses will yell more at their low skilled workers. By forcing companies to pay higher wages to low skilled employees, a higher minimum wage reduces the net value of these workers to their companies.
A higher minimum wage also reduces the total number of jobs available to unskilled workers. Consequently, raising the minimum wage makes it easier for bosses to replace any unskilled workers who quit. Under a higher minimum wage, therefore, bosses lose less if their mistreatment of employees causes some workers to leave. So unskilled workers who keep their jobs after a minimum wage hike can expect their bosses to treat them a bit worse than before.
Hire Different Types of Employees
Imagine that for some strange reason the government (A) forced Smith College to pay economists $1 million a year and (B) forbade Smith College from reducing the number of economists it employs. Well, for $1 million a year Smith College, my employer, could do a lot better than to have me as one of its economists. Under this $1 million a year minimum wage for economists, therefore, Smith would quite rationally do everything it could to fire me.
For any given wage it offers, a firm tries to hire the best workers it can. At a wage of $7.25 an hour firms will be able to attract higher quality workers than they can if they offer only $5.15 an hour. Consequently, even if the minimum wage doesn't cause a company to hire fewer workers, it will cause the firm to hire different types of workers.
Perhaps today some firm could hire either an inner-city teenager or a middle-class grandmother. The firm might prefer to hire the grandmother but, let's say, the grandmother won't work for less than $7 an hour whereas the inner-city teen would accept a wage of $5.15 an hour, so the firm hires the teen. If the minimum wage is raised to $7.25 an hour, however, the firm would quickly replace the teen with the grandmother. So even in the extremely unlikely case that a higher minimum wage doesn't reduce overall employment, it will likely reduce employment among our nation's lowest skilled individuals.
James D. Miller writes "The Game Theorist" column for
TCS and is the author of Game Theory at Work He keeps a blog here.
Minimum-Wage Wrangling
Has Parties Switching Roles
Republicans Focus
On Health-Care Issue,
Democrats Push Tax Cut
By DAVID ROGERS
January 10, 2007; Page A6
Playing against type in the new Congress, Republicans are talking up health care while Democrats talk up tax breaks for small business.
The juxtaposition is striking as the two parties haggle
over what it will take to raise the federal minimum wage, a Democratic
priority now seen as inevitable after the midterm elections.
PAY RAISE
• The Situation: Congress will vote on a minimum wage
increase, but not before bargaining over concessions for small employers
• What's at Stake: Tax breaks worth $8 billion -- $10
billion over 10 years and legislation letting trade associations offer
health coverage to small business members with less regulation by states.
• What's Next: Battle will focus on Senate after House
vote today.
Democrats are embracing billions of dollars in tax breaks to ease the effect on small employers. But as Republican governors in California and Massachusetts bring forward state plans to help uninsured families, Republicans in Congress recognize the health-care issue's populist appeal and propose to help small employers deal with covering their workers.
The result is a three-issue Washington triangle that could have unintended consequences. Paying for small-business tax breaks, for example, may mean tightening tax shelters for the wealthy and big corporations.
The action begins today, when the House is poised to adopt its minimum-wage bill raising the hourly rate to $7.25 from $5.15; the change would be phased in over two years, with three 70-cent increments. In the Senate, Finance Committee, Chairman Max Baucus (D., Mont.) will hold a hearing today to weigh tax breaks to help small employers, especially the restaurant industry, which wants a substantial acceleration in depreciation for new construction.
"We're a small-business country, and my state is a small-business state," Mr. Baucus said. He expects to add $8 billion to $10 billion in tax breaks to the Senate wage bill next week.
Hoping to trump the Democrats, House Republicans are pushing legislation to let employers with fewer than 100 workers seek coverage through trade-association health plans that could operate on a national scale exempt from state regulation.
"I think that this leadership has decided to go with health care because that is the most personal decision that families make each and every day, and it affects so many people," said Rep. Eric Cantor (R., Va.), the deputy whip.
"In the last 10 years, it does seem to me that the Republicans
have gotten smarter in not opposing everything," said Robert Berenson,
a senior fellow at the Urban Institute and a former Clinton-administration
Medicare official. "Regarding the uninsured, they have wised up and are
pursuing their own solutions."
[Chart]
Powerful Realtor and small-business lobbies have a stake, both for their members and as potential health-plan sponsors. Chief among these is the National Federation of Independent Business, a longtime Republican ally and an opponent of the Clinton administration's 1994 health overhaul plan.
Patient groups argue that the promised cost savings from AHPs will come at the expense of weakening protections for the sickest. State regulators oppose the intrusion on their jurisdiction. And bigger insurers whose small-business health plans are regulated by the states are worried that nonregulated AHPs will have a competitive advantage.
Senate Republicans made some progress toward a compromise last summer but fell short of the 60 votes needed to forestall an election-year filibuster by opponents. The question now is whether movement on the minimum wage can trigger a willingness to take a fresh look at AHP legislation and make the changes needed to reach agreement.
Facing re-election in 2008, Mr. Baucus is hopeful. "Let's see if we can reach an agreement," he said, proposing to move the minimum-wage bill first and then come back to talks on the small-business health plans. Senate Majority Whip Richard Durbin (D., Ill.), also facing the voters in two years, has an interest as well.
"We're definitely optimistic," an NFIB spokesman said later.
So far, the tax side of the political equation has been overshadowed by the health-care skirmishing. But Mr. Baucus is working with his ranking Republican, Iowa Sen. Charles Grassley, and also wants to come up with tax offsets to minimize the impact on the deficit.
The tax breaks under consideration include leasehold and expensing provisions for small employers, work opportunity tax credits as well as a plan to reduce the depreciation period for new restaurant construction from 39 years to 15 years. The 10-year cost of the package is expected to run in the range of $8 billion to $10 billion -- about half of what Congress did in 1996.
Write to David Rogers at david.rogers@wsj.com
The House is poised to adopt its minimum-wage bill raising the hourly rate to $7.25 from $5.15; the change would be phased in over two years, with three 70-cent increments," The Wall Street Journal reports. "Hoping to trump the Democrats, House Republicans are pushing legislation to let employers with fewer than 100 workers seek coverage through trade-association health plans that could operate on a national scale exempt from state regulation."
In "Minimum Wage Socialism," Jim Dorn, Cato's vice president
for academic affairs, writes: "The idea that legislators can help low-income
workers simply by mandating a pay raise is the height of hubris. While
the minimum-wage rhetoric may sound good, the reality is quite different.
Increasing the minimum wage may giv' 'liberal' legislators great pride
and win them votes, but it does not address the key issue of how to achieve
economic growth and thus reduce poverty. ... If legislators really want
to help the poor, the best thing they can do is abolish, not increase,
the minimum wage."
More >>
July 5, 2006
Minimum Wage Socialism
by James A. Dorn
James A. Dorn is professor of economics at Towson University and editor of the Cato Journal.
Communism may be dead, but socialism is alive in the many forms of government intervention we see daily in the marketplace.
One widely accepted policy — the minimum wage — is appropriately reflected in Karl Marx's dictum, "To each according to his needs, from each according to his ability."
When Maryland legislators increased the minimum wage from $5.15 to $6.15 in February (overriding Gov. Robert Ehrlich's veto), they did so because, as House Majority Leader Kumar P. Barve, D-Montgomery, put it, "If you want to have a stable society where hard-working poor people can support their families, you have to do things like this."
That sentiment was echoed more recently in Washington when 52 senators voted for an increase in the federal minimum wage (frozen since 1997) from $5.15 to $7.25 per hour over the next three years.
Sen. Ted Kennedy, D-Mass., argued that such an increase is "a matter of decency and fairness," given that Congress has awarded itself a number of pay raises.
The idea that legislators can help low-income workers simply by mandating a pay raise is the height of hubris. While the minimum-wage rhetoric may sound good, the reality is quite different. Forcing employers to pay low-skilled workers a higher than market wage — in the absence of any changes in productivity — will decrease the number of workers hired (the law of demand).
The National Federation of Independent Business estimates that if the federal minimum wage is increased to $6.65 per hour, nearly 217,000 workers would lose their jobs. The long-run consequences would be even more severe, as employers introduced labor-saving equipment and technology.
In fact, many entry-level jobs actually pay more than $5.15 or even $6.15 per hour, so the idea that without the minimum wage, workers would be exploited is a myth. In competitive markets, such as fast food and retailing, employers who pay below-market wages will not be able to attract sufficient help. McDonald's is paying up to $8 per hour in Panama City, Fla., for example.
Yet it is easy for the "legislator gods" in the state House or in Congress to take credit for increasing the pay of the poor while disavowing any negative consequences from pricing low-skilled workers out of the market. A minimum wage of $7.25 per hour translates into an income of zero if a worker cannot find a job or is fired.
It would be much wiser to let workers and employers freely negotiate wages than to enact a minimum wage law that interferes with freedom of contract and prevents low-skilled workers from gaining the experience and work ethic necessary to achieve higher living standards.
David Neumark, an economist at the University of California, Irvine, has found that increasing the minimum wage does not reduce poverty. Rather, for every 10 percent increase in the minimum wage, he estimates that the poverty rate increases by 3 percent to 4 percent. Contrary to the rhetoric, therefore, the people harmed the most by minimum-wage legislation are precisely those it is intended to help — the poor.
Increasing the minimum wage may give "liberal" legislators great pride and win them votes, but it does not address the key issue of how to achieve economic growth and thus reduce poverty. Hong Kong has no minimum wage but is one of the most prosperous economies in the world — because it is also the freest.
Economic freedom, not minimum-wage socialism, is the key to reducing poverty, as China is learning. If legislators really want to help the poor, the best thing they can do is abolish, not increase, the minimum wage.
In America, the majority of low-income earners typically move up the income ladder by improving themselves, not because of the minimum wage. Policies that increase competition and choice in public education, reduce marginal tax rates on capital and labor, and protect private property rights would be positive steps toward increasing economic freedom, workers' dignity, and prosperity.
Examiner.com on July 4, 2006.>
Minimum Wage Hikes Hurt Unskilled and Disadvantaged Workers'
Job Prospects
by James Sherk
January 2, 2007
WebMemo #1294
[back to web version]
Supporters of raising the minimum wage say that it is an important way to help disadvantaged workers get ahead. Though the majority of minimum wage workers are teenagers or young adults under the age of 25, the case for raising the minimum wage focuses on how it will help low-income adults who are struggling to get by.[1] But businesses change their mix of workers when the minimum wage rises. If they must pay higher wages, companies hire more highly-skilled and productive workers. Poor, low-skill workers thus lose out.
No Way to Fight Poverty
Minimum wage supporters seek to help poor, disadvantaged workers get ahead, but the minimum wage is not an effective anti-poverty tool. First, it is poorly targeted. It affects the employment of all minimum wage workers, not just the poor. Most minimum wage earners do not come from poor families. A majority are between the ages of 16 and 24, and less than a fifth live below the poverty line.[2] Suburban teenagers and college students working part time make up a substantial portion of the minimum-wage workforce.
Even while over-broad, the minimum wage discourages companies from hiring the very workers that its advocates seek to help. Minimum wage earners usually earn low wages because they lack skills and experience. Higher-skill workers are more productive and will work only for higher wages. When the minimum wage forces employers to pay higher wages, they substitute highly-skilled and productive workers for lower-skill workers, destroying job opportunities for lower-skilled workers.
Given the choice between hiring an unskilled worker for $7.25 an hour and a worker with more experience for the same rate, companies will always choose the more experienced worker, who will be more productive. By raising the minimum wage, the government makes it more difficult for unskilled workers to find work.
This is not just a theoretical argument. Research consistently demonstrates that higher minimum wages lead businesses to hire skilled workers at the expense of unskilled workers. David Neumark, an economist at Michigan State University, and William Wascher, a researcher at the Federal Reserve, examined how teenage employment and school enrollment changed after states raised their minimum wages.[3] They found that when states raised their minimum wage, low-skill teenagers—younger teens and those who had dropped out of school—were more likely to become unemployed. At the same time, higher-skill teenagers were more likely to get jobs, sometimes leaving school to do so. When they have to pay higher wages, businesses hire higher-skill workers, freezing the least skilled and least productive workers out of the job market.
Other studies have reached the same conclusion. David Fairris and León Bujanda of the University of California–Riverside examined how contractors in Los Angeles reacted after the city passed a "living wage" ordinance that required them to pay their employees at least $8.50 an hour.[4] Farris and Bujanda found that companies began hiring more highly-skill workers after the law went into effect. Workers hired after the law took effect were almost twice as likely to have had formal job training as workers hired before.[5]
Fairris and Bujanda also examined how much employees earned before they began working for the contractors. Workers hired after the wage law took effect had earned an average of 18 percent more in their previous jobs than workers already at the firm.[6] This again shows that businesses responded to the law by hiring more higher-skill workers, and fewer lower-skill workers, than before. A minimum wage increase forces businesses to pay the workers they hire more, but it does not force businesses to hire the same mix of workers. As a result, businesses hire different workers, to the disadvantage of lower-skilled, low-income workers.
Studies Cited by Minimum Wage Supporters Show Impact on Unskilled Workers
The vast majority of studies of the minimum wage show that it reduces employment.[7] Supporters of raising the minimum wage usually respond by pointing to the few studies that suggest it has little effect on employment rates. But even these studies often show that employers substitute higher-skilled workers for disadvantaged workers when the minimum wage rises.
Kevin Lang and Shulamit Kahn of Boston University examined how restaurant employment changed after minimum wage hikes in the late 1980s and early 1990s.[8] They found no evidence that the minimum wage reduced total restaurant employment, but they did find that it dramatically changed the mix of workers that restaurants hired. Teenage and student employment rose, while adult employment dropped. Teenagers are often more attractive employees than disadvantaged adults, and when the minimum wage rose businesses hired them instead of low-skill adults. A higher minimum wage is great news for a high school student working part time to buy an iPod. But it hurts the lower-skill adult workers who need the job to support themselves and their families.
Minimum Wage Jobs as Job Training
Lower-skill workers become less employable when the minimum wage rises. Their loss goes beyond the wages they are not earning, however. They also lose the opportunity to gain the skills that would allow them to move up the career ladder. Minimum-wage jobs are often entry-level positions that teach unskilled and inexperienced workers the skills that make them more productive employees and enable them to earn raises.
Skills like how to interact with coworkers and customers have to be learned on the job, and minimum-wage jobs provide inexperienced workers the opportunity to learn these skills. Two-thirds of all minimum-wage workers earn a raise within a year of starting out.[9] Even for lower-skill adult workers several years out of school, minimum wage jobs are paths to advancement. Over half of workers holding minimum-wage jobs eight years after they left school earned a raise within a year.[10] By reducing their job prospects, the minimum wage deprives many unskilled workers of the opportunity to gain the skills that will enable them to earn higher wages.
Conclusion
Far from giving disadvantaged workers a leg up, raising
the minimum wage cuts off the bottom rung of the career ladder for many
lower-skilled workers. When government raises the minimum wage, companies
substitute higher-skill employees for less productive ones. If businesses
have to pay the same wage, they will always choose to hire more productive
applicants. In this, the minimum wage discourages them from hiring the
very workers who need entry-level jobs the most. Further, the minimum wage
deprives many unskilled and inexperienced workers of the opportunity to
gain the skills that earn more money. Raising the minimum wage is no way
to help poor, low-skill workers out of poverty and into skilled, higher-paying
employment.
[1] Rea Hederman and James Sherk, "Who Earns the Minimum
Wage: Single Parents or Suburban Teenagers," Heritage Foundation WebMemo
No. 1186, August 3, 2006, at www.heritage.org/Research/Economy/wm1186.cfm.
[2] Ibid.
[3] David Neumark and William Wascher. "The Effects of Minimum Wages on Teenage Employment and Enrollment: Evidence from Matched CPS Surveys." In Solomon Polchek, ed., Research in Labor Economics, Vol. 15, 1996, Greenwich, Conn.: JAI Press.
[4] David Fairris and Leon Bujanda, "The Dissipation of Minimum Wage Gains for Workers Through Labor-Labor Substitution," Working Paper, April 2006, at http://client.norc.org/jole/SOLEweb/Fairris.pdf.
[5] Ibid. 12 percent of workers hired before the wage increase had prior formal training, as shown in Table 3. Column 2 of Table 4 shows that, relative to these "stayers" and controlling for firm effects, workers hired after the living wage ordinance took effect were 11 percentage points more likely to have had prior formal training.
[6] Ibid., Table 5, column 2.
[7] David Neumark and William Wascher, "Minimum Wages and Employment: A Review of the Evidence," NBER Working Paper No. 12663, November 2006, at http://www.nber.org/papers/w12663; Neumark and Wascher find that two-thirds of research papers on the minimum wage find negative employment effects, as do 18 of the 19 most reliable studies.
[8] Kevin Lang and Shulamit Kahn, "The Effect of Minimum-Wage Laws on the Distribution of Employment: Theory and Evidence," Journal of Public Economics, vol. 69(1), July 1998, pp. 67-82.
[9]David Macpherson and William Evan, "Wage Growth Among Minimum Wage Workers," Employment Policies Institute, June 2004, Table 1, at http://www.epionline.org/studies/macpherson_06-2004.pdf. The two-thirds figure comes from examining data after the last federal minimum wage increase in 1997 and is based on data from 1998 to 2002.
[10] William Carrington and Bruce Fallick, "Do Some Workers
Have Minimum Wage Careers?" Monthly Labor Review, May 2001, p. 21, Table
3, at http://www.bls.gov/opub/mlr/2001/05/art2full.pdf.
©2007 The Heritage Foundation
All Rights Reserved.
THE RIGHT MINIMUM WAGE
------------------------------------------------------------------------
Democrats consider the minimum-wage increase a signature
issue.
But the minimum wage should be the same everywhere: $0.
Labor is
a commodity; governments make messes when they decree
commodities'
prices. Washington, which has its hands full delivering
the mail
and defending the shores, should let the market do well
what Washington
does poorly, says columnist George Will.
Consider:
o Most of the working poor earn
more than the minimum wage, and
most of the 0.6
percent (479,000 in 2005) of America's wage
workers earning
the minimum wage are not poor.
o Only one in five workers earning
the federal minimum lives in
a family with earnings
below the poverty line.
o Sixty percent work part time,
and their average household
income is well over
$40,000; the average and median household
incomes are $63,344
and $46,326, respectively.
Forty percent of American workers are salaried:
o Of the 75.6 million paid by
the hour, 1.9 million earn the
federal minimum
or less, and of these, more than half are
under 25 and more
than a quarter are between ages 16 and 19;
many are students
or other part-time workers.
o Sixty percent of those earning the
federal minimum or less
work in restaurants
and bars and earn tips -- often untaxed,
perhaps -- in addition
to wages.
o Two-thirds of those earning
the federal minimum today will, a
year from now, have
been promoted and be earning 10 percent
more.
Raising the minimum wage predictably makes work more attractive
relative to school for some teenagers and raises the
dropout rate, says
Will. Two scholars report that in states that allow
people to
leave school before 18, a 10 percent increase in the
state minimum wage
caused teenage school enrollment to drop 2 percent.
Source: George F. Will, "The Right Minimum Wage," Washington
Post, January 4, 2007.
For text (subscription required):
http://www.washingtonpost.com/wp-dyn/content/article/2007/01/03/AR2007010301619.html
For more on Economic Issues:
http://www.ncpa.org/sub/dpd/?Article_Category=17
The Right Minimum Wage
By George F. Will
Thursday, January 4, 2007; A17
A federal minimum wage is an idea whose time came in 1938, when public confidence in markets was at a nadir and the federal government's confidence in itself was at an apogee. This, in spite of the fact that with 19 percent unemployment and the economy contracting by 6.2 percent in 1938, the New Deal's frenetic attempts had failed to end, and perhaps had prolonged, the Depression.
Today, raising the federal minimum wage is a bad idea whose time has come, for two reasons, the first of which is that some Democrats have an evidently incurable disease -- New Deal Nostalgia. Witness Nancy Pelosi's "100 hours" agenda, a genuflection to FDR's 100 Days. Perhaps this nostalgia resonates with the 5 percent of Americans who remember the 1930s.
Second, President Bush has endorsed raising the hourly minimum from $5.15 to $7.25 by the spring of 2009. The Democratic Congress will favor that, and he may reason that vetoing this minor episode of moral grandstanding would not be worth the predictable uproar -- Washington uproar often is inversely proportional to the importance of the occasion for it. Besides, there would be something disproportionate about the president vetoing this feel-good bit of legislative fluff after not vetoing the absurdly expensive 2002 farm bill, or the 2005 highway bill larded with 6,371 earmarks or the anti-constitutional McCain-Feingold speech-rationing bill.
Democrats consider the minimum-wage increase a signature issue. So, consider what it says about them:
Most of the working poor earn more than the minimum wage, and most of the 0.6 percent (479,000 in 2005) of America's wage workers earning the minimum wage are not poor. Only one in five workers earning the federal minimum lives in families with earnings below the poverty line. Sixty percent work part time, and their average household income is well over $40,000. (The average and median household incomes are $63,344 and $46,326, respectively.)
Forty percent of American workers are salaried. Of the 75.6 million paid by the hour, 1.9 million earn the federal minimum or less, and of these, more than half are under 25 and more than a quarter are between ages 16 and 19. Many are students or other part-time workers. Sixty percent of those earning the federal minimum or less work in restaurants and bars and earn tips -- often untaxed, perhaps -- in addition to wages. Two-thirds of those earning the federal minimum today will, a year from now, have been promoted and be earning 10 percent more. Raising the minimum wage predictably makes work more attractive relative to school for some teenagers and raises the dropout rate. Two scholars report that in states that allow people to leave school before 18, a 10 percent increase in the state minimum wage caused teenage school enrollment to drop 2 percent.
The federal minimum wage has not been raised since 1997, so 29 states with 70 percent of the nation's workforce have set minimum wages between $6.15 and $7.93 an hour. Because aging liberals, clinging to the moral clarities of their youth, also have Sixties Nostalgia, they are suspicious of states' rights. But regarding minimum wages, many have become Brandeisians, invoking Justice Louis Brandeis's thought about states being laboratories of democracy.
But wait. Ronald Blackwell, the AFL-CIO's chief economist, tells the New York Times that state minimum-wage differences entice companies to shift jobs to lower-wage states. So: States' rights are bad, after all, at least concerning -- let's use liberalism's highest encomium -- diversity of economic policies.
The problem is that demand for almost everything is elastic: When the price of something goes up, demand for it goes down. Obviously were the minimum wage to jump to, say, $15 an hour, that would cause significant unemployment among persons just reaching for the bottom rung of the ladder of upward mobility. But suppose those scholars are correct who say that when the minimum wage is low and is increased slowly -- proposed legislation would take it to $7.25 in three steps -- the negative impact on employment is negligible. Still, because there are large differences among states' costs of living and the nature of their economies, Sen. Jim DeMint (R-S.C.) sensibly suggests that each state be allowed to set a lower minimum.
But the minimum wage should be the same everywhere: $0. Labor is a commodity; governments make messes when they decree commodities' prices. Washington, which has its hands full delivering the mail and defending the shores, should let the market do well what Washington does poorly. But that is a good idea whose time will never come again.
Minimum Wages
by Linda Gorman
Minimum wage laws set legal minimums for the hourly wages paid to certain groups of workers. Invented in Australia and New Zealand with the admirable purpose of guaranteeing a minimum standard of living for unskilled workers, they have been widely acclaimed as both the bulwark protecting workers from exploitation by employers and as a major weapon in the war on poverty. Minimum wage legislation in the United States has increased the federal minimum wage from $.25 per hour in 1938 to $5.15 in 2001, and expanded its coverage from 43.4 percent of all private, nonsupervisory, nonagricultural workers in 1938 to over 87 percent by 1990. As the steady legislative expansion indicates, the minimum wage has had widespread political support enjoyed by few other public policies.
Unfortunately, neither laudable intentions nor widespread support can alter one simple fact: although minimum wage laws can set wages, they cannot guarantee jobs. In reality, minimum wage laws place additional obstacles in the path of the most unskilled workers who are struggling to reach the lowest rungs of the economic ladder. According to a 1978 article in American Economic Review, the American Economic Association's main journal, fully 90 percent of the economists surveyed agreed that the minimum wage increases unemployment among low-skilled workers. It also reduces the on-the-job training offered by employers and shrinks the number of positions offering fringe benefits. To those who lose their jobs, their training opportunities, or their fringe benefits as a result of the minimum wage, the law is simply one more example of good intentions producing hellish results.
To understand why minimum wage policies have such pernicious effects, one must understand how wages are determined in the free market. Consider, for example, the owner-operator of a small diner. To stay in business, he has to make sufficient profits to provide adequate support for his family. The market dictates how much he can charge for his meals because people can choose to eat at other restaurants or prepare their meals at home. The market also dictates what he must pay for food, restaurant space, electricity, equipment, and other factors required to produce his meals. Although the restaurant owner has little control over either the prices he can charge for his meals or the prices that he must pay for the inputs needed to produce them, he can control his costs by changing the combinations of inputs that he uses. He can, for example, hire teenagers to wash and slice raw potatoes for french fries, or he can purchase ready-cut potatoes from a large company with an automated french-fry production process.
The combination of inputs used and the amount that the diner owner can afford to pay for each one depend both on the productivity of the input and on the price that customers will pay for the product. Suppose that a trainee french-fry cutter can peel, cut, and prepare ten orders of fries in an hour, and that the diner's customers order about ten orders of french fries an hour at $1.00 each. If the minimum profit required to keep the owner in business plus all costs except the cutter's labor amounts to $.80 for each order, then the owner can afford a wage of up to $2.00 per hour for one trainee. Legislating a minimum wage of $4.50 per hour means that the diner owner loses $2.50 an hour on the trainee. The owner will respond by firing the trainee. The minimum wage prices the trainee out of the labor market. Similarly, other employers will respond to the increased minimum wage by substituting skilled labor (which does not cost as much more than unskilled labor as it did before the minimum wage) for unskilled labor, by substituting machines for people, by moving production abroad, and by abandoning some types of production entirely.
Australia provided one of the earliest practical demonstrations of the harmful effects of minimum wages when, in 1921, the federal court institutionalized a real minimum wage for unskilled men. The court set the wage by estimating what employees needed, while ignoring what employers could afford to pay. As a result unskilled workers were priced out of the market. These laborers could find work only in occupations not covered by the law or with employers willing to break it. Aggressive reporting of violations by vigilant unions made evasion difficult, and the historical record shows that unemployment remained a particular problem for unskilled laborers throughout the rest of the decade.
The same type of thing happened in the United States when a hospital fired a group of women after the Minimum Wage Board in the District of Columbia ordered their wages raised to the legal minimum. Ironically, the women sued to halt enforcement of the minimum wage law. In 1923 the U.S. Supreme Court, in Adkins v. Children's Hospital, ruled that the minimum wage law was simple price-fixing and an unreasonable infringement on individuals' freedom to determine the price at which they would sell their services. Although the peculiar logic of the last seventy years has seen this line of reasoning completely abrogated, the battle over allowing people to work at whatever wage they choose continues.
One skirmish occurred in 1990 when the U.S. Department of Labor ordered the Salvation Army to pay the minimum wage to voluntary participants in its work therapy programs. The programs provide participants, many of them homeless alcoholics and drug addicts, a small weekly stipend and up to ninety days of food, shelter, and counseling in exchange for processing donated goods. The Salvation Army said that the expense of complying with the minimum wage order would force it to close the programs. Ignoring both the fact that the beneficiaries of the program could leave to take a higher-paying job at any time and the cash value of the food, shelter, and supervision, the Labor Department insisted that it was protecting workers' rights by enforcing the minimum wage. By the peculiar logic of the minimum wage laws, workers have the right to remain unemployed but not the right to get a job by selling their labor for less than the minimum wage.
In addition to affecting how many people will be employed, minimum wage laws may also leave workers worse off by changing how they are compensated. For many low-wage employees fringe benefits such as paid vacation, free room and board, inexpensive insurance, subsidized child care, and on-the-job training (OJT) are an important part of the total compensation package. To avoid increasing total compensation, employers react to arbitrary boosts in money wages by cutting other benefits. In extreme cases, employers may convert low-wage full-time jobs with fringe benefits to high-wage part-time jobs with reduced benefits and fewer hours. Employees who prefer working full time with benefits are simply out of luck.
The reduction in benefits may be substantial. Masanori Hashimoto used data from the 1967-68 U.S. minimum wage hike to calculate its effect on the value of on-the-job training received by white men. Hashimoto estimated that the 28 percent increase in the minimum wage reduced the value of OJT by 2.7 to 15 percent. Because OJT is an important source of education, particularly for those with limited formal schooling, Hashimoto's findings have ominous implications. By reducing OJT, the minimum wage law increases the number of dead-end jobs and effectively consigns some of the unskilled to a lifetime of reduced opportunity.
Estimates of the overall effect of increases in the minimum wage on total U.S. employment often focus on teenagers, who, as a group, contain the highest proportion of unskilled workers. Most studies suggest that a 10 percent increase in the minimum wage decreases teenage employment by 1 to 3 percent. Using these estimates to forecast small increases in unemployment from future minimum wage increases is risky because most of the estimates rely on data from the sixties and early seventies, when minimum wage legislation applied to fewer occupations.
Raising the minimum wage when it applies to a relatively small proportion of occupations will not necessarily increase unemployment. Some people will lose their jobs in covered occupations and withdraw from the labor market entirely. These people are not included in the unemployment statistics. Others who lose their jobs or are offered fewer hours of work will seek jobs at lower pay in uncovered occupations. This labor influx drives down wages in the uncovered sector, but people do find jobs and unemployment remains constant. As minimum wage legislation expands to cover more occupations, however, the shrinking uncovered sector may not be able to absorb all of the people thrown out of work, and unemployment may increase. In the United States the 1989 minimum wage legislation brought this possibility one step closer by extending coverage to all workers engaged in interstate commerce regardless of employer size. Small businesses previously exempt from the minimum wage faced an 11.8 percent increase in money wages. If the repeal of the exemption that affected more than 6 percent of the nation's hourly workers substantially reduces the number of uncovered jobs, then overt unemployment caused by the minimum wage could become a more serious problem.
Estimates of the overall effect of minimum wage increases also tend to blur the regional and sectoral shifts that average together to produce the national result. A federal minimum wage of $4.25 an hour may have little effect in a large city where almost everyone earns more. But it may cause greater unemployment in a rural area where it substantially exceeds the prevailing wage. Regional and sectoral studies leave little doubt that substantial increases in the minimum in areas with lower wages can cause industries to shrink and can inhibit job creation. The growth of the textile industry in the South, for example, was propelled by low wages. Had the federal minimum wage been set at the wage earned by northern workers, the expansion might never have occurred.
This explains why unions, whose members seldom hold minimum wage jobs, encourage minimum wage legislation and, as in the Australian case, assiduously help enforce its provisions by reporting suspected violations. Unions have historically represented skilled, highly productive workers. As has been demonstrated in the construction industry, employers facing excessive wage demands from union members may find it less expensive to hire unskilled workers at low wages and to train them on the job. Unskilled workers often benefit: accepting lower wages in return for training increases their expected future income. With high minimum wages like those specified for government construction by the Davis-Bacon Act, the wages plus the training cost may exceed the total compensation that employers can afford. In that case the employer would prefer the union member to his unskilled competitor, and passage of a minimum wage law reduces the competition faced by union members.
In spite of evidence indicating that minimum wage laws reduce the number of jobs and distort compensation packages, some people still argue that their benefits outweigh their costs because they increase the incomes of the poor. This argument implicitly assumes that minimum wage workers are the sole earner in a family. This assumption is false. In 1988, for example, the vast majority of minimum wage workers were members of households containing other wage earners. Moreover, only 8 percent of all minimum wage workers were men or women who maintained families, and not all of those families were poor. The simple fact is that most minimum wage workers are young and work part-time. In 1988, 60 percent of minimum wage workers were sixteen to twenty-four years old, and about 70 percent worked part-time.
In view of what minimum wage laws actually do, their often uncritical acceptance as a major weapon in the war on poverty stands as one of the supreme ironies of modern politics. If a minimum wage set $.50 above the prevailing wage helps the working poor with no ill effects, why not eliminate poverty completely by simply legislating a minimum wage of $10.00? The problem, of course, is that pricing people out of a job does not reduce poverty. Neither does skewing compensation packages toward money wages and away from training, or encouraging employers to substitute skilled workers for unskilled workers, part-time jobs for full-time jobs, foreign labor for domestic labor, and machines for people. Minimum wage laws do all of these things and, in the process, almost surely do the disadvantaged more harm than good.
About the Author
Linda Gorman is a Senior Fellow with the Independence
Institute in Golden, Colorado. She was previously an economics professor
at the Naval Postgraduate School in Monterey, California.
Further Reading
Brown Charles. "Minimum Wage Laws: Are They Overrated?" Journal of Economic Perspectives 2, no. 3 (1988): 133-45.
Eccles, Mary, and Richard B. Freeman. "What! Another Minimum Wage Study?" American Economic Review 94 (May 1982): 226-32.
Forster, Colin. "Unemployment and Minimum Wages in Australia, 1900-1930." Journal of Economic History 45, no. 2 (June 1985): 383-91.
Hashimoto, Masanori. "Minimum Wage Effects on Training on the Job." American Economic Review 72, no. 5 (1982): 1070-87.
Rottenberg, Simon, ed. The Economics of Legal Minimum Wages. 1981.
Welch, Finis. Minimum Wages: Issues and Evidence. 1978.
MINIMUM WAGE = MINIMUM EMPLOYMENT
------------------------------------------------------------------------
Minimum wage floors price out the low-skilled workers
they are meant to
help, according to the Institute for Research on the
Economics of
Taxation (IRET).
According to the Labor Department, as of 2004:
o Less than 3 percent of hourly
wage workers were paid at or
below the federal
minimum wage.
o About half are under age 25,
and about a quarter are
teenagers.
o Less than 2 percent of workers
25 or older get the minimum
wage or less.
o About 60 percent of these
low-wage workers were in the
leisure and hospitality
industry, primarily food services and
drinking places,
where wages are supplemented by tips.
Nonetheless, there are minimum wage recipients who need
work to support
themselves and their families. But history has
shown that raising
minimum wage levels only hurt (often intentionally) low
income workers,
says IRET:
o The 1931 Davis-Bacon Act,
requiring "prevailing"
wages on federally
assisted construction projects, was
supported by the
idea that it would keep contractors from
using "cheap colored
labor" to underbid contractors
using white labor.
o Apartheid South Africa enacted a
minimum wage to price
low-skilled black
workers out of selected trades.
o In the 1950s, New England
textile manufacturers supported
Sen. John F. Kennedy's
efforts to increase the federal minimum
wage to prevent
competing mills from starting up in the
low-wage South.
Today, the biggest backers of minimum wage hikes are unions.
Their intent -- similar to the past -- is not to raise
the incomes of
the poor, says IRET. Rather, they seek to block
low-wage workers
from competing with higher-skilled, but also higher-priced,
union
members.
Source: "Minimum Wage = Minimum Employment," Institute
for
Research on the Economics of Taxation, Advisory No. 212,
November 1,
2006.
For text:
ftp://ftp.iret.org/pub/ADVS-212.PDF
For more on Minimum Wage:
http://www.ncpa.org/sub/dpd/?Article_Category=24
December 18, 2006
Why the Minimum Wage Law Causes Unemployment
What Economic Studies Show About the Employment Effects
of the Minimum Wage
http://www.ncpa.org/studies/s190/s190d.html
Since its beginnings in late 1938, the minimum wage has been increased 17-fold in nominal terms. [See Figure I.] President Clinton's proposal would bring the wage to about 20 times its initial level.
Early History of the Minimum Wage Law.
During the depressed economic conditions of the late
1930s, the Fair Labor Standards Act was passed. The new law created a minimum
wage of 25 cents an hour, roughly 40 percent of the actual average wage.
Even though the minimum was very low and applied to a limited number of
workers, in some areas the negative employment effects were substantial
from the outset. For example:
* Needlework exports from Puerto Rico,
where the law also applied, declined about 70 percent after the enactment
of the Fair Labor Standards Act.2
* Nationwide, a government estimate
concluded that between 30,000 and 50,000 jobs were lost as a direct result
of enforcing the minimum wage.3
* Since the labor force has more than
doubled over the years, that would be the equivalent of perhaps 100,000
jobs lost today.
Interestingly, the provisions of the Fair Labor Standards Act recognized the possibility that minimum wages could have employment effects. The basic legislation invoked the phrase -without curtailing employment- several times in describing options available to those administering the law. For example, a 25-cent-an-hour minimum was to begin October 24, 1938. This was to be in effect for one year, followed by a 30-cent minimum for the next six years and a 40-cent rate in 1945.4 The minimum could rise more rapidly towards the 40-cent level if administrators felt that this was possible without increasing unemployment.5
After 1945, the minimum wage was not increased further until January 25, 1950. At that point, it rose to 75 cents an hour. Prior to this increase, the 40-cent minimum represented about 30 percent of the average hourly wage. After the increase, it was over half the average hourly wage.
Economists Reach a Consensus. In a classic article published in 1946, Nobel Laureate George Stigler argued that minimum wage regulations reduced employment. But empirical evidence was still sparse.6 In subsequent years, though, as the federal government repeatedly increased the minimum wage, the opportunities to explore the empirical relationship between minimum wage changes and employment levels multiplied. In the third of a century following Stigler's article, a professional consensus developed around his basic thesis.7 This consensus was firmly established before 1980.8 In 1982, a survey of the economics literature concluded that minimum wage increases have significant negative effects on employment.9
At about the same time, both a Minimum Wage Study Commission
established by Congress and the conservative American Enterprise Institute
conducted additional investigations of the issue. Despite these groups'
distinctly different policy perspectives, their findings were so similar
that ...if one did not know which study had been funded by which group,
one could not guess from the results. ...
The vast bulk of the research studies funded by the two
groups show modest/moderate impacts consistent with the professional consensus.10
Recent Heresies.
There matters stood until recently, partly one suspects
because there was no strong or effective political pressure for further
increases in the minimum wage through the remainder of the 1980s. After
generally accepting a single interpretation of the minimum wage-employment
linkage, the country experienced a prolonged period without federal minimum
wage increases. After 1981, the statutory minimum was not changed until
April of 1990. The last increase took effect in April 1991.
By then, the orthodox view of the employment impact of minimum wages was being challenged. In 1992, Princeton economist David Card disputed this view.11 Lawrence Katz and Alan Krueger, the former and present chief economists of the U.S. Labor Department, sided with Card.12 Since then, others have joined and extended the debate.13 The popular press has cited these challenges to orthodoxy as a justification for increased minimum wages.14
Card, Krueger and Katz rely largely on evidence from changing state minimum wage laws to reach their conclusions that the unemployment effects of minimum wages are very small. However, Ronald Ehrenberg of Cornell has pointed out that these studies ignore the fact that raising the minimum wage forces some firms out of business.15 Finis Welch of Texas A&M University believes the authors have ignored the impact of other factors that might have increased employment had the minimum wage not been increased.16 Those who challenged the conventional wisdom have fundamentally violated the basic ceteris paribus (hold other factors constant) assumption critical to economic analysis.17
Further, when Card and Krueger studied low-wage jobs in the New Jersey and Pennsylvania fast-food industry, they maintained that the number of such jobs actually went up in New Jersey when that state raised its minimum wage, while the number of jobs decreased in neighboring Pennsylvania, where the minimum wage was not increased. However, Linda Chavez, a former staff director of the U.S. Commission on Civil Rights, says that teenage employment overall fell 28 percent in New Jersey while it was falling only 9 percent in Pennsylvania.18
The arguments advanced by Card et al. seem to have been
answered adequately by David Neumark and William Wachser.19 Also, in a
recent study of the restaurant industry, using a different methodology
than that of most minimum wage studies, we obtained results that are strongly
consistent with the earlier findings.20 Moreover, even the authors of other
new studies do not appear to advocate minimum wage hikes. In fact, Krueger
said, "I want to emphasize that my comments should not be interpreted as
support for the position that increasing the minimum wage is sound public
policy."21
Minimum Wage Hike Threatens Healthy U.S. Economy
Artificially raising the minimum wage would destroy entry-level jobs and put low-skilled Americans out of work
12/1/06, Washington, DC – Despite the flourishing U.S. economy and record low unemployment level, low-skilled jobs—such as the retail and leisure and hospitality industries—are in decline. These jobs will be further threatened by the prospect of a federal minimum wage hike, warns the Employment Policies Institute (EPI).
Decades of economic research prove that raising the minimum wage reduces job opportunities, particularly for people with few skills. When faced with the increase in labor costs that attend minimum wage hikes, employers often respond by hiring more skilled applicants, automating jobs, or cutting back on customer service.
Contrary to the opinion of proponents of minimum wage hikes, a rising tide doesn’t necessarily lift all boats, and an extremely healthy skilled job market often masks an ailing low-skilled job market.
“The unintended consequences of a minimum wage hike will disproportionately affect low-skilled jobs while skilled labor may continue to flourish,” said Jill Jenkins, EPI’s chief economist. “In other words, if two computer programmer jobs are created and one less grocery store checker is hired, the net job creation is positive, but you’re still seeing a decline in entry-level job opportunities.”
A study by economists at the Federal Reserve found that every 10% increase in the minimum wage leads to a 2%-3% decrease in employment overall. When you focus on the job loss suffered by low-skilled individuals such as high school drop-outs or minority teens, the increase in unemployment is as high as 8.5% for every 10% increase in the minimum wage, according to research from Cornell and the University of Connecticut.
“Instead of pushing for a minimum wage increase, lawmakers
could affect real change by promoting expansion of the Earned Income Tax
Credit (EITC),” added Jenkins. “The EITC effectively targets benefits to
families in need without jeopardizing jobs.”
Should Congress Raise the Federal Minimum Wage?--Posner
Increasing the federal minimum wage, currently $5.15 an hour, is a priority of the new Democratic Congress. Democratic leaders want to raise it by 40 percent, to $7.25 an hour. From an economic standpoint, even from an egalitarian standpoint, raising the minimum wage, especially by such a large amount (roughly 10 percent of the American workforce makes less than $7.25 an hour, which is double the percentage of the workforce that is paid the current minimum wage), would be a grave mistake. As a matter of economic theory, increasing the price of an input into production, such as labor, has two effects: an increase in the price of the product, because the producer's costs have risen (provided the increased input cost affects his competitors as well) and a reduction in the demand for the input, both because the higher price of the product reduces demand for it and because substitute inputs will now be more attractive. Any such substitution will be inefficient because it is motivated not by an increase in the real cost of labor but by a government-mandated increase in the price of the input, which has the same misallocative effect as monopoly pricing.
If the input is labor, forcing employers to pay employees an above-market wage will result in (1) higher prices for the goods or services produced by the employers, which will have the same effect as a tax on the consumers of those goods or services, (2) higher wages for those minimum-wage employees whose employers decide to retain them and pay the mandated new wage, and (3) less employment of marginal workers, that is, of workers paid less than the imposed minimum. Any interference with the market-determined wage level is prima facie inefficient; and to the extent that marginal workers are poorer than workers unaffected by a minimum wage, and the consumers of goods and services produced by employers of marginal workers are also below average in income, a minimum-wage law is inegalitarian as well as inefficient. Its effect on income equality, however, depends not only on the relative incomes of the groups affected by the law but also on the balance between the effect on employment and the effect on the wages of those who are retained. The lower the percentage drop in employment relative to the size of the minimum wage, the less likely the net effect of the mininum-wage law will be to make marginal workers worse off. Some economists, notably David Card and Alan Krueger, deny that the minimum wage has any disemployment effect. See their book Myth and Measurement: The New Economics of the Minimum Wage (1995), but their work has been heavily criticized. See, e.g., David Neumark & William Wascher, "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania: Comment," 90 Am. Econ. Rev. 1362 (2000), and Richard V. Burkhauser, Kenneth A. Couch & David C. Wittenburg, "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey," 18 J. Lab. Econ. 653 (2000). It is unlikely that a 40 percent increase in the minimum wage would have no effect on employment.
Although working full time at $5.15 an hour yields an annual income (slightly more than $10,000) barely above the poverty line, most minimum-wage workers are part time, and for the majority of them their minimum-wage employment supplements an income derived from other sources. Examples of such workers are retirees living on social security or private pensions who want to get out of the house part of the day and earn some pin money, stay-at-home spouses who want to supplement their full-time spouse's earnings, teenagers working after school, and other students. An increase in the minimum wage--depending critically of course on how great the increase is--will provide a windfall to some minimum-wage workers, many of whom are not poor, and disemploy some others, also not poor. The effect on wage equality is likely to be slight, but consumer prices will be higher (which may reduce overall equality) and the efficiency with which goods and services are produced by low-wage workers will be reduced.
As a means of raising people from poverty or near poverty, the minimum wage is distinctly inferior to the Earned Income Tax Credit, which compensates for low wages without interfering with the labor market. EITC is of course not devoid of allocative effect, because like any other government spending it is defrayed out of taxes; but it is probably a less inefficient tax than the minimum wage. And it is a more efficient device for spreading the wealth, since many, perhaps most, minimum-wage workers are not poor.
So why are the Democrats pushing to increase the minimum wage rather than to make EITC more generous? Three reasons can be conjectured. First, unions, which are an important part of the Democratic Party's coalition, favor the minimum wage because it reduces competition from low-wage workers and thus enhances the unions' bargaining power and so their appeal to workers. This would not be as serious a problem for unions if minimum-wage workers were organized. But the fact that most minimum-wage workers are part time makes them uninterested in joining unions. Second, increasing the EITC would mean an increase in government spending and hence in pressure to increase taxes, and the Democrats wish to avoid being labeled tax-and-spend liberals. And third, genuinely poor people vote little. The number of nonpoor who would be benefited by an increase in the minimum wage, when combined with the number of nonpoor workers whose incomes will rise as a result of reducing competition from minimum-wage workers, probably exceeds the number of nonpoor who will be laid off as a result of an increase in the minimum wage. Teenagers, moreover, will be among the groups hardest hit, and most of them do not vote.
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On Raising the Federal Minimum Wage--BECKER
An increase in the minimum wage has several distinctive negative effects on the economy. While the wages of some low skilled workers would improve, it would reduce employment opportunities for teenagers and other lower skilled workers. They are pushed either into unemployment or the underground economy. A bigger minimum also raises prices of fast foods and other goods produced with large inputs of unskilled labor. Workers who receive on the job training must accept lower wages in return. A higher floor on wages prevents the wages of lower skilled workers from being reduced much, and hence discourages firms from providing much training to these employees.
A rise in the minimum wage increases the demand for workers with greater skills because it reduces competition from low-skilled workers. This is an important reason why unions have always been strong supporters of high minimum wages because these reduce the competition faced by union members from the largely non-union workers who receive low wages.
Most knowledgeable supporters of a higher minimum wage do not believe it is an effective way to reduce the poverty rate. Poorer workers who are lucky enough to retain their jobs at a higher wage obviously do better, but the poorer workers who are priced out of the above ground economy are made worse off. Moreover, many of those who receive higher wages are not poor, but are teenagers and other secondary workers in middle class and rather rich families. Poor families are also disproportionately hurt by the rise in the cost of fast foods and other goods produced with the higher priced low-skilled labor since these families spend a relatively large fraction of their incomes on such goods.
A recent petition by over 600 economists, including 5 Nobel Laureates in Economics, advocated a phased-in rise in the federal minimum wage to a much higher $7.25 per hour from the present $5.15 per hour. This petition received much attention, and the number of economists signing is impressive (and depressing). Still, the American Economic Association has over 20,000 members, and I suspect that a clear majority of these members would have refused to sign that petition if they had been asked. They believe, as I do, that the negative effects of a higher minimum wage would outweigh any positive effects. That is one reason I would surmise why only a fraction of the 35 living economists who received the Nobel Prize signed on to the petition--I believe all were asked to sign.
Controversy remains in the United States (and elsewhere) over the effects of the minimum wage mainly because past changes in the U.S. minimum wage have usually been too small to have large and easily detectable general effects on employment and unemployment. The effects of an increase to $7.25 per hour in the federal minimum wage that many Democrats in Congress are proposing would be large enough to be easily seen in the data. It would be a nice experiment from a strictly scientific point of view, for it would help resolve the controversy over whether the effects of large increases in the minimum wage would be clearly visible in data on employment, training, and some prices. Presumably, even the economists and others who are proposing this much higher minimum must believe that at some point a still higher minimum would cause too much harm. Otherwise, why not propose $10 or $15 per hour, or an even higher figure? I am confident that for this and other reasons, the actual immediate increase in the federal minimum wage is likely to be significantly lower than $2.10 per hour.
A number of countries, including France, have already
initiated this experiment, for the ratio of the minimum wage to the average
wage in these countries is much higher than in the United States. The effects
of the French minimum have been carefully studied by two excellent economists,
Guy Laroque and Bernard Salanie, in a series of articles, such as " Labor
Market Institutions and Employment in France," Journal of Applied Econometrics,
2002. They find that the relatively high minimum in France explains a significant
part of the low employment rate of married women in France. Salanie has
also argued that the high French minimum wage is important in explaining
the dismal employment prospects of young persons in France, and the huge
unemployment rate of Muslim youths there, estimated to be about 40 per
cent.
Time for the $5.15 Minimum Wage
To Punch Out?
November 11, 2006; Page A5
THE MAIN EVENT
Having won control of Congress, Democrats are promising
to introduce a bill to raise the federal minimum wage to $7.25 from $5.15
within the first 100 hours after the new Congress convenes in January.
* * *
Federal minimum-wage levels haven't been raised in nine years, although not for lack of trying. As recently as August, the Senate blocked a minimum-wage increase that was tied to an estate-tax cut and a measure allowing an exemption from the minimum wage for certain workers who earn tips.
With Democratic majorities in both houses of Congress,
however, President Bush now says he sees a minimum-wage increase as an
area where Democrats and Republicans can "find common ground." Over the
past nine years, many states have taken matters into their own hands and
passed their own minimum-wage increases. Today 29 states, including six
added in Tuesday's election ballot referendums, have or plan to have a
minimum wage higher than $5.15 an hour. Even some U.S. cities have their
own minimum wage. Santa Fe, N.M., for instance, has a city minimum wage
of $8.50 an hour, which will gradually increase to $10.50 by 2008.
QUESTION OF THE DAY
[Question of the Day]
What is an appropriate minimum wage? Cast your vote in
the Question of the Day.
MORE
[Hot Topic] • The WSJ editorial board's view
• By the Numbers
Here's a look at some of the issues:
How many would be affected by the change? Because many states have minimum-wages that surpass the federal law, the Economic Policy Institute, Washington, D.C., estimates that only about 15 million people would be affected by a federal minimum-wage increase to $7.25. That number could decrease slightly after the six states that voted to implement a wage increase on Tuesday put their laws into action. The EPI includes some "spillover" in this figure -- that is, people who made more then $7.25 before the change but will likely get an increase in pay to stay in the same relative position on their company's pay scale.
Would some lose their jobs as a result? This is a hotly debated question. Traditionally, labor unions have pushed for wage increases, saying unemployment isn't a factor, while the restaurant, retail, and small-business industries have said raising the minimum wage will create job loses. Young and unskilled workers are the groups usually singled out as most at risk.
A watershed study by economists David Card and Alan B.
Krueger in 1994 said that minimum-wage increases in New Jersey didn't result
in job losses in the fast-food industry. But that stance has been challenged
by other economists. A 2003 survey by Dan Fuller and Doris Geide-Stevenson
said that 46% of academic economists in the U.S. agreed with the statement,
"a minimum-wage increases unemployment among young and unskilled workers,"
while 28% partly agreed, and 27% disagreed. A similar study from 1978,
published in the American Economic Review, said 90% of economists surveyed
agreed or partly agreed with the statement.
[A waitress at a Birch Run, Mich., restaurant.]
A waitress at a Birch Run, Mich., restaurant.
Regardless of what economists say, public opinion has always been strongly in favor of lifting the federal minimum wage.
Do some earn less than the federal minimum wage? The U.S. Department of Labor estimates that about 1.4 million people earn below minimum wage and that 72% of those people work in the leisure and hospitality industry. This figure can be misleading because the Labor Department data are based on answers given by workers. Many people round down their salary to $5 an hour when they respond to the survey. The Labor Department says 300,000 people said they earned exactly $5 an hour on the 2005 survey.
Also, many people who work in food preparation -- waiters, for example -- take home paychecks of less than $5.15 an hour because of a federal "tip-credit" law, which allows employers to pay workers less per-hour if they meet minimum-wage standards based on tips.
---- Sarah Nassauer
FACTS
All six states that put a minimum-wage referendum on ballots Nov. 7 passed an increase.
In the wake of the Great Depression, Congress set the first minimum wage in October 1938 at 25 cents an hour under the Fair Labor Standards Act. The act also established maximum working hours and banned most child labor.
Gallup Polls taken to gauge public opinion on minimum-wage increases since 1937 show that public opinion has never been against raising the minimum wage. The level of support varied from about 55% in 1945 to 83% in 2006.
Minimum-wage workers tend to be young. About half of workers earning $5.15 or less in 2005 were under 25 years old, and about one-fourth of workers earning at or below the minimum wage were 16 to 19. Among employed teenagers, about 9% earned $5.15 or less.
The industry with the highest proportion of workers with reported hourly wages at or below $5.15 in 2005 was leisure and hospitality, at about 14%. About three-fifths of all workers paid at or below the federal minimum wage were in this industry, primarily in food services.
As of Dec. 2, the U.S. will have gone nine years, four months and one day without increasing the federal minimum wage, the longest stretch in the nation's history. The longest stretch to date is from 1981 to 1990, when the federal minimum wage was raised to $3.80.
POINTS OF VIEW
"My thinking on this [minimum wage] has changed dramatically. The evidence appears to be against the simple-minded theory that a modest increase in the minimum wage causes substantial job loss."
--Federal Reserve Former Vice Chairman Alan Blinder
"Minimum wage hikes end up hurting the very people they are intended to help by jeopardizing the jobs of those most in need of assistance."
--Mike Flynn, Employment Policies Institute
"Republicans have never hesitated to cut taxes for the wealthiest few but they have refused to give America's workers a raise for nearly a decade, even as energy, housing, education and health costs have skyrocketed. That's immoral, and Democrats will take our nation in a new direction by raising the minimum wage."
--Nancy Pelosi, Democratic Congresswoman and likely future Speaker of the House
"Why not be the party that has a little bit of heart and cares about ordinary people?"
-- Rep. Ray LaHood (R., Ill.)
Below the Minimum Wage
by Alan Reynolds
Alan Reynolds is a nationally syndicated columnist and a senior fellow at the Cato institute.
"What Is a Living Wage?" Jon Gertner's overstuffed cover story in the New York Times Magazine, offers a guess that, "Probably only around 3 percent of those in the workforce are actually paid $5.15 an hour or less." The last two words -- "or less" -- are absolutely critical, yet totally ignored as usual.
The Internet leaves no excuse for guessing about what is "probably" true. Just type "Statistical Abstract" into Google, and then click on Section 12, Table 636: "Workers Paid Hourly Rates."
Table 636 reveals that only 520,000 were paid the $5.15 federal minimum wage in 2004. That was merely four-tenths of one percent (0.4 percent) of total non-farm civilian employment -- far short of Gertner's 3 percent adventure in probability. Nearly three times as many U.S. workers (1,483,000) were paid less than the minimum wage. Among full-time workers, only 177,000 earned the $5.15 minimum wage in 2004, while 3.3 times as many (583,000) earned less than $5.15. As I mentioned, the words "or less" after $5.15 are there for a reason.
Whenever the minimum wage has been increased, the most obvious result was an increase in the number earning less than the minimum.
If we ignore the 45 percent of full-time U.S. employees who earn salaries rather than wages, it might almost be true that "around 3 percent" of those paid by the hour are actually paid $5.15 an hour or less. But that is only because 2 percent of those paid by the hour earn less than $5.15 an hour. And that raises an obvious question: How on earth is an increase in the minimum wage supposed to help the nearly 1.5 million people who are not earning that much in the first place?
Gertner was handicapped in answering that question by his choice of sources. He lauds David Card and Alan Krueger, who managed to write an entire book about the minimum wage without even noticing 1.5 million people earning less than the minimum wage. Gertner even quotes Robert Pollin, whose appalling book, The Living Wage, claimed, "Only 8.9 percent of the workforce actually earns the minimum wage." Either these experts are unaware of the Statistical Abstract, or they think facts are just a moral issue.
When the minimum wage was last increased in 1997, the number of workers earning less than the minimum jumped to 3 million. The percentage of teens working for less than the minimum rose from 7.2 percent to 19.8 percent (it was 4.6 percent in 2004).
I plowed this abandoned field once before in a July 2004 column, "When More Is Less," which is still at cato.org under my bio. "Any employer with an annual income below $500,000 is free to ignore the minimum wage," I explained. "The federal minimum wage does not apply to workers on small farms or at seasonal amusement or recreational facilities. It does not apply to newspaper deliverers, companions for the elderly, outside salesmen, U.S. seamen on foreign-flagged ships, switchboard operators or part-time babysitters." Such handy loopholes aside, there is sure to be some outright evasion of any minimum-wage law, since it is impossible to monitor all the casual day labor and home care going on.
Gertner's minimum wage story is local, rather then national, but the issues are the same. He offers the unusual example of Santa Fe, N.M., a town of "wealthy retirees and ... movie stars," where "the tight labor market has pushed up wages so that many entry-level workers were already earning more than $8 an hour." We're not talking about some sleepy little village in Mississippi or Montana.
In February 2003, the city council hiked the Santa Fe minimum wage to $8.50 an hour, and to $9.50 this year. That was not as bold as it sounds, since many entry-level workers were already earning more than $8 an hour. Yet Gertner managed to dig up 17 human interest stories, and all but two of those were supposedly earning much less than Santa Fe's legal minimum last year, which was $8.50 an hour. They earned as little as $5.50 an hour, the story tells us, even as we are also told the minimum wage has just been increased from $8.50 to $9.50.
How could that be possible? Perhaps these people worked for little shops that are exempt from the law. But if that were true, then the questions they were asked about how they will benefit from $9.50 an hour would have been a cruel hoax. Well, it's just supposed to be a morality tale.
Every minimum wage law, national or local, has loopholes big enough to drive a truck through. Santa Fe's minimum wage does not apply to businesses with fewer than 25 employees. That means it excludes all the smallest businesses, the ones most likely to offer the worst wages and benefits. Count the workers at any Santa Fe drycleaner, gas station, convenience store or quaint little gift shop or bistro, and you won't find one dozen employees, much less two dozen. To the extent that the Santa Fe minimum wage is binding (higher than the tight market would be paying anyway), its effect will be to divert more displaced job applicants into such small enterprises that are exempt from the law, and thereby depress wages and benefits in such small businesses.
If any little business happened to be approaching 25 employees, the author rightly notes, they'd have a perverse incentive to stay small. Supermarkets in Santa Fe will also have a greater incentive to invest in self-checkout lanes, or to relocate outside city limits.
"Is How Much You Pay a Worker a Moral Issue?" asks the magazine cover. Well, moralizing can easily substitute for economics among elitists who don't really care how many more people they shove into the ranks of those paid less than some local or national minimum.
Those displaced from job opportunities by a higher minimum wage have to abandon the job search or they have to compete in larger numbers for scarce jobs that pay less than the minimum wage. Such intensified rivalry must push the lowest wages even lower. As moral issues go, this "living wage" crusade is purely malevolent.
This article appeared on Townhall.com on January 19, 2006.
Below the minimum wage
By Alan Reynolds
Thursday, January 19, 2006
"What Is a Living Wage?" Jon Gertner's overstuffed cover story in The New York Times Magazine, offers a guess that, "Probably only around 3 percent of those in the workforce are actually paid $5.15 an hour or less." The last two words -- "or less" -- are absolutely critical, yet totally ignored as usual.
The Internet leaves no excuse for guessing about what is "probably" true. Just type "Statistical Abstract" into Google, and then click on Section 12, Table 636: "Workers Paid Hourly Rates."
Table 636 reveals that only 520,000 were paid the $5.15 federal minimum wage in 2004. That was merely four-tenths of one percent (0.4 percent) of total non-farm civilian employment -- far short of Gertner's 3 percent adventure in probability. Nearly three times as many U.S. workers (1,483,000) were paid less than the minimum wage. Among full-time workers, only 177,000 earned the $5.15 minimum wage in 2004, while 3.3 times as many (583,000) earned less than $5.15. As I mentioned, the words "or less" after $5.15 are there for a reason.
Whenever the minimum wage has been increased, the most obvious result was an increase in the number earning less than the minimum.
If we ignore the 45 percent of full-time U.S. employees who earn salaries rather than wages, it might almost be true that "around 3 percent" of those paid by the hour are actually paid $5.15 an hour or less. But that is only because 2 percent of those paid by the hour earn less than $5.15 an hour. And that raises an obvious question: How on earth is an increase in the minimum wage supposed to help the nearly 1.5 million people who are not earning that much in the first place?
Gertner was handicapped in answering that question by his choice of sources. He lauds David Card and Alan Krueger, who managed to write an entire book about the minimum wage without even noticing 1.5 million people earning less than the minimum wage. Gertner even quotes Robert Pollin, whose appalling book, "The Living Wage," claimed, "Only 8.9 percent of the workforce actually earns the minimum wage." Either these experts are unaware of the Statistical Abstract, or they think facts are just a moral issue.
When the minimum wage was last increased in 1997, the number of workers earning less than the minimum jumped to 3 million. The percentage of teens working for less than the minimum rose from 7.2 percent to 19.8 percent (it was 4.6 percent in 2004).
I plowed this abandoned field once before in a July 2004 column, "When More Is Less," which is still at cato.org under my bio. "Any employer with an annual income below $500,000 is free to ignore the minimum wage," I explained. "The federal minimum wage does not apply to workers on small farms or at seasonal amusement or recreational facilities. It does not apply to newspaper deliverers, companions for the elderly, outside salesmen, U.S. seamen on foreign-flagged ships, switchboard operators or part-time babysitters." Such handy loopholes aside, there is sure to be some outright evasion of any minimum-wage law, since it is impossible to monitor all the casual day labor and home care going on.
Gertner's minimum wage story is local, rather then national, but the issues are the same. He offers the unusual example of Santa Fe, N.M., a town of "wealthy retirees and ... movie stars," where "the tight labor market has pushed up wages so that many entry-level workers were already earning more than $8 an hour." We're not talking about some sleepy little village in Mississippi or Montana.
In February 2003, the city council hiked the Santa Fe minimum wage to $8.50 an hour, and to $9.50 this year. That was not as bold as it sounds, since many entry-level workers were already earning more than $8 an hour. Yet Gertner managed to dig up 17 human interest stories, and all but two of those were supposedly earning much less than Santa Fe's legal minimum last year, which was $8.50 an hour. They earned as little as $5.50 an hour, the story tells us, even as we are also told the minimum wage has just been increased from $8.50 to $9.50.
How could that be possible? Perhaps these people worked for little shops that are exempt from the law. But if that were true, then the questions they were asked about how they will benefit from $9.50 an hour would have been a cruel hoax. Well, it's just supposed to be a morality tale.
Every minimum wage law, national or local, has loopholes big enough to drive a truck through. Santa Fe's minimum wage does not apply to businesses with fewer than 25 employees. That means it excludes all the smallest businesses, the ones most likely to offer the worst wages and benefits. Count the workers at any Santa Fe drycleaner, gas station, convenience store or quaint little gift shop or bistro, and you won't find one dozen employees, much less two dozen. To the extent that the Santa Fe minimum wage is binding (higher than the tight market would be paying anyway), its effect will be to divert more displaced job applicants into such small enterprises that are exempt from the law, and thereby depress wages and benefits in such small businesses.
If any little business happened to be approaching 25 employees, the author rightly notes, they'd have a perverse incentive to stay small. Supermarkets in Santa Fe will also have a greater incentive to invest in self-checkout lanes, or to relocate outside city limits.
"Is How Much You Pay a Worker a Moral Issue?" asks the magazine cover. Well, moralizing can easily substitute for economics among elitists who don't really care how many more people they shove into the ranks of those paid less than some local or national minimum.
Those displaced from job opportunities by a higher minimum wage have to abandon the job search or they have to compete in larger numbers for scarce jobs that pay less than the minimum wage. Such intensified rivalry must push the lowest wages even lower. As moral issues go, this "living wage" crusade is purely malevolent.
July 25, 2004
When More Is Less
by Alan Reynolds
Alan Reynolds is a senior fellow with the Cato Institute and a nationally syndicated columnist.
Soon after Sen. John Kerry proposed raising the national minimum wage from $5.15 to $7 by 2007, predictable cheers arose from some quarters and predictable boos from others. Yet both supporters and critics keep missing a crucial point.
Take a careful look at the precise wording of a recent Bureau of Labor Statistics (BLS) report on this: "Slightly over half of workers earning $5.15 or less were under age 25, and about one-fourth were age 16-19.... About 2 percent of workers age 25 and over earned the minimum wage or less."
The key phrase in that report -- strangely ignored by both supporters and critics of a higher minimum wage -- is "or less." Among 73 million workers still paid by the hour in 2003 (40 percent of us are salaried), only 545,000 or 0.7 percent earned the minimum wage. Three times as many -- 1.6 million or 2.2 percent -- earned less than the minimum wage.
That is a huge improvement over 1997, when 3 million earned less than the minimum wage. Contrary to a universal confusion between words and reality, those paid the official "minimum" wage are not the nation's lowest-paid workers.
The federal minimum wage does not apply to workers on small farms or at seasonal amusement or recreational facilities. It does not apply to newspaper deliverers, companions for the elderly, outside salesmen, U.S. seamen on foreign-flag ships, switchboard operators or part-time babysitters.
Any employer with an annual income below $500,000 is free to ignore the minimum wage, except in states with their own minimum for such small establishments (such as $2 an hour in Oklahoma, $2.80-$3.35 in Ohio and $4 in Montana). Such jobs offer a crude safety valve, preventing the full brunt of minimum wage increases from reducing employment.
Not all unskilled job applicants precluded from minimum wage jobs end up unemployed, or (another neglected effect) as discouraged labor force dropouts. Instead, many are just displaced into jobs exempt from the federal minimum wage.
Jobs paying less than the minimum wage, legally or otherwise, are typically more arduous and less secure than jobs in, say, chain stores or restaurants, where the minimum wage is more easily enforced. Jobs exempt from the minimum wage generally offer no pension or health benefits,and no effective regulation of overtime hours, sick pay or other working conditions. Employer payment of Social Security taxes is notoriously negligent, leaving workers ineligible for benefits.
Past experience shows an increase in the minimum wage is not only likely to reduce the number of workers earning the minimum wage, but also to increase the number earning less than the minimum. The resulting increase in workers forced by a higher minimum wage to compete for sub-minimum wage jobs can be expected to push the lowest wages even lower.
The minimum wage was increased from $2.65 to $2.90 in January 1979 and to $3.15 in 1981. The percentage of hourly wage workers earning less than the minimum reached 5.6 percent by 1979 and 6.8 percent in 1981.
The unchanged $3.35 minimum wage gradually became less burdensome as wages and prices rose during the strong 1983-89 expansion. So by 1989 the percentage earning less than the minimum had fallen to 2.2 percent. But the minimum was then increased to $3.80 in April 1990 (and to $4.25 a year later) and the percentage earning less than the minimum jumped to 3.8 percent in 1991. The economy was in recession during part of 1981 and 1991, however, so we cannot be entirely certain the higher minimum wage was the main culprit.
The effect of the most recent rise in the minimum wage is harder to ignore (although Mr. Kerry nonetheless ignores it). The minimum wage was increased to $4.75 in October 1996 and to the current $5.15 a year later. What happened? The percentage of workers earning less than the minimum wage jumped from 2.5 percent (1.7 million) in 1995 to 4.2 percent (3 million) by 1997. The percentage of teens working for less than the minimum rose from 7.2 percent to 19.8 percent.
The increased minimum wage is the only plausible explanation, because the job market was unusually strong. The unemployment rate dropped from 5.6 percent in April 1996 to 4.2 percent in April 1997, even with a near doubling of workers who earned less than the minimum wage.
Some cite the falling unemployment in 1996-97 as evidence the higher minimum wage did no harm. They are quite mistaken. Jobs paying the minimum wage currently account for only four-tenths of 1 percent of all U.S. jobs -- far too tiny to have much effect on total unemployment. For those directly affected, however, the effect can be extremely nasty.
Critics of the minimum wage emphasize the negative effect of the minimum wage on employment, particularly among teens, new immigrants and other entry-level workers. This is correct as far as it goes. States with minimum wages of around $7, for example, generally suffer above-average unemployment -- 6.1 percent unemployment in Washington, 6.2 percent in California, 7.3 percent in Alaska.
But unemployment is not the only possible effect. Those displaced from job opportunities by a higher minimum wage have another option: They often can and do work for less than the minimum wage. A higher minimum wage reduces the availability of such jobs, leaving a more low-wage job-seekers competing for jobs paying less than the minimum wage. That, in turn, must push the lowest wages even lower.
When the minimum wage is pushed up faster than the market would have moved it, the effect is to greatly increase the proportion of jobs paying less than the minimum. Employers offering less than the minimum, legally or otherwise, then find a flood of applicants whenever the minimum wage rises. These workers were displaced by dwindling opportunities in the larger, more formal businesses uniquely affected by the federal law.
Cutting off the lowest rung on the ladder of opportunity
may please some members of labor organizations who are much higher on the
ladder, because it reduces future competition for better jobs. But to attributing
compassion to an increased minimum wage is the opposite of its most obvious
effect. In reality, Mr. Kerry's proposal to raise the minimum wage to $7
an hour would shove hundreds of thousands of the young and unskilled into
dead-end jobs paying less than the minimum.
October 12, 2006
Hall of Shame
Russell Roberts
Six hundred and fifty economists, many of them illustrious and at illustrious institutions, believe that demand curves are vertical:
We believe that a modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effects that critics have claimed. In particular, we share the view the Council of Economic Advisors expressed in the 1999 Economic Report of the President that "the weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment." While controversy about the precise employment effects of the minimum wage continues, research has shown that most of the beneficiaries are adults, most are female, and the vast majority are members of low-income working families.
The full text of the petition endorsing an increase in the minimum wage, along with the economists who signed it, is here.
What were they thinking? Little or no effect on employment? How can you sign your name to something like that and call yourself an economist? I guess you could argue that there's little effect on TOTAL employment. That effect is very hard to find empirically because so few workers are affected by the minimum wage and its impact gets swamped by other factors. But among low-skilled workers, the ones we want to help? Maybe the people who signed believe that "modest" increases in the federal minimum wage (to $7.25) would effect so few people (many of whom are already covered by state minimum wage laws), that the effect is mainly symbolic. So signing a petition is more of a political statement than a statement about economic reality.
It wouldn't bother me if they petitioned for social programs that would help workers who lose their jobs due to an increase in the minimum wage. You can be in favor of that and still be a first-rate economist—you believe that the benefits of increasing the minimum outweigh the harm and you'd like to mitigate the harm. But to argue that there's no harm, that there's a free lunch because the demand curve for low-skilled labor is vertical? How do you defend that?
(HT: Chris Meisenzahl)
Wishful Thinking on the Minimum Wage
By Steve Chapman
Sunday, October 22, 2006
Economics was dubbed "the dismal science" because it is constantly at war with one of life's most pleasant occupations -- wishful thinking. Suggest a simple step to make people better off -- say, by freezing gasoline prices -- and economists will dourly explain why it will have unintended consequences that outweigh any benefit. They've also been known to visit kindergarten playgrounds and announce there is no Santa Claus.
But a group of reputable scholars is trying to put a happy face on economic realities. They say the government can decree higher pay for the least-compensated employees and the only consequence will be the intended, benign one.
The Economic Policy Institute, a Washington research group, recently unveiled a newspaper ad trumpeting a statement signed by some 675 economists who endorse raising the minimum wage from $5.15 an hour to $7.25. Among the signers are Nobel Laureates Kenneth Arrow, Clive Granger, Lawrence Klein, Robert Solow and Joseph Stiglitz.
A generation ago, it was universally agreed, even among liberal economists, that raising the minimum wage was a mistake because it would produce higher unemployment. Force companies to pay the lowest-skilled workers more than they are worth, and companies will get rid of them. In this view, it's better to have a job that pays $5 an hour than to lose one that pays $5.15.
That insight violated, but didn't curb, the perennial liberal desire to pursue social improvement at other people's expense. In the past, Democrats boosted the minimum wage in stubborn disregard of the wisdom of academia. Lately, though, they have been able to brandish studies alleging that in the real world, an increase doesn't raise unemployment and may reduce it.
In fact, the notable research merely showed that a higher minimum wage failed to raise unemployment in the fast food industry, not that it failed to destroy jobs in general. But whatever their shortcomings, the studies made it respectable for economists to echo the old Michelob slogan: "Who says you can't have it all?"
The economists' statement is carefully hedged, quoting from the 1999 Economic Report of the President: "The weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment." Put more succinctly, a small increase may cause a small increase in unemployment.
But small increases also provide only small benefits, at least to the workers who keep their jobs. And the change the economists endorse is not a modest one. It would lift the floor from $5.15 to $7.25 -- a 40 percent increase -- in the space of 26 months.
If the federal government sought to discourage the hiring of low-skilled workers by making employers pay a 40 percent tax on their wages, no economist would expect low-wage employment to grow or remain the same. But that's exactly how this proposed change would work.
Supporters insist employers will reap benefits in lower turnover and reduced costs for training new workers. But if businesses could make more money with that tradeoff, the government wouldn't have to force them to do it -- greed would be motivation enough.
Despite the minority view expressed in the ad, Hoover Institution economist David Henderson says the consensus in the trade is that each 10 percent add-on would destroy 1 to 2 percent of young people's jobs. So a $7.25 minimum wage could mean the loss of up to 1.6 million positions.
That may seem a small price to pay for enlarging the paychecks of millions of other workers. Sen. Edward Kennedy, D-Mass., thunders, "It's a travesty that a family of three earning the minimum wage works five days a week all year round yet still lives below the poverty line."
But he has taken some liberties with the truth. A family of three with one parent working full-time and the other half-time, both at the minimum wage, gets $15,450 a year in wages, less than the poverty level of $16,600. But, notes John Wancheck of the Center on Budget and Policy Priorities, that family also qualifies for the federal Earned Income Tax Credit and (with a child under 17) the child-care tax credit, bringing total take-home income to $17,638.
That's still a modest amount, but more than this family will earn if one of its members is unemployed. And chances are good that economists have been right all along in expecting such consequences. It may be deeply unwelcome to hear that the government can't fix the price of anything without self-defeating side effects. But even dismal truths are true.
Steve Chapman is a columnist and editorial writer for
the Chicago Tribune.
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The blogger Max Sawicky has highlighted a letter being sent to economists. The letter asks them to sign and affirm the desirability of raising the minimum wage. Sad to see such an obviously bright gentleman pushing such profoundly silly economic nostrums. Raising the minimum wage is precisely and exactly what should not be done -- due both to predictable ill-effects and to the questionable morality of such an action.
As far as the effect is concerned, the letter is correct that a modest increase would only have a modest effect on unemployment. But then that's never really been the objection. While a small increase is obviously both unwelcome and painful for those who suffer it, the actual amount is swamped by the general turnover of employment in the country. Much more important is the effect on the number of hours both offered and demanded. Higher wages will lead to more people being willing to work for them and, at least if the very basis of the economic arts -- the supply and demand curves -- are valid, a drop in the number of hours offered. That this turns up as a reduction in the hours of work available, rather than jobs themselves, doesn't make this mismatch any more enjoyable for those caught in it.
As George Mason's Alex Tabarrok points out it's also an extremely inefficient way of doing what its proponents claim, reducing poverty.
"The letter says, for example, that 'The minimum wage is also an important tool in fighting poverty.' Rubbish. But don't take my word for it.
'The minimum wage is a blunt instrument for reducing overall poverty, however, because many minimum-wage earners are not in poverty and because many of those in poverty are not connected to the labor market. We calculate that the 90-cent increase in the minimum wage between 1989 and 1991 transferred roughly $5.5 billion to low-wage workers.... an amount that is smaller than most other federal antipoverty programs, and that can have only limited effects on the overall income distribution.'
"The source? Card and Krueger in Myth and Measurement (p.3)."
Harvard's Greg Mankiw is also less than impressed with the arguments involved in trying to buck the laws of supply and demand and notes that a far more cost effective measure to increase the incomes of the working poor is to increase the Earned Income Tax Credit (EITC). He also urges us to look at who actually earns the minimum wage. Well, quite, as many point out, there's a lot of teenagers in there, a lot of people who are part of families not in poverty, despite their earning said minimum wage. It's also worth noting how few of those earning the minimum wage actually depend upon it for all of their income:
"The industry with the highest proportion of workers with reported hourly wages at or below $5.15 was leisure and hospitality (about 14 percent). About three-fifths of all workers paid at or below the Federal minimum wage were employed in this industry, primarily in the food services and drinking places component. For many of these workers, tips and commissions supplement the hourly wages received."
Now it's a few years since I finished my eight-year stint in that industry (everything from the graveyard shift at Denny's to waiting table at Pierre Cardin's Maxim's) but the entire reason to do the job was the tip income, even when serving pancakes to drunks at four in the morning.
It could even be worth pointing out that poverty amongst those working full time is a very small part of any of the problems being faced. Here are the detailed statistics on who is in poverty, by race, by age, by alternative measures of poverty and, perhaps most importantly, by the number of hours worked and whether they are all year round or not.
This, to me at least, is an extremely important part of the argument. On the one side, we're told that there is something unnatural, wrong, about someone being in poverty if they work full time all year. I might even agree. But I don't see that this vanishingly small part of the problem (the vast majority of the poor are working part time or not at all) justifies raising the minimum wage for all. Rather, it might, if we accept the basic premise, justify helping those who are indeed working full time out of poverty in some other manner.
So far we seem to have evidence that raising the minimum wage is an extremely expensive way of helping a very few people out of poverty, those very few working full time yet still stuck below the poverty line. To raise the minimum wage means raising it also for a far larger group of people who are not in poverty (those earning tips perhaps?) and those not working full time. We also have those aforementioned ill-effects on the quantity of work desired and on offer, leading to, while the change in undesired unemployment might be low, an inevitable increase in undesired underemployment.
However, there is one much larger problem, as Paul Krugman pointed out:
"Consider, for example, the effects of 'Plan Y' (never mind) on the hypothetical head of a household, currently making $5.43 an hour. According to their estimates, as long as he or she remained fully employed, the living-wage law would raise earned income from $10,860 to $14,500 -- and also mandate $2,500 in health coverage. (This is, incidentally, a 57 percent increase in the cost to employers; you have to have a lot of faith in Card-Krueger not to worry that some jobs might be lost.) According to their numbers, that family would currently pay less than $900 in taxes while receiving some $9,700 in benefits such as food stamps, Earned Income Tax Credit, and health care. Their calculations also show that most of the gains from the living wage proposal would be offset by reductions in these other redistributive programs. Indeed, only about one-fifth of the mandated increase in wages and benefits actually gets manifested in disposable income; the rest is taken away as benefits decline."
You see, those in work and still in poverty, we already help them. If their wages rise then that help is withdrawn: so our rise in the minimum wage becomes even more expensive as a poverty alleviation method, we have to raise it even further to have anything more than a marginal effect upon actual disposable income.
As Krugman goes on to point out, at this point it all becomes political: there are those who despair of, say, raising the EITC and so will admit that while the minimum wage route is expensive, doesn't do very much and has a number of effects that we don't really want very much, it is the only thing that could be done. This might even be true, but if it is, I'd rather welcome economists signing a letter stating so rather than glossing over those bad effects.
There is, to my mind at least, something really rather unethical about this route though. Given that rises in the minimum wage -- at least the vast majority of them -- get taken back in lower benefits, what is really happening is that the cost of raising the working poor out of poverty is being transferred from the taxpayers to some other group. Dependent upon the incidence, it might be the investors in companies that use minimum wage labor, it might be customers of such businesses or it might be the workers themselves, suffering from either un- or under-employment. Opinions will differ here, of course, but my bet would be some combination of groups two and three -- not actually the people we would like to bear such a burden.
Think of it this way: there you are in a bar; there's a group in the corner you want to buy a drink for. Do you say "Get em' in barkeep, and put it on that guy's tab"? Or "put it on my (or our) tab"?
What's being proposed in this letter urging a raise in the minimum wage is the former. That while we as a society might indeed want to raise out of poverty those working hard, we're going to make someone else (as noted, precisely the people we don't want to bear such a burden) pay for it. The moral response, if we do indeed want to raise the hard working poor out of their poverty is the latter, to state that we, as a society, should be willing to pay for it ourselves. That means through the EITC and, yes, through the tax system.
Whether or not you agree that such action should be taken about the incomes of the poor is an entirely different question. But having said that, collective action must be taken. So deliberately to offer a solution, that doesn't not become paid for collectively? Well, pardon me, but I call that immoral. But then that's politics, isn't it?
Tim Worstall is a TCS Daily contributing write
The minimum wage http://marginalrevolution.blogs.com/
6-23-06
Tyler Cowen
Will Wilkinson offers a good summary of economic thought on the topic. His early salvo:
The law of demand is very, very empirically adequate as it is...
Here is my previous post on the minimum wage. Here is Tyrone on the minimum wage.
Addendum: Jane Galt (where is Jennifer?) adds commentary.
Does the minimum wage put people out of work?
Steve Landsburg imparts much wisdom on the minimum wage; read Brad DeLong as well. Steve writes:
How do we know what was in all the unpublished research about the minimum wage? Of course we don't know for sure, but here's what we do know: First, the big published studies were no more statistically significant than the small ones. Second, this shouldn't happen if the published results fairly represent all the results. Third, that means there must be some important difference between the published and the unpublished work. And fourth, that means we should be very skeptical of what we see in the published papers.
Now that we've re-evaluated the evidence with all this in mind, here's what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers.
The work of Card and Krueger has emphasized the puzzle of why minimum wage boosts don't cause a big downturn in employment. They offer up a complicated story about labor market monopsony.
My take:
On this issue (and many others) I've been much influenced by my colleague Gordon Tullock. Gordon notes that the government can make an employer raise nominal money wages, but can't stop him from turning off the air conditioner. [A more optimistic scenario is that the employer invests in creating a higher-productivity job.] Surely just about every job out there can be made worse, one way or another, in a way that saves the employer money.
So the scenario is now simple. The government boosts the minimum wage. Low-wage workers earn more. Few lose their jobs. Workers sweat more too, one way or another. Few are much better off.
Addendum: There is a neat twist on this argument, drawing on the idea of an intra-family externality. Let's say you hold the "traditionalist" view that the poor don't work hard enough for their families. If Tullock's mechanism is operative, you might then favor increasing the minimum wage. The end result would be more sweat at a higher money wage.
Posted by Tyler Cowen on July 10, 2004 at 04:27 AM in
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» The new consensus on minimum wages from John Quiggin
Coming in a bit late, I have the opportunity to survey
a range of blogospheric discussion of the topic of minimum wages, which
largely supports the view (not surprising to anyone but an economist) that
minimum wages are good for... [Read More]
Tracked on Jul 12, 2004 5:29:18 PM
» Minimum wage from The Volokh Conspiracy
This Steven Landsburg piece in Slate has prompted blogospheric commentary (Brad DeLong, [Read More]
Tracked on Jul 12, 2004 6:25:57 PM
» The new consensus on minimum wages from John Quiggin
Coming in a bit late, I have the opportunity to survey
a range of blogospheric discussion of the topic of minimum wages, which
largely supports the view (not surprising to anyone but an economist) that
minimum wages are good for... [Read More]
Tracked on Jul 12, 2004 7:00:07 PM
» The new consensus on minimum wages from John Quiggin
Coming in a bit late, I have the opportunity to survey
a range of blogospheric discussion of the topic of minimum wages, which
largely supports the view (not surprising to anyone but an economist) that
minimum wages are good for... [Read More]
Tracked on Jul 12, 2004 8:09:07 PM
» Is there a "new consensus" on the minimum wage?
from ProfessorBainbridge.com
Steven Landsburg's Slate article on the minimum wage
has generated considerable discussion in the economic end of the blogosphere.
(See, e.g., Cowen, Quiggin, and DeLong.) Some of the commentary seems to
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Tracked on Jul 12, 2004 11:36:42 PM
» CST, Economics, and the Minimum Wage from Mirror
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The US Conference of Catholic Bishops supports an increase
in the minimum wage, opining that:Work has a special place in Catholic
social thought: work is more than just a job; it is a reflection of our
human dignity, and a [Read More]
Tracked on Jul 13, 2004 12:11:26 AM
» The new consensus on minimum wages from John Quiggin
Coming in a bit late, I have the opportunity to survey
a range of blogospheric discussion of the topic of minimum wages, which
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Have You No Respect for the Law (of Demand)?!
June 19, 2006
silhouette3.JPG From the desk of Jane Galt:
I heart Will Wilkinson
Why? You ask. Because he writes pieces like this: the
piece that I would have written, if I were as smart and talented as Mr
Wilkinson is . . .
The law of demand is a bitter pill for defenders of labor market price controls. Noted economic theorist Matt Yglesias has grown weary of appeals to “Economics 101? in the minimum wage debate. “After all,” Yglesias writes, “there’s a reason they offer more economics classes and you don’t get your degree after taking just one.” His American Prospect colleague Ezra Klein says of the law of demand that “It’s a good guideline, but it’s got no end of exceptions.” The minimum wage, of course, is one those exceptions.
They’re both right in general, if not about the minimum wage in particular. There are more economics classes, and they do teach exceptions. However, let’s not imagine that there is some advanced economic class in which you learn that the law of demand is false. (Well, no doubt there is somewhere. There is contradiction-friendly “paraconsistent logic,” after all.)
To use Yglesias’s misapplied example, Econ 101 principles do not stand to higher-level economics in the way that Newtonian physics stands to relativity and quantum machanics: as a useful, but literally false, simplification of reality. Economic laws are not strict laws of nature, codifying ineluctable relationships of necessity, and they do not pretend to be. So counterexamples are not ipso facto falsifying, and the law of demand is never replaced with a better, more empirically adequate, law. The law of demand is very, very empirically adequate as it is: It captures a ubiquitous regularity of human behavior that is abundantly comfirmed every moment of every day, and without which there would be no science of economics.
But it is just a regularity, like people flinching involuntarily when they hear a sudden, loud sound. It doesn’t have to happen, but it’s pretty surprising when it doesn’t. (”Is he deaf? Paralyzed?”) And when it doesn’t, there’s need for some special explanation.
Economic laws, like the principles of all the “special sciences,” are ceteris paribus generalizations: generalizations that are true other things being equal. Econ 101 lays out the basic laws and explains what follows from them ceteris paribus. Later, students learn about cases when other things are not equal — when there are exceptions to the generalization. So, it is always possible to argue that the law of demand does not apply in this or that kind of circumstance. A certain necessary auxiliary condition, which is almost always present, may be absent in a certain kind of case, causing the regularity to break down. But then, in order to predict an exception to the regular pattern, you need to cite the absence of the relevant auxiliary condition (e.g., “He can’t hear; that’s why he didn’t flinch”). I hope Yglesias is not also tired of Philosophy of Science 101.
Now, let’s note two things. First, you will be utterly hopeless in reliably identifying exceptions to a ceteris paribus law when you never grasped its logic in the first place. Exhortations to mind your Econ 101 generally aren’t exhortations to stop being so darn advanced. They are exhortations to actually comprehend the principles upon which advancement depends. And, second, the fact that a law is ceteris paribus does not mean you can deny its applicability whenever you want to. Political convenience tends not to be an appropriate auxiliary condition. You can’t wave your hands and just hope that a good argument is in some upper-level textbook you haven’t read.
I can understand why liberals get frustrated with conservatives citing "basic economics". In fact, things that make intuitive sense sometimes aren't true, because your intuition is wrong, or (more commonly), because there are other basic factors, which also make complete intuitive sense, that you have overlooked. A long time ago, on a website far, far away, I tried to explain this in relation to the conservative economic intuition that if you cut people's taxes, they will work harder:
. . . there are tradeoffs involved in decisions to save or work: every dollar saved is a dollar you can't consume now. And every hour worked is an hour of leisure lost.
When people are making tradeoffs between two goods, economists commonly analyze it from the point of view of two effects: the income effect, which is the effect on your demand for a good of a change in your income, and the substitution effect, which is the effect on your demand for a good in the change of the relative prices of the good and it's substitutes.
Breathe deeply. The bleeding from the ears stops after a little while.
Seriously, it's not that hard to understand. Think of a good -- say Ramen Noodles. The income effect on this good is negative: as your income goes up, your demand for Ramen goes down.
The substitution effect is also easy to understand: if McD's is having a 99 cent Big Mac special, you shelf the cup o' noodles and head out for some mystery meat.
Got it? Great. So let's look at . . . a cut in marginal rates.
. . . the cut in marginal rates effectively increases your income. The income effect on demand for leisure v. work is unambiguous: as they feel richer, people want to work less and play more.
The substitution effect is also easy to comprehend. The tax cut just effectively raised your hourly rate. Leisure is therefore more expensive. Say you were taking home $10 an hour, but now you're getting $12. Every extra hour you decide to play instead of work is costing you more money. The marginal hours, the ones you spent watching shows you don't really like on Saturday afternoon, or arguing with your boyfriend about whose turn it was to get the car washed, might have been worth $10 but just aren't worth $12. So you work more.
. . . arguments about the effect of marginal tax cuts on the economy thus hinge on a debate over whether the income effect or the substitution effect is larger. That debate is still raging, and it's a post for another day. Suffice it to say that Bush's economists think that the substitution effect outweighs the income effect, so that cutting marginal rates will grow the economy.
Conservatives who argue the unambiguous case that people work harder when they're taxed less are overlooking a big, easily intuitive factor: when people have more money, they can afford to take more time off. (They're often overlooking another factor: most people don't have that much discretion about how much they work. This is the factor most often cited by liberals opposing tax cuts, but they too get it wrong, by forgetting that there are lots of marginal cases who do decide how much they work. A new rule or regulation doesn't have to effect every single person in the country--or the relevant market--to have an effect.)
That's very irritating, particularly since it's often exponentially harder to explain situations using multiple intuitions, even if the intuitions themselves are simple, than it is to explain them using only one. Witness the above explanation of income and substitution effects, which I think I've boiled down pretty concisely, versus: "if people get to keep more of their paychecks, they'll work harder." Truth be told, the tendency of conservatives to proclaim that their various deeply beliefs about things like property rights and hard work are not value judgements, but "Scientifically Proven! Using Economics!" sets my teeth on edge too.
But, then, liberals engage in the same sort of irritating single-intuition mongering: "Capital gains tax cuts primarily benefit the rich" . . . because, you know, taxing capital has absolutely no effect on the rest of us. We don't consume goods or services that are produced using capital, do we? After all, capital is icky--I certainly don't want any of that nasty capital in my double-frazzleberry mocha latte. I buy certified capital-free goods!
The economists who signed petitions in 2004 endorsing Kerry were, by and large, liberals who wanted a liberal president because, well, they're liberals. This is very understandable. But then they had to go and dress it up as some sort of super-scientific judgement that they'd made, not because they're liberals, but because they had Special Economic Insight that allowed them to divine a deep, universal truth which pointed to John Kerry as the superior presidential candidate. This was no more impressive than conservatives arguing that the wisdom of George Bush's tax cuts had been handed down from the divine Economist-in-Chief to Art Laffer on a pair of golden tablets. It seems to me that conservatives are more prone to this sort of economic philosphizing than liberals, but it is by no means a unipartisan vice.
More telling, though, is Will Wilkinson's point: just because economics often tells a more complicated story than political sound-bytes would suggest, doesn't mean that simple stories are always wrong. Lots and lots of simple stories are right. Rent control not only destroys the housing stock, but also eventually redistributes available housing from the poor to connected middle-class insiders, often government/non-profit employees, or to wealthy people who can afford "key fees" and the like. Confiscatory taxation produces black markets. High inflation produces high interest rates. When interest rates go up, the prices of bonds and housing go down.
Price ceilings and floors are among the most well documented economic phenomenon out there. The results are intuitively obvious: if you set the price of something below market level, there will soon be none of that thing left, and if you set its price above the market level, you will end up with a glut. These things are utterly predictible. When such regulations are proposed, they are, in fact, predicted. And with depressing regularity, the predictions come true.
In the case of the minimum wage, there is a decent argument that within the relatively small margins at which our nation's various levels of government tinker with it, the effect on employment is too small to be picked out of noisy economic data in which hundreds of variables are constantly changing. There is also the kind of complicated argument that Mr Yglesias is fond of, which is ably outlined by Mr Wilkinson:
The most popular principled explanation for the failure of minimum wage increases to create unemployment is a story about monopsony conditions for low-wage labor, i.e., imperfectly competitive labor market conditions in which there is a single buyer of low-wage labor (or a colluding band of buyers), that is able to set wages that workers have little choice but to accept. A simple model (Econ 101, even!) shows that under such conditions, an increase in the minimum wage, within a certain range, could even increase employment and raise efficiency.
It is not, to be sure, a very good argument: it is very hard to see how thousands of minimum-wage paying establishments, most of them engaged in cutthroat competition with the other mwp establishments, and all of them plagued by high turnover costs, could be engaging in the sort of collusion implied by monopsony. Proponents of this theory, such as Card and Krueger (the authors of the most famous study arguing that the minimum wage doesn't decrease employment), offer a lovely, complicated story about search costs and so forth, but this is patently unconvincing. Unless you are in a very, very economically depressed area, it's hard to see how the search costs in the minimum-wage market could fall more heavily on the workers than on the employers, who have to not only find workers, but also train them. The workers, meanwhile, can easily find out who's hiring just by driving down the main highway, or taking a stroll through the local mall. And they get paid during the difficult training period. A much more parsimonious explanation is that Card & Krueger screwed up . . . and indeed, when you look at payroll records, rather than a telephone survey, you get the result predicted by our simplistic Econ 101 model: employment went down.
That's not to say that there aren't any economists who think that the minimum wage is a good thing; there are. But as Mr Wilkinson points out, that's not the consensus view. And if you're a liberal who likes to defer to the consensus on things like supply side tax cuts, you cannot then turn around and declare that your other pet policies are okay because some economist, somewhere believes that it's a good idea. I mean, if you've ever been to the annual meeting of the American Economics Association, you'll know that there is nothing so nutty that some economist, somewhere, can't be found to endorse it.
Nor, when you propose to violate the consensus, can you
escape your obligation to explain why you think this will work by grandly
proclaiming that "Economics is complicated". I mean, physics is complicated--so
complicated that I nevere actually took any--but as a general rule v =
v0 + at just the same.
Posted by Jane Galt at June 19, 2006 12:40 PM | TrackBack
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Comments
But the overwhelming economic consensus is that the employment impact of small changes in the minimum wage have such a small change in the economy that it can not be found in the data.
It is a minority view that a raise in the minimum wage produces a significantly large enough drop in employment that minimum wage employees are worse off. Remember, for the minimum wage employee to be worse off the drop in employment must be larger then the gain in wages.
What I see from opponents of miniminum wages is claims
that it causes a drop in employment and therefore the minimum wage employees
must be worse off-- but a drop in employment does not necessarily make
minimum wage employees worse off.
Posted by: spencer on June 19, 2006 02:40 PM
The Sin of Wages
The real reason to oppose the minimum wage.
By Steven E. Landsburg
Posted Friday, July 9, 2004, at 9:19 AM ET
Illustration by Robert Neubecker
John Kerry wants to raise the minimum wage, and President
Bush, at least in principle, is on board—provided, says the president's
spokesman, that it can be done without placing unreasonable costs on "job
creators."
The president is trying to cast doubt on Kerry's proposal by alluding to the old canard that minimum wages cause unemployment and therefore hurt the very people they're supposed to help. Obviously that's occasionally true. If you contribute $6 an hour to your employer's bottom line, and if he's forced to pay you $7 an hour, you'll soon find yourself out on the street.
But so what? Sure, you've lost your job. But don't forget, this was a minimum-wage job in the first place. Losing a lousy job might not be a whole lot worse than keeping it. Meanwhile, lots of minimum-wage workers keep their jobs and are presumably grateful to the politicians who raised their wages.
Continue Article
In fact, the power of the minimum wage to kill jobs has been greatly overestimated. Nowadays, most labor economists will tell you that that minimum wages have at most a tiny impact on employment.
Twenty years ago, they'd have told you otherwise. Back then, dozens of published studies concluded that minimum wages had put a lot of people (especially teenagers, blacks, and women) out of work. As the studies continued to pile up, you might think we'd have grown more confident about their common conclusion. Instead, the opposite happened. Even though the studies were all in agreement, they managed to undercut each other.
Here's how: Ordinarily, studies with large sample sizes should be more convincing than studies with small sample sizes. Following the fates of 10,000 workers should tell you more than following the fates of 1,000 workers. But with the minimum-wage studies, that wasn't happening. According to the standard tests of statistical significance, the results of the large-scale studies were, by and large, neither more nor less significant than the results of the small-scale studies. That's screwy. Screwy enough to suggest that the studies being published couldn't possibly be a representative sample of the studies being conducted.
Here's why that matters: Even if minimum wages don't affect employment at all, about five out of every 100 studies will, for unavoidable statistical reasons, appear to show a significant effect. If you could read all 100 studies, that wouldn't be a problem—95 conclude the minimum wage is pretty harmless as far as employment goes, five conclude it's a big job-killer, you realize the latter five are spurious, and you draw the appropriate conclusion. But if the 95 studies that found no effect were deemed uninteresting and never got published, then all you'd see were the spurious five. And then the next year, another five, and the next year another five.
Even when the bulk of all research says one thing, the bulk of all published research can tell a very different and very misleading story.
How do we know what was in all the unpublished research about the minimum wage? Of course we don't know for sure, but here's what we do know: First, the big published studies were no more statistically significant than the small ones. Second, this shouldn't happen if the published results fairly represent all the results. Third, that means there must be some important difference between the published and the unpublished work. And fourth, that means we should be very skeptical of what we see in the published papers.
Now that we've re-evaluated the evidence with all this in mind, here's what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers.
In fact, the minimum wage is very good for unskilled workers. It transfers income to them. And therein lies the right argument against the minimum wage.
Ordinarily, when we decide to transfer income to some group or another—whether it be the working poor, the unemployed, the victims of a flood, or the stockholders of American Airlines—we pay for the transfer out of general tax revenue. That has two advantages: It spreads the burden across all taxpayers, and it makes politicians accountable for their actions. It's easy to look up exactly how much the government gave American, and it's easy to look up exactly which senators voted for it.
By contrast, the minimum wage places the entire burden on one small group: the employers of low-wage workers and, to some extent, their customers. Suppose you're a small entrepreneur with, say, 10 full-time minimum-wage workers. Then a 50 cent increase in the minimum wage is going to cost you about $10,000 a year. That's no different from a $10,000 tax increase. But the politicians who imposed the burden get to claim they never raised anybody's taxes.
If you want to transfer income to the working poor, there are fairer and more honest ways to do it. The Earned Income Tax Credit, for example, accomplishes pretty much the same goals as the minimum wage but without concentrating the burden on a tiny minority. For that matter, the EITC also does a better job of helping the people you'd really want to help, as opposed to, say, middle-class teenagers working summer jobs. It's pretty hard to argue that a minimum-wage increase beats an EITC increase by any criterion.
The minimum wage is nothing but a huge off-the-books tax paid by a small group of people, with all the proceeds paid out as the equivalent of welfare to a different small group of people. If a tax-and-spend program that arbitrary were spelled out explicitly, voters would recoil. How unfortunate that when it is disguised as a minimum wage, not even our Republican president can manage to muster a principled objection.
Steven E. Landsburg is the author, most recently, of Fair
Play: What Your Child Can Teach You About Economics, Values, and the Meaning
of Life. You can e-mail him at armchair@troi.cc.rochester.edu.
Illustration by Robert Neubecker. Photograph of the waitress
on Slate's home page from Corbis.
http://www.cato-at-liberty.org/2006/06/16/have-you-no-respect-for-the-law-of-demand/
The law of demand is a bitter pill for defenders of labor market price controls. Noted economic theorist Matt Yglesias has grown weary of appeals to “Economics 101? in the minimum wage debate. “After all,” Yglesias writes, “there’s a reason they offer more economics classes and you don’t get your degree after taking just one.” His American Prospect colleague Ezra Klein says of the law of demand that “It’s a good guideline, but it’s got no end of exceptions.” The minimum wage, of course, is one those exceptions.
They’re both right in general, if not about the minimum wage in particular. There are more economics classes, and they do teach exceptions. However, let’s not imagine that there is some advanced economic class in which you learn that the law of demand is false. (Well, no doubt there is somewhere. There is contradiction-friendly “paraconsistent logic,” after all.)
To use Yglesias’s misapplied example, Econ 101 principles do not stand to higher-level economics in the way that Newtonian physics stands to relativity and quantum machanics: as a useful, but literally false, simplification of reality. Economic laws are not strict laws of nature, codifying ineluctable relationships of necessity, and they do not pretend to be. So counterexamples are not ipso facto falsifying, and the law of demand is never replaced with a better, more empirically adequate, law. The law of demand is very, very empirically adequate as it is: It captures a ubiquitous regularity of human behavior that is abundantly comfirmed every moment of every day, and without which there would be no science of economics.
But it is just a regularity, like people flinching involuntarily when they hear a sudden, loud sound. It doesn’t have to happen, but it’s pretty surprising when it doesn’t. (”Is he deaf? Paralyzed?”) And when it doesn’t, there’s need for some special explanation.
Economic laws, like the principles of all the “special sciences,” are ceteris paribus generalizations: generalizations that are true other things being equal. Econ 101 lays out the basic laws and explains what follows from them ceteris paribus. Later, students learn about cases when other things are not equal — when there are exceptions to the generalization. So, it is always possible to argue that the law of demand does not apply in this or that kind of circumstance. A certain necessary auxiliary condition, which is almost always present, may be absent in a certain kind of case, causing the regularity to break down. But then, in order to predict an exception to the regular pattern, you need to cite the absence of the relevant auxiliary condition (e.g., “He can’t hear; that’s why he didn’t flinch”). I hope Yglesias is not also tired of Philosophy of Science 101.
Now, let’s note two things. First, you will be utterly hopeless in reliably identifying exceptions to a ceteris paribus law when you never grasped its logic in the first place. Exhortations to mind your Econ 101 generally aren’t exhortations to stop being so darn advanced. They are exhortations to actually comprehend the principles upon which advancement depends. And, second, the fact that a law is ceteris paribus does not mean you can deny its applicability whenever you want to. Political convenience tends not to be an appropriate auxiliary condition. You can’t wave your hands and just hope that a good argument is in some upper-level textbook you haven’t read.
If you want to say that a wage floor is not going to throw some low-wage workers out of their jobs (or prevent them from getting jobs), you’ve got to say, in a principled way, why not. The burden is on those who predict an exception to an immensely reliable regularity. The most popular principled explanation for the failure of minimum wage increases to create unemployment is a story about monopsony conditions for low-wage labor, i.e., imperfectly competitive labor market conditions in which there is a single buyer of low-wage labor (or a colluding band of buyers), that is able to set wages that workers have little choice but to accept. A simple model (Econ 101, even!) shows that under such conditions, an increase in the minimum wage, within a certain range, could even increase employment and raise efficiency.
Card and Krueger’s famed statistical work on minimum wage, which wage-increase advocates wave around as if it were proof of the Resurrection, tells a kind of very complex monopsony story. They recognize, unlike many of the people who abuse their findings, that their statistical results on minimum wage hikes, in isolation from further theory, can at best establish that other things were not equal at a certain place and time (e.g., fast food restaurants in Pennsylvania and New Jersy in the mid-1990s). This provides no basis for predicting the effects of future minimum wage increases unless it is accompanied by a principled theory of what general features of the situation were not equal.
Their theory, in a nutshell, is: “Turnover costs, imperfect information, search frictions, commuting costs, and inertia generate short-run, and possibly long-run, monopsony power for individual firms.” This is not exactly a simple condition, likely to apply uniformly across a huge, diverse country. That an increased minimum wage might not cause unemployment in some places where certain conditions apply does not provide a strong argument for raising it everywhere. And the monopsony story, as far as I understand it, establishes only that there is a range up to which the wage floor could be raised without creating a disemployment effect. In order to use Card and Krueger to support an increase to $7, you would need to provide evidence that the federal minimum is not already at the top of that range, and that $7 will not exceed it. Maybe somebody has done this, but I haven’t seen it.
Card and Krueger’s empirical work would constitute some evidence in favor of their monopsony hypothesis. But how well does the evidence support the theory? For a taste just from the Cato archives, try Douglas K. Adie and Lowell Gallaway’s review of C&K’s book Myth and Measurement in the Cato Journal, or “Sense and Nonsense on the Minimum Wage ” by Donald Deere, Kevin Murphy, and Finis Welch, in Regulation Magazine. Yglesias cites a petition of economists in favor of raising the minimum wage. Probably more informative is this serious 2002 NBER research summary by UC Irvine economist David Neumark, in which he reports that “although there may be some outlying perspectives, economists’ views of the effects of the minimum wage are centered in the range of the earlier [than Card & Krueger] estimates, and many of the more-recent estimates, of the [significantly positive] disemployment effects of minimum wages.” That is, C & K’s position is an “outlying perspective.”
But consensus tennis is a very silly game. Better is Neumark’s analysis of the state of play (in 2002) regarding the C & K studies:
More recent studies have used panel data covering multiple states over time, exploiting differences across states in minimum wages. This approach permits researchers to abstract from aggregate economic changes that may coincide with changes in the national minimum wage and hence make difficult untangling the effects of minimum wages in aggregate time-series data.
Evidence from these “second generation” studies has spurred considerable controversy regarding whether or not minimum wages reduce employment of low-skilled workers, with some researchers arguing that the predictions of the standard model are wrong, and that minimum wages do not reduce and may even increase employment. The most prominent and often-cited such study uses data collected from a telephone survey of managers or assistant managers in fast-food restaurants in New Jersey and Pennsylvania before and after a minimum wage increase in New Jersey.
Not only do these data fail to indicate a relative employment decline in New Jersey, but rather they show that employment rose sharply there (with positive employment elasticities in the range of 0.7).
On the other hand, much recent evidence using similar sorts of data tends to confirm the prediction that minimum wages reduce employment of low-skilled workers; so does earlier work with a much longer panel of states. Moreover, an approach to estimating the employment effects of minimum wages that focuses more explicitly on whether minimum wages are high relative to an equilibrium wage for affected workers reveals two things: first, disemployment effects appear when minimum wages are more likely to be binding (because the equilibrium wage absent the minimum is low); second, some of the small or zero estimated disemployment effects in other studies appear to be from regions or periods in which minimum wages were much less likely to have been binding. Finally, a re-examination of the New Jersey-Pennsylvania study that I conducted, based on payroll records collected from fast-food establishments, finds that the original telephone survey data were plagued by severe measurement error, and that the payroll data generally point to negative employment elasticities.
That is to say, C & K’s findings have been challenged.
Meanwhile, studies continue to appear emphasizing the hazards of minimum wage laws. I find Neumark’s recent paper with Olena Nizalova especially unsettling. They find evidence that minimum wage laws discourage teenagers and young adults from acquiring the human capital they need in order to get better jobs and higher wages later in life. That is, minimum wage laws work to ensure that those who already have the fewest opportunities to develop their capacities, have even fewer still. They say this baleful effect is strongest for young blacks.
Progressives find grand, symbolic political importance in the minimum wage. But isn’t their most important concern the welfare and prospects of the poor?
posted by Will Wilkinson on 06.16.06 @ 12:30 pm Email
Filed Under: Welfare & Workforce
[…] http://www.janegalt.net/blog/archives/005713.html http://www.cato-at-liberty.org/2006/06/16/have-you-no-respect-for-the-law-of-demand/ http://www.nber.org/papers/w10656 […]
By peterskim.org blog » Blog Archive » Making real increases in the value of low-income workers on 06.19.06 12:39 pm | Permalink
Opposite Day: Tyrone on the minimum wage
As you might expect, the rather surly Tyrone prefers to write under the fold...
"Minimum wage, bah humbug. It is easy to defend. Tyrone snorts at you.
First let us clear out some garbage. The minimum wage should not be $50 an hour, and simply citing this possibility does not serve as an effective reductio. And yes racist South African labor unions supported minimum wages, but wouldn't you expect them, vile as they may have been, to support higher wages in any case?
We know the empirical evidence on minimum wages is mixed. I am familiar with the Card-Krueger smackdowns but at the end of the day you have to work hard to get a big effect on employment. Most importantly, all of these studies miss the longer-run effects that make a legally binding minimum wage such a good idea.
Don't obsess over static neoclassical economics, where you start with a firm, a competitive market, and a set of marginal products already in place. Think dynamic and look at the longer-run. If you ban jobs beneath some hourly wage, you will end up with more jobs above that wage. Ex ante, companies can set up their production to mesh with high-wage rather than low-wage jobs. Surely we should prefer an economy with higher marginal products, higher wages, and higher median income. Yes this redistributes a bit of wealth from capital but what an efficient way to do so. And we all know that long-run dynamic gains tend to swamp one-time static losses.
Don't expect to pick up these effects in any study with a short time horizon.
Furthermore there is more slack in the system than many economic models would indicate. As a young'un, I worked in a supermarket. When they raised the legal minimum wage, they raised my wage as well. I was happy. No one fired me.
Minimum wages probably lower the net amount of government intervention in an economy. Lower minimum wages would mean higher welfare payments to make up the difference. Ever heard of EITC? In reality, minimum wages and EITC work together to keep the poor at decent standards of living. More importantly, they keep poor workers in the private sector rather than letting them become wards of the state. Try living on the minimum wage (much less beneath it), and without the safety net of your parents, if you don't get my point.
Perhaps you think the minimum wage is an excessively blunt policy instrument, given that many near-minimum jobs are held by upper middle class teenagers. Fair enough, but this also means that the minimum wage doesn't put many of those people out of work. We can go back to focusing on the net effects on the poor.
Tyler, what is really your problem with the minimum wage? Free market economists love to bash it because they can posture as friends of the poor. They can pretend that basic economics has great relevance. They can claim to know something useful, rather than facing the fact that opposition to big government really means opposition to massive income transfers. Since the American public is not willing to go this route, free market economists have to focus their yapping on the minimum wage and the (actually quite small) benefits of free trade.
Tyler, don't you agree? Tyrone signs off."
There he goes again. As a child, he would never even sit straight at the dinner table. Readers, if you now wish to refresh yourself, try this, or perhaps even this. And maybe someone over at CrookedTimber is up for Opposite Day, but on some other topic...?
Posted by Tyler Cowen on March 10, 2006 at 07:14 AM in
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Comments
this is wonderful
Posted by: Luis Enrique at Mar 10, 2006 7:42:51 AM
Tylerone-
That must have been very hard for you. I picture you squirming and turning red through the entire post.
Posted by: Rich Berger at Mar 10, 2006 9:29:59 AM
Rich
C'mon - Tyrone is just Tyler writing with a conscience. Too close to home for Alex. A real proponent would have made more than an emotinal case anyway and had data to support the claim that "jobs are not lost."
Posted by: Martin at Mar 10, 2006 10:22:15 AM
I would really like to hear what Tyrone has to say about the stultifying social effects of private ownership of capital. C'mon, what does he think about the ill effects of commodification of labor? Inquiring minds want to know!
Posted by: neil at Mar 10, 2006 10:57:47 AM
If the intention is to portray a hypothetical Tyrone of
roughly Tyler's level of ability, this isn't even close. It's not a parody,
but it's not a serious attempt.
Rather than a Tyrone who dismissed "static neoclassical
economics" I'd like one who attempts to convince a reasonably rational
observer with a generally moderate but significant conviction in the utility
of neoclassical economics but who also cares about alleviating suffering
more than about enabling opportunity and efficiency and who is only 95th
percentile good at seeing the big picture rather than 99.9th percentile.
Posted by: michael vassar at Mar 10, 2006 11:38:12 AM
"If you ban jobs beneath some hourly wage, you will end up with more jobs above that wage."
Wrong assumption, meaning that every following proposition is wrong, too.
Posted by: Pavel at Mar 10, 2006 11:42:44 AM
Tyrone: Free market economists love to bash it because they can posture as friends of the poor. They can pretend that basic economics has great relevance.
Right on, bro!
Tyrone: They can claim to know something useful, rather than facing the fact that opposition to big government really means opposition to massive income transfers.
Whoa, Tyrone! It sounds like Tyler snuck in here and messed you up. The real Tyrone would say "rather than facing the fact that opposition to big government equals cheerleading for big business." As you well know, Tyrone, big business is just as big a threat to Americans' well-being as big government!
Later, dude.
Posted by: DF at Mar 10, 2006 11:52:13 AM
Looking for the subtext? "Tyrone" is number 8 on Levitt's list of the twenty "Blackest", most distinctively African American, boy's names. I imagine Tyler just missed qualifying for the top twenty whitest. Tyrone is a great choice for a villainous alter-ego.
http://www.pfff.us/books/Freakonomics%20-%20Steven%20Levitt.pdf
Plus, I thought Tyrone's argument was pretty clever.
Parke
Posted by: Parke at Mar 10, 2006 11:56:11 AM
Interesting idea -- perhaps a two-part policy "taxing" capital by enforcing a relatively high minumum wage, but then compensating the businesses to bring them back up to (or slightly above) their pre-min-wage profits could be a good policy. Think of it like a compensated price change for labor. It's certainly more interesting than most of the min-wage arguments...
If you believe in dynamic scoring, such a compound tax/subsidy policy would be an intertemporal Kaldor-Hicks improvement; the amount earned by the gov't would swamp the required subsidy to the capital owners.
There is some published stuff in the insurance literature on this type of tax/subsidy policy (cf. Crocker and Snow, SEJ 1985) and a working paper examining a related Pigou tax idea by two other guys.
Of course, in real min-wage debates, you'll never hear the prospect of an efficiency-enhancing capital-owners subsidy being floated. It's hard to argue (even on Opposite Day) that there is an ongoing subtext of redistribution from capital owners to wage earners.
Posted by: ModalHubby at Mar 10, 2006 12:54:19 PM
In France, where the minimum is fairly high, but not all that high, but where payroll taxes are very high and were there is "little" flexibility (although that is debatable), total unemployment is high (about 10%) and much more so (23%) among the young. This has not created more "above minimum wage jobs" because companies have invested heavily in automation technology instead of labor... According to the OECD, if one counts only people who actually work, French workers are the most productive workers in the world.
Labor's only true friend is bargaining power, and that can only come in fast growing economies...
Posted by: Philippe at Mar 10, 2006 12:58:02 PM
I agree that it's a great post. I believe he put forth the arguments the other side would put forth. Not necessarily the best arguments logically but very persuasive politically. I think France is a bad counter example. I have the impression that France has a vast underground economy. I think that always happens when over regulation happens. Prohibitions are great examples.
Posted by: Huggy at Mar 10, 2006 1:10:58 PM
I've heard similar arguments before, and I suspect that Tyrone/Tyler could come up with studies to buttress all of the specific empirical claims made.
The basic argument, that by banning very-low-productivity labor, the government encourages automation and capital investment, seems fairly reasonable. My main argument would be that by distoriting the economy by encouraging more capital investment than would otherwise occur, there are resulting other dislocations in the economy, which are not well-known. I'd suspect that the resultant dislocation is to increase unemployment, but that the effect has been ongoing long enough that it's hard to spot it. An Austrian might argue that by encouraging over-investment in capital, similar to money inflation, the minimum wage contributes to eventual crashes as the excess investment in capital is liquidated.
Posted by: Anthony at Mar 10, 2006 1:58:07 PM
Tyrone is right that low wages make more for more government interventions in the economy, but the way to deal with that problem is not the minimum wage, but to enforce the laws against illegal immigration. Without the vast "reserve army of the unemployed" entering the country each year, the normal workings of supply and demand would drive up wages for unskilled work to levels more acceptable to the American public.
You can have libertarianism in one country or you can have a globalized labor market, but you sure won't get both. Controlling the borders is the simple solution.
Posted by: Steve Sailer at Mar 10, 2006 2:58:32 PM
I agree with Steve Sailer that reducing immigration (both legal and illegal, but especially illegal) would reduce the supply of unskilled labor, and the result would be higher market wages.
Funny how the same libertarian economists who rail against the minimum wage because it allegedly causes unemployment are completely apathetic to the unemployment caused by unfettered immigration.
Furthermore, Tyrone ignores the issue that the market wage is less than the true value of labor on account of the fact that employers have unequal bargaining power. So a minimum wage higher than the market rate actually creates a MORE EFFICIENT allocation of resources.
Posted by: Half Sigma at Mar 10, 2006 5:16:35 PM
Shouldn't libertarians be advocating for unrestrained immigration, actually? Libertarians aren't defined by an interest in minimizing unemployment.
Half Sigma, doesn't a lot of the minimum wage debate depend on whether or not the minimum wage is above the true value of labor?
Posted by: Barbar at Mar 10, 2006 5:22:54 PM
I think it is clear that minimum wages are beneficial to poor workers. Is there anybody who is legally allowed to work in this country, is not severely mentally unstable, is not severely physically disabled, and is unable to find minimum wage employment? Yet, since many people who fit in this category earn exactly the minimum wage, we know that the minimum wage impacts wages favorably and given the prevalence of minimum wage jobs available it does not seem to impact the unemployment rate.
One of the main arguments against the minimum wage seems to be that the EITC causes less distortion. This may be true, but I'm guessing that many of those against the minimum wage are against the EITC as well. I think the minimum wage has to be looked at all else equal, not whether an alternative hypotehtical policy increasing EITC would be better.
Posted by: GamblingEconomist at Mar 10, 2006 6:07:07 PM
"Furthermore, Tyrone ignores the issue that the market wage is less than the true value of labor on account of the fact that employers have unequal bargaining power."
I'm curious about this "fact". How would one measure this bargaining power, in order to verify this fact?
Posted by: Don at Mar 10, 2006 6:08:40 PM
Tyrone states, "Perhaps you think the minimum wage is an excessively blunt policy instrument, given that many near-minimum jobs are held by upper middle class teenagers. Fair enough" but is incorrect.
Bureau of Labor Statistics show that nearly half (982,000
out of 2,003,000) of hourly wage workers earning at or below minimum wage
are 25 and over. Another large chunk are 20-24.
NYT January 15, 2006
What Is a Living Wage?
By JON GERTNER
If It Happened in Baltimore, Maybe It Can Happen Anywhere
For a few weeks in the summer of 1995, Jen Kern spent her days at a table in the Library of Congress in Washington, poring over the fine print of state constitutions from around the country. This was, at the time, a somewhat-eccentric strategy to fight poverty in America. Kern was not a high-powered lawyer or politician; she was 25 and held a low-paying, policy-related job at Acorn, the national community organization. Yet to understand why living-wage campaigns matter - where they began, what they mean and why they inspire such passion and hope - it helps to consider what Kern was doing years ago in the library, reading obscure legislation from states like Missouri and New Mexico.
A few months earlier, she and her colleagues at Acorn witnessed an energetic grass-roots campaign in Baltimore, led by a coalition of church groups and labor unions. Workers in some of Baltimore's homeless shelters and soup kitchens had noticed something new and troubling about many of the visitors coming in for meals and shelter: they happened to have full-time jobs. In response, local religious leaders successfully persuaded the City Council to raise the base pay for city contract workers to $6.10 an hour from $4.25, the federal minimum at the time. The Baltimore campaign was ostensibly about money. But to those who thought about it more deeply, it was about the force of particular moral propositions: first, that work should be rewarded, and second, that no one who works full time should have to live in poverty.
So Kern and another colleague were dispatched to find out if what happened in Baltimore could be tried - and expanded - elsewhere. As she plowed through documents, Kern was unsure whether to look for a particular law or the absence of one. Really, what she was trying to do was compile a list of places in the U.S. where citizens or officials could legally mount campaigns to raise the minimum wage above the federal standard. In other words, she needed to know if anything stood in the way, like a state regulation or a court decision. What she discovered was that in many states a law more ambitious than Baltimore's - one that didn't apply to only city contractors but to all local businesses - seemed permissible.
Whether a wage campaign was winnable turned out to be a more complicated matter. In the late 90's, Kern helped Acorn in a series of attempts to raise the minimum wage in Denver and Houston, as well as the state of Missouri. They all failed. "It wasn't even close," she says. In the past few years, though, as the federal minimum wage has remained fixed at $5.15 and the cost of living (specifically housing) has risen drastically in many regions, similar campaigns have produced so many victories (currently, 134) that Kern speaks collectively of "a widespread living-wage movement."
Santa Fe has been one of the movement's crowning achievements. This month the city's minimum wage rose to $9.50 an hour, the highest rate in the United States. But other recent victories include San Francisco in 2003 and Nevada in 2004. And if a pending bill in Chicago is any indication, the battles over wage laws will soon evolve into campaigns to force large, private-sector businesses like Wal-Mart to provide not only higher wages but also more money for employee health care.
It is a common sentiment that economic fairness - or economic justice, as living-wage advocates phrase it - should, or must, come in a sweeping and righteous gesture from the top. From Washington, that is. But most wage campaigns arise from the bottom, from residents and low-level officials and from cities and states - from everywhere except the federal government. "I think what the living-wage movement has done in the past 11 years is incredible," David Neumark, a frequent critic of the phenomenon who is a senior fellow at the Public Policy Institute of California, told me recently. "How many other issues are there where progressives have been this successful? I can't think of one."
The immediate goal for living-wage strategists is to put initiatives on the ballots in several swing states this year. If their reckoning is correct, the laws should effect a financial gain for low-income workers and boost turnout for candidates who campaign for higher wages. In Florida, a ballot initiative to raise the state's minimum wage by a dollar, to $6.15, won 71 percent of the vote in 2004, a blowout that surprised even people like Kern, who spent several weeks in Miami working on the measure. "We would like it to become a fact of political life," Kern says, "where every year the other side has to contend with a minimum-wage law in some state." Though victories like the one in Florida may have done little to help the Kerry-Edwards ticket - George Bush won 52 percent of the state's vote - Kern and some in the Democratic establishment have come to believe that the left, after years of electoral frustration, has finally found its ultimate moral-values issue. "This is what moves people to the polls now," Kern insists. "This is our gay marriage." Already, during the past few months, a coalition of grass-roots and labor organizations has begun gathering hundreds of thousands of signatures to ensure that proposed laws to increase wages are voted on in November. The first targets, Kern told me, will be Arizona, Colorado, Michigan and Ohio. Next in line, either this year or soon after, are Montana, Oklahoma and Arkansas, the home of Wal-Mart.
Does America Care About the Gap Between Rich and Poor?
I first met Kern on a sunny morning in late September in Albuquerque, a city of 470,000 that made her list when she was working in the Library of Congress 10 years ago. She was now, at age 35, campaigning for a ballot initiative that would raise the minimum wage in the city to $7.50 an hour from $5.15. There was no face for the placards, no charismatic presence to rally the troops at midnight or to shake hands at dawn outside 7-Eleven. Instead, there was a number, $7.50, a troop of campaign workers to canvass the neighborhoods and an argument: that many low-wage workers were being paid poverty wages. That a full-time job at the federal minimum rate added up to $10,712 a year. That local businesses could afford the pay raise. And that it was up to the voters to restore balance.
One of the more intriguing questions about campaigns like the one in Albuquerque, and those planned for swing states next fall, is whether they reflect a profound sense of public alarm about the divergence between rich and poor in this country. Certainly most Americans do not support higher wages out of immediate self-interest. Probably only around 3 percent of those in the work force are actually paid $5.15 or less an hour; most low-wage workers, including Wal-Mart employees, who generally start at between $6.50 and $7.50 an hour, earn more. Increasing the minimum wage to $7.25 an hour (as proposed by Senate Democrats) would directly affect the wages of only about 7 percent of the work force. Nevertheless, pollsters have discovered that a hypothetical state ballot measure typically generates support of around 70 percent. A recent poll by the Pew Research Center actually put the support for raising the national minimum wage to $6.45 at 86 percent. Rick Berman, a lobbyist who started the Employment Policies Institute and who is a longtime foe of living-wage laws, agrees that "the natural tendency is for people to support these things. They believe it's a free lunch." On the other hand, the electorate's reasons for crossing party lines to endorse the measures may be due to the simple fact that at least 60 percent of Americans have at one time or another been paid the minimum wage. Voters may just know precisely what they're voting for and why.
In the mid-1990's, the last time Congress raised the minimum wage, the Clinton White House was reluctant to start a war over the federal rate, according to Robert Reich, the former labor secretary. For an administration bent on policy innovation, that would have seemed "old" Democrat. "Then we did some polling and discovered that the public is overwhelmingly in favor," Reich told me recently. "At which point the White House gave the green light to Democrats in Congress." Reich, now a professor at the University of California, Berkeley, happens to view the minimum wage as a somewhat inefficient tool for alleviating poverty (compared with earned income tax credits, say). But he acknowledges that it has a powerful moral and political impact, in states red as well as blue, and especially now, in an era when workers see the social contract with their employers vanishing. "They see neighbors and friends being fired for no reason by profitable companies, executives making off like bandits while thousands of their own workers are being laid off," Reich says. "They see health insurance drying up, employer pensions shrinking. Promises to retirees of health benefits are simply thrown overboard. The whole system has aspects that seem grossly immoral to average working people." As Reich points out, whatever the minimum wage's limitations may be as a policy instrument, as an idea, "it demarcates our concept of decency with regard to work."
The idea, Reich points out, isn't new, even if the recent fervor for it is. Massachusetts enacted a state minimum wage in 1912, several decades before the federal minimum wage of 25 cents an hour was adopted in 1938. And most of the wage ordinances of the past decade specifically trace their origins back to Baltimore in 1995. After that moment, in fact, the phrase "living wage" soon caught on - or, you might say, returned. It was a popular workers' refrain in the late 19th century and was the title of a 1906 book by John Ryan, a Roman Catholic priest. In the late 1990's, a loose national network of advocates sprang up, incorporating organized labor, grass-roots groups like Acorn and the Industrial Areas Foundation and, more recently, the National Council of Churches. Legal advice often came out of the Brennan Center for Justice at New York University's law school, where a lawyer named Paul Sonn helped write wage ordinances and ballot measures for various states and cities.
By dint of its piecemeal, localized progress, the modern living-wage movement has grown without fanfare; one reason is that until recently, most of the past decade's wage laws, like Baltimore's, have been narrow in scope and modest in effect. Strictly speaking, a "living wage" law has typically required that any company receiving city contracts, and thus taxpayers' money, must pay its workers a wage far above the federal minimum, usually between $9 and $11 an hour. These regulations often apply to employees at companies to which municipalities have outsourced tasks like garbage collection, security services and home health care. Low-wage workers in the private sector - in restaurants, hotels, retail stores or the like - have been unaffected. Their pay stays the same.
In Santa Fe, the City Council passed a similar kind of wage law in 2002, raising the hourly pay for city employees and contractors. Some officials in Santa Fe, however, had decided from the start that its wage rules should ultimately be different - that the small city (population 66,000) could even serve as a test example for the rest of the U.S. Early on, several city councilors told me, they anticipated that Santa Fe - with a high cost of living, a large community of low-paid immigrants and a liberal City Council - would eventually extend its wage floor to all local businesses, private as well as public, so that every worker in the city, no matter the industry, would make more than $5.15. The initial numbers that the councilors considered as they began to strategize seemed stratospheric: a living wage that began at $10 or $12 or even $14.50 an hour. For some laborers, that could double their incomes. Nothing remotely like it existed in any other city in the country.
The Economists Are Surprised
In the years before the enactment of the federal minimum wage in the late 1930's, the country's post-Depression economy was so weak that the notion that government should leave private business to its own devices was effectively marginalized. During the past few decades, though, in the wake of a fairly robust economy, debates on raising the minimum wage have consistently resulted in a rhetorical caterwaul. While the arguments have usually been between those on the labor side, who think that the minimum wage should be raised substantially, and those on the employer side, who oppose any increase, a smaller but vocal contingent has claimed, more broadly and more philosophically, that it is in the best interest of both business and labor to let the market set wages, not the politicians. And certainly not the voters.
This last position was long underpinned by the academic consensus that a rise in the minimum wage hurts employment by interfering with the flow of supply and demand. In simplest terms, most economists accepted that when government forces businesses to pay higher wages, businesses, in turn, hire fewer employees. It is a powerful argument against the minimum wage, since it suggests that private businesses as a group, along with teenagers and low-wage employees, will be penalized by a mandatory raise.
The tenor of this debate began to change in the mid-1990's following some work done by two Princeton economists, David Card (now at the University of California, Berkeley) and Alan B. Krueger. In 1992, New Jersey increased the state minimum wage to $5.05 an hour (applicable to both the public and the private sectors), which gave the two young professors an opportunity to study the comparative effects of that raise on fast-food restaurants and low-wage employment in New Jersey and Pennsylvania, where the minimum wage remained at the federal level of $4.25 an hour. Card and Krueger agreed that the hypothesis that a rise in wages would destroy jobs was "one of the clearest and most widely appreciated in the field of economics." Both told me they believed, at the start, that their work would reinforce that hypothesis. But in 1995, and again in 2000, the two academics effectively shredded the conventional wisdom. Their data demonstrated that a modest increase in wages did not appear to cause any significant harm to employment; in some cases, a rise in the minimum wage even resulted in a slight increase in employment.
Card and Krueger's conclusions have not necessarily made philosophical converts of Congress or the current administration. Attempts to raise the federal minimum wage - led by Senators Edward M. Kennedy on the left and Rick Santorum on the right - have made little headway over the past few years. And the White House went so far as to temporarily suspend the obligation of businesses with U.S. government construction contracts to pay so-called prevailing wages (that is, whatever is paid to a majority of workers in an industry in a particular area) during the rebuilding after Hurricane Katrina. David Card, who seems nothing short of disgusted by the ideological nature of the debates over the wage issue, says he feels that opinions on the minimum wage are so politically entrenched that even the most scientific studies can't change anyone's mind. "People think we're biased, partisan," he says. And he's probably right. While Card has never advocated for or against raising the minimum wage, many who oppose wage laws have made exactly those assertions about his research. Nonetheless, in Krueger's view, he and Card changed the debate. "I'm willing to declare a partial victory," Krueger told me. Some recent surveys of top academics show that a significant majority now agrees that a modest raise in the minimum wage does little to harm employment, he points out.
If nothing else, Card and Krueger's findings have provided persuasive data, and a degree of legitimacy, to those who maintain that raising the minimum wage, whether at the city, state or federal level, need not be toxic. The Economic Policy Institute, which endorses wage regulations, has succeeded recently in getting hundreds of respected economists - excluding Card and Krueger, however, who choose to remain outside the debate - to support raising the federal minimum to $7 an hour. That probably would have been impossible as recently as five years ago. Even Wal-Mart's president and C.E.O., Lee Scott, recently spoke out in favor of raising the minimum wage. It wasn't altruism or economic theory or even public relations that motivated him, but a matter of bottom-line practicality. "Our current average hourly wage for workers is $9.68," Lee Culpepper, a Wal-Mart spokesman, told me. "So I would think raising the wage would have minimal impact on our workers. But we think it would have a beneficial effect on our customers."
What a Higher Minimum Wage Can Mean to Those Making It
One evening in Santa Fe, I sat down with some of the people Wal-Mart is worried about. Like Louis Alvarez, a 58-year-old cafeteria worker in the Santa Fe schools who for many years helped prepare daily meals for 700 children. For that he was paid $6.85 an hour and brought home $203 every two weeks. He had no disposable income - indeed, he wasn't sure what I meant by disposable income; he barely had money for rent. Statistically speaking, he was far below the poverty line, which for a family of two is about $12,800 a year. For Alvarez, an increase in the minimum wage meant he would be able to afford to go to flea markets, he said.
I also met with Ashley Gutierrez, 20, and Adelina Reyes, 19, who have low-paying customer-service and restaurant jobs. By most estimates, 35 percent of those who make less than $7.25 an hour in the U.S. are teenagers. A few months ago, Reyes told me, she was spending 86 hours every two weeks at two minimum-wage jobs to pay for her car and for college. Gutierrez, also in school, was working 20 hours a week at Blockbuster video for the minimum wage. People like Alvarez and Gutierrez and Reyes were the ones who spurred two city councilors in Santa Fe, Frank Montaño and Jimmie Martinez, to introduce the living-wage ordinance. "Our schools here don't do so well," Montaño told me, explaining that he believed higher-wage jobs would let parents, who might otherwise have to work a second job, spend more time with their children. (At the same time working teenagers like Reyes would have more time with their parents.) For Santa Fe residents who were living five or six to a room in two-bedroom adobes, Montaño said he hoped a higher minimum wage might put having their own places to live at least within the realm of possibility.
Montaño was confident - perhaps too confident, as it would turn out - that businesses would become acclimated to higher payroll costs. He has run a restaurant and a tour-bus company himself, and he knew that the tight labor market in Santa Fe had pushed up wages so that many entry-level workers were already earning more than $8 an hour. "The business owners believe that government, especially at the local level, should not dictate to business, so to them it was a matter of principle," Montaño says. It was to him too. "We knew that other communities were watching what we were doing," he explains. He and his colleagues on the council were already receiving help from Paul Sonn at the Brennan Center in New York. "I knew that their involvement meant that they saw this as something that was important nationally," Montaño says. "As we got our foot in the door in terms of this ordinance being applied to the private sector," he surmised, that would give the living-wage network the ammunition to help other communities across the country do likewise. "I always knew, early on," Montaño says, "that if Santa Fe enacted such an ordinance, that it likely would go to court, and that if it passed the legal test, it would be the kind of ordinance that other communities would copy." The problem, at least from Montaño's perspective, was getting it enacted in the first place.
The Moral Argument Carries the Day in Santa Fe
Santa Fe's City Council asked nine residents, representing the interests of labor and management, to join a round table that would settle the specifics of the proposed living-wage law - how high the wage would be, for instance, and how soon it would be phased in. Some members of the round table, like Al Lucero, who owns a popular local restaurant, Maria's New Mexican Kitchen, found the entire premise of a city wage law objectionable. "I think the minimum wage at $5.15 is ridiculous," Lucero told me. "If the state were to raise it overall, to $7 an hour or $7.50 an hour, I think that would be wonderful. I think we need to do it." But $9 or $10 or $11 was too high, in his view - and it would put Santa Fe at a disadvantage to other cities in the state or region that could pay workers less. Also, there were the free-market principles that Frank Montaño had anticipated: "They were trying to push and tell us how to live our lives and how to conduct our business," says Lucero, who employs about 60 people.
Not surprisingly, Lucero's opponents on the round table saw things in a different light. For example, Carol Oppenheimer, a labor attorney, viewed the proposed law as a practical and immediate solution. "I got involved with the living-wage network because unions are having a very hard time," she told me. She assumed that local businesses could manage with higher payrolls. Yet after only a few meetings of the task force, both sides dug in, according to Oppenheimer.
It was then that the living-wage proponents hit on a scorched-earth, tactical approach. "What really got the other side was when we said, 'It's just immoral to pay people $5.15, they can't live on that,"' Oppenheimer recalls. "It made the businesspeople furious. And we realized then that we had something there, so we said it over and over again. Forget the economic argument. This was a moral one. It made them crazy. And we knew that was our issue."
The moral argument soon trumped all others. The possibility that a rise in the minimum wage, even a very substantial one, would create unemployment or compromise the health of the city's small businesses was not necessarily irrelevant. Yet for many in Santa Fe, that came to be seen as an ancillary issue, one that inevitably led to fruitless discussions in which opposing sides cited conflicting studies or anecdotal evidence. Maybe all of that was beside the point, anyway. Does it - or should it - even matter what a wage increase does to a local economy, barring some kind of catastrophic change? Should an employer be allowed to pay a full-time employee $5.15 an hour, this argument went, if that's no longer enough to live on? Is it just under our system of government? Or in the eyes of God?
The Rev. Jerome Martinez, the city's influential monsignor, began to throw his support behind the living-wage ordinance. When I met with him in his parish, in a tidy, paneled office near the imposing 18th-century church that looks over the city plaza, Martinez traced for me the moral justification for a living wage back to the encyclicals of Popes Leo XIII and Pius XI and John Paul II, in which the pontiffs warned against the excesses of capitalism. "The church's position on social justice is long established," Father Jerome said. "I think unfortunately it's one of our best-kept secrets."
I asked if it had been a difficult decision to support the wage law. He smiled slightly. "It was a no-brainer," he said. "You know, I am not by nature a political person. I have gotten a lot of grief from some people, business owners, who say, 'Father, why don't you stick to religion?' Well, pardon me - this is religion. The Scripture is full of matters of justice. How can you worship a God that you do not see and then oppress the workers that you do see?"
I heard refrains of the moral argument all over Santa Fe. One afternoon I walked around the city with Morty Simon, a labor lawyer and a staunch supporter of the living wage whose wife is Carol Oppenheimer. "This used to be the Sears," Simon told me as we walked, pointing to boutiques and high-end chain stores. "And we had a supermarket over here, and there was a hardware store too." Simon came to Santa Fe 34 years ago as a refugee from New York, he said, and for him the unpretentious city he once knew was gone. The wealthy retirees and second-home buyers had come in droves, and so had the movie stars. Gene Hackman and Val Kilmer had settled here; Simon recently found out that someone had plans for a 26,000-square-foot house, apparently a new local record. For him, the moral component of the law, the possibility of regaining some kind of balance, was what mattered. "It was really a question of, What kind of world do you want to live in?" he said.
Several Santa Fe councilors had, over the course of the previous year, come to Morty Simon's view that the wage ordinance presented an opportunity to stop the drift between haves and have-nots. Carol Robertson Lopez, for example, had initially opposed the living-wage law but changed her mind after 30 hours of debate. "We take risks, oftentimes, to benefit businesses," she told me, "and we take risks to benefit different sectors. I felt like this was an economic risk that we were taking on behalf of the worker." She acknowledged that some residents thought the city had started down a slippery slope toward socialism; jokes about the People's Republic of Santa Fe were rampant. But Robertson Lopez says that by the night of the vote she had few reservations. "I think the living wage is an indicator of when we've given up on the federal government to solve our problems," she says. "So local people have to take it on their own."
The living-wage ordinance had its final hearing on Feb. 26, 2003, in a rancorous debate that drew 600 people and lasted until 3 a.m. The proposal set a wage floor at $8.50 an hour, which would increase to $9.50 in January 2006 and $10.50 in 2008. It would also regulate only businesses with 25 or more employees.
It passed the City Council easily, by a vote of 7 to 1. A few weeks later, a group of restaurant and hotel owners filed suit in state court on the grounds that the living-wage ordinance exceeded the city's powers and was a violation of their rights under New Mexico's constitution. A judge suspended the wage law until a trial could resolve the issues.
Businesses Fight Back
To business owners in Santa Fe, the most worrisome aspect of the living-wage law is that the city has sailed into uncharted territory. Most of the minimum-wage campaigns in the U.S. have been modest increases of a dollar or a dollar and a half. The numerous state campaigns for 2006 will probably propose raises to between $6.15 and $7 and hour. (When San Francisco raised its minimum wage to $8.50 an hour in 2004 - indexed to inflation, it is now $8.82 - California's state minimum wage was $6.75, so the increase was 26 percent.) And even staunch supporters of a higher minimum wage accept that there is a point at which a wage is set so high as to do more harm than good. "There is no other municipality in the country that believes that $9.50 should be the living wage," says Rob Day, the owner of the Santa Fe Bar and Grill and one of the plaintiffs who sued the city. In fact, the most apt comparison would be Great Britain, which now has a minimum wage equivalent to about $8.80 an hour. "They have minimum wages that are Santa Fe level," says Richard Freeman, a Harvard economist. And at least for the moment, he says, "they have lower unemployment than we do."
As the lawsuit against the city progressed, though, Europe wasn't even a distant consideration. The focus was on the people of Santa Fe. I read through a transcript of New Mexicans for Free Enterprise v. City of Santa Fe one day this fall in a conference room at Paul, Weiss, Rifkind, Wharton & Garrison, the white-shoe law firm in Midtown Manhattan that defended, pro bono, Santa Fe's right to enact the living-wage ordinance. In many respects, the trial, which took place over the course of a week in April 2004, was an unusual public exchange on profits, poverty and class in America. Paul Sonn, the lawyer at the Brennan Center at New York University who wrote the Santa Fe ordinance, had enlisted Sidney Rosdeitcher, a partner at Paul, Weiss, to be lead counsel for Santa Fe's defense. Rosdeitcher told me that before the trial began, he wasn't convinced that there were many factual issues in dispute; as he saw it, the living-wage controversy was about the law and, in particular, whether Santa Fe had a legal "home rule" authority, under the provisions of the New Mexico constitution, to set wages, even for private industry. Nevertheless, several low-wage workers took the stand to relate the facts, as they saw them, of what the wage increase would do to improve their quality of life. The Rev.
Jerome Martinez took the stand as an employer of 65 people in his parish and Catholic school. And a number of restaurant owners, in turn, explained how the new law could ultimately force them out of business.
The plaintiffs - the New Mexicans for free enterprise - were not unsympathetic: the restaurateurs who took the stand, like Rob Day or Elizabeth Draiscol, who runs the popular Zia Diner in town, opened their books to show that their margins were thin, their costs high, their payrolls large. They cared about their employees (providing health care and benefits), trained unskilled workers who spoke little or no English, gave regular raises and paid starting salaries well above $5.15. They had built up their businesses through an extraordinary amount of hard work. Draiscol testified that her restaurant, for instance, had $2.17 million in annual revenue in the fiscal year of 2003. Though her assets were substantial - a restaurant can be valued at anywhere from 30 to 70 percent of its annual revenues, and Draiscol said that Zia had been appraised at 66 percent of revenues, or about $1.4 million - she earned a salary of $49,000 a year. Draiscol testified that the living wage would raise her payroll, which accounted for 55 to 65 employees (depending on the season), by about $43,192 a year. Rob Day put the expenses of a living-wage increase even higher. In addition to labor costs, he estimated that the price of goods would go up as his local suppliers, forced to pay employees higher wages themselves, passed along their expenses to the Santa Fe Bar and Grill.
Rosdeitcher showed that the restaurants had made serious errors overestimating their costs. Still, the increase in expenditures was not negligible. Over the past few years, a variety of experts have tried to perfect the science of predicting what will happen to a community in the wake of a minimum-wage change, and one of those experts, Robert Pollin, a professor of economics at the University of Massachusetts Amherst, served as the expert witness on behalf of Santa Fe. Pollin projected that the living wage would affect the wages of about 17,000 workers. About 9,000 of those workers would receive raises because of the ordinance, he said; the rest would receive what he called "ripple effect" increases - which meant that those making, say, $8.50 or more before the raise would most likely receive an additional raise from their employers to reflect their job seniority. Pollin calculated that wage increases would cost businesses a total of $33 million. And to pay for those amounts, restaurants and hotels and stores would probably need to raise prices between 1 and 3 percent. The question, therefore, was whether business owners were willing to raise prices or make less in profits. In the trial, Pollin cited an obscure 1994 academic experiment in which several economists had set a different price within the same restaurant for a fried-haddock dinner. In varying the price of the haddock between $8.95 and $10.95, the researchers' goal was to find out whether variations in cost affected demand in a controlled environment. As it turned out, they didn't. Customers ordered the haddock at both $8.95 and $10.95.
Results From the Santa Fe Experiment
That the city of Santa Fe has effectively become a very large fried-haddock-dinner experiment is difficult to deny. A state court judge ruled in favor of the city soon after the trial, allowing the living-wage ordinance to take effect in June 2004; recently, the judge's decision was affirmed by a state appellate court, giving the city, and its living-wage advocates, a sweeping victory. Many business owners have found these legal losses discouraging. This fall, not long after I visited the city, the Santa Fe Chamber of Commerce sent a note to its members to gauge their opinion on the $8.50 living wage and the hike on Jan. 1 to $9.50. Some members reported that they had no trouble adjusting to the first raise and supported a further increase. (Some of these owners, whose high-end businesses employ skilled workers, paid more than $8.50 to begin with.) Others insisted that they were not averse to a state or federal raise in the minimum wage but that Santa Fe's citywide experiment had put local businesses at a competitive disadvantage: companies could move outside the city limits or could outsource their work to cheaper places in the state. But most respondents opposed the law. The living wage had forced them to raise prices on their products and services, which they feared would cut into business.
To look at the data that have accumulated since the wage went into effect is to get a more positive impression of the law. Last month, the University of New Mexico's Bureau of Business and Economic Research issued some preliminary findings on what had happened to the city over the past year and a half. The report listed some potential unintended consequences of the wage raise: the exemption in the living-wage law for businesses with fewer than 25 employees, for instance, created "perverse incentives" for owners to keep their payrolls below 25 workers. There was some concern that the high living wage might encourage more high-school students to drop out; in addition, some employers reported that workers had begun commuting in to Santa Fe to earn more for a job there than they could make outside the city.
Yet the city's employment picture stayed healthy - overall employment increased in each quarter after the living wage went into effect and was especially strong for hotels and restaurants, which have the most low-wage jobs. Most encouraging to supporters: the number of families in need of temporary assistance - a reasonably good indicator of the squeeze on the working poor - has declined significantly. On the other hand, the city's gross receipts, a reflection of consumer spending and tourism, have been disappointing since the wage went into effect. That could suggest that prices are driving people away. Or it could merely mean that high gas and housing prices are hitting hard. The report calculates that the cost of living in Santa Fe rose by 9 percent a year over the past two and a half years.
Rob Day of the Santa Fe Bar and Grill sees this as the crux of the matter. In his view, the problem with Santa Fe is the cost of housing, and there are better ways than wage regulations - housing subsidies, for example - to make homes more affordable. In the wake of the wage raise, Day told me, he eventually tweaked his prices, but not enough to offset the payroll increases. He let go of his executive chef and was himself working longer hours. "Now in the matter of a year and a half, I think there is a whole group of us who thought, If we were going to start over, this isn't the business we would have gone into," he says.
Al Lucero, the owner of Maria's New Mexican Kitchen, says that the living-wage battle has risked turning him into a caricature. Opponents backing the living wage "paint us as people who take advantage of workers," he told me. By contrast, Lucero sees himself as an upstanding member of the community who provides jobs (he has 60 employees) and had always paid well above the federal minimum. Other business owners said similar things but would not speak out publicly. They feared alienating customers. As some told it, they had started businesses with a desire to create wealth and jobs in a picturesque small city. Then they had awakened in a mad laboratory for urban liberalism.
The Issue in Albuquerque
Long after he did his influential research with David Card on the effect of minimum-wage raises, Alan Krueger says, he came to see that ultimately the minimum wage is less about broad economic outcomes than about values. Which is not to say that workers' values should trump those of owners. Rather, that when wealth is being redistributed from one party to another - and not, in the case of Santa Fe, from overpaid C.E.O.'s and hedge-fund managers but from everyday entrepreneurs who have worked long hours to succeed in their businesses - things can get complicated. Indeed, while it is tempting to see the wage disputes in Santa Fe and elsewhere as a reflection of whether one side is right or wrong, on either economic or moral grounds, they are, more confusingly, small battles in a larger war (and, in America, a very old war) over where to draw the line on free-market capitalism. On one side there is Al Lucero, on the other someone like Morty Simon or the economist Robert Pollin, who says: "The principled position is: 'Why should anyone tell anyone what to do? Why should the government?' I just happen to disagree with that. A minimally decent employment standard, to me, overrides the case for a free market."
And yet, the fact that voters or elected politicians should decide who wins these battles, rather than economists or policy makers, seems fitting. During Albuquerque's living-wage campaign this past fall, Santa Fe - the smaller, wealthier, northern neighbor - served as a rallying point. But it was also a question mark: Was Santa Fe's experience repeatable? Was it even worth pointing to as an exemplar? In the final days of the Albuquerque effort, Jen Kern of Acorn told me she had little doubt that the wage victory in Santa Fe, like the one in San Francisco, was an indication that a battle for creating high base wages in America's cities, in addition to the states, could be won. But these were also rich cities, liberal cities - "la-la lands," as she put it. "I think with citywide minimums, if this is going to be the next era in the living-wage movement, it's got to look like it's winnable," Kern says. "The danger or the limitations of just having San Francisco and Santa Fe having passed this is that people in other parts of the country are going to say, 'Well, I'm not Santa Fe, I'm not San Francisco."' In Kern's view, a win "in a city like Albuquerque, which I think everyone thinks of as sort of a normal city," was a truer test.
And it didn't pass that test. When the $7.50 ballot initiative lost by 51 percent to 49 percent on Oct. 4, it made many in the living-wage movement wonder how these battles will play out over the next year or two. One political consultant involved in the movement questioned whether the Albuquerque wage itself, at $7.50 an hour, had been set too high by Acorn to win broad support. Matthew Henderson of Acorn, who ran the day-to-day campaign, said he thought they were outspent by their opponents. Most likely, though, the outcome was determined by the actual grounds on which the battle was fought. The businesses that opposed the $7.50 wage, represented mainly by the Greater Albuquerque Chamber of Commerce, challenged a small provision in the proposed living-wage law that would allow those enforcing a living wage to have wide "access" to a workplace. The campaigns soon began trading allegations through television ads and direct mailings about how far such access might go. And so the living-wage campaign had become a surreal fight over privacy (it would allow "complete strangers to enter your child's school," one mailing against the measure claimed) rather than wages. When I met with Terri Cole, the president and C.E.O. of Albuquerque's Chamber of Commerce, a few days before the vote, she acknowledged that the chamber opposed the living-wage law on philosophical grounds. But she said she saw the access clause as a legitimate grounds for a fight.
Will It Play Nationally?
In the aftermath of Albuquerque, Jen Kern took solace in the fact that 10 years after she visited the Library of Congress, and 10 years after she began working on living-wage campaigns, the opposition fought not on the economic merits or risks of a higher wage, but on a side issue like privacy. Still, a loss is a loss. It is possible that the Albuquerque wage campaign may still prevail, in effect: New Mexico's governor, Bill Richardson, has said he would consider a statewide raise this spring, presumably to $7 or $7.50, from $5.15, that would affect all New Mexicans. (It would, in all likelihood, leave Santa Fe's higher wage unaffected.) Yet such an act does little to clarify whether progressives can actually transform strong levels of voter support for higher wages into wins at the polls. Kristina Wilfore, the head of the Ballot Initiative Strategy Center, a progressive advocacy group, says that over the years there has been anywhere from a 2 to 5 percent increase in voter turnout specifically correlated with wage measures. "But people think it's some big panacea, and it's not," says Wilfore, who regards success as dependent on how well a local wage coalition (organized labor, grass-roots groups, church-based organizations) can work together at raising money and mobilizing voters.
For specific candidates in a state or city where a wage measure is on the ballot, it can be similarly complicated. Representative Rahm Emanuel of Illinois, chairman of the Democratic Congressional Campaign Committee, told me that the local battles over living wages reflect the broader debate in the U.S. over health care, retirement security and an advancing global economy. "Every district is different," Emanuel says of the slate of Congressional races for 2006, "but there is not one where the living wage, competitive wages or health care doesn't play out. The minimum-wage issue, if it's on the ballot, is part of the economic argument."
David Mermin of Lake Research Partners, who frequently conducts polls on minimum-wage issues, told me that the dollar level of a wage proposal is important, though it can vary from place to place. ("People have different feelings about what's a lot of money," he says.) But he has found that quirks can emerge. An increase to $6.15 sometimes doesn't poll as well as an increase to $6.75, which can generate more intensity and broader support from voters. Mermin also says that wage measures have had success in recent years, Albuquerque notwithstanding, not because Americans feel differently but because campaigners are getting smarter about stressing morals over economics. And when handled adroitly, a wage platform can motivate the kind of voters who are difficult to engage in other ways: younger voters, infrequent voters, low-income urban voters. His research, Mermin adds, shows that most people who vote for the minimum wage know it's not going to affect their lives tomorrow: "It's not like fixing the health-care system, or repairing the retirement system," he says. "It doesn't rise to that level directly. And if you list it in 10 issues, it doesn't pop out in priority. But when it is on the ballot, it crystallizes a lot of things people feel about the economy and about people who are struggling." In his experience, voters seem to process these measures as an opportunity to take things into their own hands and change their world, just as Morty Simon did.
Still, as an endgame, many in the living-wage movement see the prize not in a series of local victories in 2006 but in Congressional action that results in a substantial increase in the federal minimum wage - and even better - one that is indexed to inflation, so that such battles about raising the wage don't need to be fought every few years. The long-run trajectory, Paul Sonn told me, is for cities and states to create enough pressure to ultimately force a raise on the federal level. Or to put it another way, the hope is that raising wages across the U.S. will ultimately demonstrate to voters and to Washington lawmakers both the feasibility and the necessity of a significantly higher minimum wage. In the meantime, Sonn says, cities like Santa Fe play an important role in policy innovation, "really as sort of laboratories of economic democracy." Richard Freeman of Harvard echoes this point. "If you go back, a lot of the New Deal legislation, good or bad, came about because there was a lot of state legislation," Freeman says. Policies from New York or Wisconsin were adapted into the federal system of laws. "A lot of it came from state variations in the past, and I think we'll see a lot more of this in the next few years. The things that work the best might be adopted nationally."
Of course, it also seems plausible that any kind of national coherence on economic - or moral - matters may have ended long ago. Just as the voters of states and cities have sorted themselves politically into red and blue, and into pro- and anti-gay marriage, in other words, they are increasingly sorting their wage floors and (perhaps soon) their health-care coverage. This trend may produce not progressive national policies but instead a level of local self-determination as yet unseen. Or as Freeman puts it, "Let Santa Fe do what it wants, but let's not impose that on Gadsden, Ala." That wouldn't make a federal increase in the minimum wage insignificant, but it would make it something of a backdrop for major population centers. As Robert Reich says, "The reality is, even if the wage were raised to $6.15, it would not be enough to lift a family out of poverty." And as Jen Kern notes, even a federal minimum wage that goes up to $7.25, which is the proposal from the Senate Democrats and which probably isn't going anywhere until 2008, doesn't approach what it now costs to live in some cities.
This was why, in December, Kern and Acorn were considering the prospects for laying the groundwork for living-wage ordinances in other cities. And it's why, also in December, Paul Sonn was helping to write an ordinance for Lawrence Township, N.J., aimed at forcing the city's big-box retailers like Wal-Mart to pay a higher wage (more than $10 an hour) and to contribute a larger share of employee benefits. Last month, Sonn also pointed out to me that Santa Cruz, Calif., was considering plans to introduce a measure that would establish a minimum wage of $9.25 an hour.
It wasn't quite Santa Fe's level, but close. And that suggested that the small New Mexican city, to the delight of its living-wage advocates and the chagrin of many business owners, was no longer just an experiment. Rather, it had already become something best described, for better or for worse, as a model.
Jon Gertner is a contributing writer for the magazine.
New Study Reveals Devastating Consequences of Wage Hike for Santa Fe's Least-Educated Adults
Economist Cites Lost Jobs, Involuntary Part-Time Employment, and Worker
12/8/05, Washingon, D.C.–A new study on the outcome of Santa Fe’s Living Wage Ordinance commissioned by the Employment Policies Institute (EPI) exposes the negative economic consequences resulting from June 2004’s wage hike. The city’s least-educated adults, those the increase was intended to help, bore the brunt of the wage hike’s ill-effects.
“The results here unquestionably show a decline in labor market opportunities for less-educated adults,” said University of Kentucky labor and health economist Dr. Aaron Yelowitz, who conducted the study. “This manifests itself in higher unemployment, longer unemployment spells, more involuntary part-time work, fewer full-time equivalent jobs, labor substitution toward teenagers, and perhaps most surprisingly, in no detectable wage gains.”
The study is a follow-up to Dr. Yelowitz’s previous research on Santa Fe, which revealed roughly a 16 percent increase in the unemployment rate and an alarming loss of 540 jobs as a result of the wage hike. The research also revealed that Santa Fe’s least educated residents—those with 12 or fewer years of education—suffered nearly all the job losses.
Dr. Yelowitz’s new study shows that the job loss among this vulnerable group was due in large part to displacement by high school students attracted into the labor market by the higher wage. In fact, the likelihood that a low-wage employee was an unmarried teenager enrolled full-time in high school more than doubled after the ordinance was enacted.
This research also finds that the low-skilled adults who do keep their jobs end up working fewer hours than before; those with 12 years or fewer of education saw their hours reduced by an average of 3.2 hours per week following the increase.
Dr. Yelowitz’s research on Santa Fe provides a strong case against increasing the minimum wage again this January.
“The findings in this study should provide a cautionary tale about moving from $8.50 an hour in Santa Fe to $9.50 or $10.50,” said Dr. Yelowitz. “Based on the evidence from the initial move from $5.15 to $8.50, policymakers should expect pronounced adverse effects on the labor market, especially among less-educated adults.”
To read the study, go to www.EPIonline.org/studies
HOW DID THE $8.50 CITYWIDE MINIMUM WAGE AFFECT THE SANTA
FE LABOR
MARKET?
------------------------------------------------------------------------
In June 2004 Santa Fe became one of three cities in the
United States
to pass a city-wide minimum wage applying to private
businesses. The
city's increase to $8.50 an hour -- a 65 percent increase
-- affected
all businesses within city limits employing more the
25 people.
Aaron Yelowitz of the University of Kentucky found that
Santa Fe's
minimum wage had significant and negative effects on
the labor market.
Even more troubling, he found that the negative effects
of the wage
hike were concentrated on the least-skilled members of
the economy --
the very individuals the increase was intended to help.
He found:
o The likelihood of unemployment
for employees in Santa Fe
went up by
3.3 percent.
o For less-educated employees,
however, the results were much
higher, with
their likelihood of unemployment
increasing
8.3 percentage points.
o The usual hours of work
fell by 1.0 hours for the full
sample and
3.2 hours for less-educated individuals.
o There was significant
evidence to suggest the displacement
of adult employees
by unmarried high school age
employees.
These are all unintended consequences that should give
pause to
any claims of success of the ordinance, says Yelowitz.
Source: Aaron S. Yelowitz, "How Did the $8.50 Citywide
Minimum Wage
Affect the Santa Fe Labor Market? A Comprehensive Examination,"
Employment Policies Institute, December 6, 2005.
For text:
http://www.epionline.org/study_detail.cfm?sid=91
For more on Economy:
http://www.ncpa.org/iss/eco/
Super-Sized Strawman
By Stuart K. Hayashi Published
06/29/2005
E-Mail Bookmark Print Save
TCS
Morgan Spurlock is at it again.
http://www.techcentralstation.com/062905I.html
Capitalizing on his fame from his Oscar-nominated film "Super Size Me," Morgan Spurlock has gained a "reality" series on the FX channel. The premise of the show, Thirty Days, is that Spurlock will try to live according to some new lifestyle over a month-long period.
In the June 15 premiere, Spurlock and his fiancée taped themselves trying to live on minimum-wage pay. The rules of this televised game, as summarized on the Fans of Reality TV website, were:
1) They will both
work minimum wage jobs.
2) They will each
begin with the equivalent of one week's worth of minimum wage pay. This
equates to $206, or $178.47 after taxes. Ouch.
3) They have to freeze
their credit cards and accounts and leave all their money behind. They
empty their wallets into a box and Morgan retains only his driver's license
and ACLU membership card.
Predictably, the couple had a rough time, as evidenced by this episode summary from the "Fans of Reality TV" website:
On Day 30, the couple sits at the table and tallies up their finances, counting the money they've saved and adding up what they still owe for utilities and rent. The result is that thanks to medical bills, they are in debt to the tune of three months' pay. The harsh truth is that although they lived in a very cheap apartment, never turned down a job, and got all of their belongings from a free store, it was impossible to get by and not acquire a large debt -- even for two healthy, young, educated, non-minority individuals. As they pack up their meager belongings and leave their apartment for the last time, they are both very sad to know that so many others have to go on living this way.
The implication is that many families suffer as a result
of the minimum wage being so low. Ergo, there ought to be a double-digit
"living wage."
A perusal of the reactions posted on the Fans of Reality TV website amply demonstrates that Spurlock got his point across:
"[T]his was deep. I shed a few tears now and then realizing
what so many families in this "rich" country go through on a daily basis.
. . I think this show should be required watching for everyone in
America, particularly all our US senators and representatives."
Indeed, many left-wingers enjoy spreading the notion that there are many U.S. households in which the highest-income-earner scrounges by on minimum wage. In the Tuesday, March 29 edition of the Honolulu Advertiser, one op-ed sobbed over a "minimum-wage worker trying to feed a family on $6.25 an hour."
When Spurlock and his ilk go on and on about how a household cannot survive long-term on mere minimum wage, they make a strawman argument.
It's untrue that the majority of minimum-wage-earners go on making such low wages for years and years. According to the U.S. Bureau of Labor Statistics, 63 percent of workers who make the minimum wage or less receive raises that put them above the minimum-wage level within one year of employment. Only 15 percent of workers still earn the minimum wage after a period of three years.
Are there teeming masses of starving minimum-wage earners throughout the nation? Actually, minimum-wage-earners comprise only 3.0 percent of all workers paid by the hour in the United States and only 1.8 percent of American wage and salary earners .
A great portion of minimum wage-earners are young people -- more than business-bashing activists would have you believe. "Just three out of 10 of those earning minimum wage are youths," writes left-wing columnist Mark Shields. "Seventy percent of minimum-wage earners are adults ages 20 or older." Shields's use of the word youths is misleading.
It's true that 27.5 percent of minimum-wage-earners are sixteen- to nineteen years old. But it's equally true that those ranging in ages sixteen to twenty-four make up 52.6 percent of minimum-wage workers.
According to a July 2004 study by Joseph Sabia and Richard Burkhauser,. Some 40 percent of U.S. minim only 5.3 percent of U.S. minimum-wage-earners come from households that are below the official U.S. poverty line um-wage-earners live in households where the total yearly income is at least triple the maximum amount of income a household can receive and still be classified as being below the poverty line. And 63 percent of those who earn the minimum wage are not the highest income-earner in their household.
Finally, over 82 percent of minimum-wage-earners are childless or are not the highest income-earner of their household.
Contrary to what may be assumed there is no necessary correlation between a country having a minimum wage and having a high average standard of living. Hong Kong has no minimum wage, yet it has both a higher per-capita income and a lower unemployment rate than many wealthy countries that do have minimum wages, such as Finland, France, Spain, and Italy.
But don't expect facts and figures to sway Mr. Spurlock. The Naderites will be content with Spurlock's anecdotal schlockumentary about his isolated experience, and will happily go on talking as if the majority of the U.S. population is a proletarian class forced to work for minimum wage until death.
Stuart K. Hayashi is an assistant editor at MooreLies and the founder of The Fiftieth Star. He can be reached at radical_individualist@hotmail.com
Effective Tax Rates and the Living Wage
Dr. Aaron Yelowitz - University of Kentucky, Dr. Richard
Toikka - Lewin Group
Executive Summary
http://www.epionline.org/study_detail.cfm?sid=81
Over the past decade, more than 110 ordinances have been passed mandating “living wages” for employees in businesses contracting with a locality and/or receiving financial assistance through tax breaks or economic development grants. The wage rates set by these ordinances often exceed the federal minimum wage by 150–200 percent. These original laws—which applied to very few businesses— had a limited effect on the overall economy of a city. Over the past year, however, these initial ordinances have been used as the basis for expanded citywide living wage ordinances.
The first of these expanded city wide living wage ordinances to pass was in Santa Fe, New Mexico, where an $8.50 minimum wage went into effect (after a court challenge) in June 2004. This initial level will increase to $10.50 an hour by 2008 and will thereafter be indexed to inflation. In November 2003, voters in San Francisco passed an $8.50 minimum wage for city businesses, and the Madison, Wisconsin, city council passed a $7.75 minimum wage in that city soon after. While the “success” of living wage ordinances is often cited in support of citywide wage floors, there have been few rigorous studies analyzing the effect of these living wages on either the total income or living standards of low-income families.
In this study, Dr. Aaron Yelowitz of the University of Kentucky and Dr. Richard Toikka of the Lewin Group utilized Survey of Income and Program Participation (SIPP) data to analyze the effect of living wage ordinances on earnings, income, and government assistance. In order to more fully analyze changes in the standard of living for low-income families, this study examines total income and not simply earnings. If living wage ordinances were to increase earnings but do so only at the expense of other forms of income, the policy would only change the composition of income and not increase the quality of life for low-income families— the stated purpose of these ordinances. Quantifying the ordinances’ benefits is critical because increasing the wage floor leads to disemployment as businesses either decrease their labor force, shift to more efficient employees, or leave the jurisdiction entirely. It would take a significant benefit to justify this cost.
Previous work on this topic (Toikka, Yelowitz, and Neveu, 2003) found that low-income families face exceptionally high marginal tax rates and—as a result—living wage ordinances appeared to be badly targeted and ineffective at raising comprehensive disposable income. This study extends that earlier work by estimating the actual responses of households to living wage mandates by utilizing the 1996 SIPP data set.1
As mentioned above, previous work analyzing the effectiveness of living wage ordinances examined only cash income. For example, Neumark and Adams (2002) found a modest decrease in poverty rates utilizing data from the Current Population Survey Annual Demographic Files measure of cash income, which excludes in-kind benefits such as food stamps and subsidies such as Earned Income Tax Credit (EITC) payments. Failing to account for these income sources can dramatically distort the effect of a policy on the actual standard of living for a family. For example, a family with two children can qualify for more than $4,000 in tax-free cash assistance as a result of the EITC (and earn even more in states with supplemental state-run EITC programs). A benefit of this size would clearly affect the quality of life of lowincome families.
As earnings increase, recipients can see the benefits from these programs decrease dramatically. For example, the marginal tax rate in the “phase-out range” for the EITC can reach as high as 21.06 percent and the tax rates for food stamps are generally 30 percent. Failing to include the loss of these benefits when evaluating the benefit of living wage ordinances can dramatically inflate the perceived effectiveness.
Examining the effect of living wage ordinances, the authors found that the ordinances decreased cash transfer assistance. Specifically, the authors found that the enactment of a living wage ordinance decreased assistance by $34 per month. In addition, the authors found that the increase in earnings resulting from the ordinance was only $16 per month. This means that for every dollar in increased earnings from a living wage ordinance, families can expect to lose up to $2.12 in cash assistance—greatly limiting the ability of the policy to help low-income families. Controlling for factors such as the business cycle, state minimum wage levels, and welfare reform, the authors found that the enactment of a living wage increased total family income by only $55 per month. Due to lost benefits, 38 percent of this increase in income is crowded out. If the effect of important programs like food stamps is factored in, this tax rate would likely be higher.
Overall, the authors have found that living wage ordinances do little to actually increase the standard of living for low-income families. The $55-a-month increase in total family earnings represents a less than 2 percent increase for the average family. In terms of an increase in earnings, the $16-per-month increase represents an increase of approximately one-half of one percent. The authors state, “a reasonable reading of our results is that the living wage has a limited capability in improving the economic status of the poor.” This limited capability is important because decades of studies clearly show that mandated wage floors create disemployment effects—particularly for the low-skilled employees these laws are intended to help. Pushing the intended beneficiaries out of a job while providing minimal benefits to remaining employees makes living wage ordinances an ineffective anti-poverty policy.
Download the full study in .pdf format
Minimum wage, maximum folly
Walter E. Williams (archive)
March 23, 2005 | Print | Send
Senators Edward Kennedy, D-Mass., and Rick Santorum, R-Pa., both introduced proposals to increase the minimum wage from its current $5.15 an hour. Sen. Kennedy's proposal would have raised the minimum wage to $7.25 in three steps over 26 months, while Sen. Santorum's would have raised it to $6.25 in two steps over 18 months. Two weeks ago, both measures failed passage in the Senate.
Sen. Kennedy said, "I believe that anyone who works 40 hours a week, 52 weeks a year, should not live in poverty in the richest country in the world," after telling fellow senators that minimum wage workers earn $5,000 below the poverty line for a family of three. Sen. Santorum said, "I feel very comfortable that our proposal keeps the balance between the ability of lower-skilled employees to enter the work force at a wage in which they are compensated for the skills they bring to the job."
The idea that minimum wage legislation is an anti-poverty tool is simply sheer nonsense. Were it an anti-poverty weapon, we might save loads of foreign aid expenditures simply by advising legislators in the world's poorest countries, such as Haiti, Bangladesh and Ethiopia, to legislate higher minimum wages. Even applied to the United States, there's little evidence suggesting that increases in the minimum wage help the poor. Plus, according to the Bureau of Labor Statistics, only 2.2 percent of working adults earn the minimum wage.
The crucial question for any policy is not what are its intentions but what are its effects? One of its effects is readily seen by putting yourself in the place of an employer and asking: If I must pay $6.25 or $7.25 an hour to whomever I hire, does it make sense for me to hire a worker whose skills enable him to produce only $4.00 worth of value per hour? Most employers would view doing so as a losing economic proposition. Thus, one effect of minimum wages is that of discriminating against the employment of low-skilled workers.
For the most part, teenagers dominate the low-skilled worker category. They lack the maturity, skills and experience of adults. Black teenagers not only share those characteristics, but they are additionally burdened by grossly fraudulent education, making them even lower skilled.
Bureau of Labor Statistics unemployment data confirms the economic prediction about minimum wage effects. Currently, the teen unemployment rate is 16 percent for whites and 32 percent for blacks. In 1948, the unemployment rate for black teens (16-17) was lower (9.4 percent) than white teens (10.2 percent). Plus, black teens were more active in the labor force.
How might we explain that? How about arguing that there was less racial discrimination in 1948, or back then black teens were more highly educated than white teens? Of course, such arguments would be nonsense. The fact of the matter is that while there was a minimum wage of 40 cents an hour prior to 1948, it had been essentially repealed by the post-World War II inflation; however, with successive increases in the minimum wage, black teen unemployment rose relative to white teens to where it has become permanently double that of white teens.
If the minimum wage law has these effects, then
how does it pass political muster? The current Social Security debate over
private accounts gives us a hint. In the political arena, you dump on people
who can't dump back on you. Few politicians owe their office to the youth
vote. Despite the "concern for the children" malarkey they spout, it's
voting age adults to whom politicians are beholden. It turns out that adults
benefit from the discriminatory effects of minimum wages, and older adults
benefit from Social Security intergenerational transfer
July 25, 2004
When More Is Less
by Alan Reynolds
Alan Reynolds is a senior fellow with the Cato Institute and a nationally syndicated columnist.
Soon after Sen. John Kerry proposed raising the national minimum wage from $5.15 to $7 by 2007, predictable cheers arose from some quarters and predictable boos from others. Yet both supporters and critics keep missing a crucial point.
Take a careful look at the precise wording of a recent Bureau of Labor Statistics (BLS) report on this: "Slightly over half of workers earning $5.15 or less were under age 25, and about one-fourth were age 16-19.... About 2 percent of workers age 25 and over earned the minimum wage or less."
The key phrase in that report -- strangely ignored by both supporters and critics of a higher minimum wage -- is "or less." Among 73 million workers still paid by the hour in 2003 (40 percent of us are salaried), only 545,000 or 0.7 percent earned the minimum wage. Three times as many -- 1.6 million or 2.2 percent -- earned less than the minimum wage.
That is a huge improvement over 1997, when 3 million earned less than the minimum wage. Contrary to a universal confusion between words and reality, those paid the official "minimum" wage are not the nation's lowest-paid workers.
The federal minimum wage does not apply to workers on small farms or at seasonal amusement or recreational facilities. It does not apply to newspaper deliverers, companions for the elderly, outside salesmen, U.S. seamen on foreign-flag ships, switchboard operators or part-time babysitters.
Any employer with an annual income below $500,000 is free to ignore the minimum wage, except in states with their own minimum for such small establishments (such as $2 an hour in Oklahoma, $2.80-$3.35 in Ohio and $4 in Montana). Such jobs offer a crude safety valve, preventing the full brunt of minimum wage increases from reducing employment.
Not all unskilled job applicants precluded from minimum wage jobs end up unemployed, or (another neglected effect) as discouraged labor force dropouts. Instead, many are just displaced into jobs exempt from the federal minimum wage.
Jobs paying less than the minimum wage, legally or otherwise, are typically more arduous and less secure than jobs in, say, chain stores or restaurants, where the minimum wage is more easily enforced. Jobs exempt from the minimum wage generally offer no pension or health benefits,and no effective regulation of overtime hours, sick pay or other working conditions. Employer payment of Social Security taxes is notoriously negligent, leaving workers ineligible for benefits.
Past experience shows an increase in the minimum wage is not only likely to reduce the number of workers earning the minimum wage, but also to increase the number earning less than the minimum. The resulting increase in workers forced by a higher minimum wage to compete for sub-minimum wage jobs can be expected to push the lowest wages even lower.
The minimum wage was increased from $2.65 to $2.90 in January 1979 and to $3.15 in 1981. The percentage of hourly wage workers earning less than the minimum reached 5.6 percent by 1979 and 6.8 percent in 1981.
The unchanged $3.35 minimum wage gradually became less burdensome as wages and prices rose during the strong 1983-89 expansion. So by 1989 the percentage earning less than the minimum had fallen to 2.2 percent. But the minimum was then increased to $3.80 in April 1990 (and to $4.25 a year later) and the percentage earning less than the minimum jumped to 3.8 percent in 1991. The economy was in recession during part of 1981 and 1991, however, so we cannot be entirely certain the higher minimum wage was the main culprit.
The effect of the most recent rise in the minimum wage is harder to ignore (although Mr. Kerry nonetheless ignores it). The minimum wage was increased to $4.75 in October 1996 and to the current $5.15 a year later. What happened? The percentage of workers earning less than the minimum wage jumped from 2.5 percent (1.7 million) in 1995 to 4.2 percent (3 million) by 1997. The percentage of teens working for less than the minimum rose from 7.2 percent to 19.8 percent.
The increased minimum wage is the only plausible explanation, because the job market was unusually strong. The unemployment rate dropped from 5.6 percent in April 1996 to 4.2 percent in April 1997, even with a near doubling of workers who earned less than the minimum wage.
Some cite the falling unemployment in 1996-97 as evidence the higher minimum wage did no harm. They are quite mistaken. Jobs paying the minimum wage currently account for only four-tenths of 1 percent of all U.S. jobs -- far too tiny to have much effect on total unemployment. For those directly affected, however, the effect can be extremely nasty.
Critics of the minimum wage emphasize the negative effect of the minimum wage on employment, particularly among teens, new immigrants and other entry-level workers. This is correct as far as it goes. States with minimum wages of around $7, for example, generally suffer above-average unemployment -- 6.1 percent unemployment in Washington, 6.2 percent in California, 7.3 percent in Alaska.
But unemployment is not the only possible effect. Those displaced from job opportunities by a higher minimum wage have another option: They often can and do work for less than the minimum wage. A higher minimum wage reduces the availability of such jobs, leaving a more low-wage job-seekers competing for jobs paying less than the minimum wage. That, in turn, must push the lowest wages even lower.
When the minimum wage is pushed up faster than the market would have moved it, the effect is to greatly increase the proportion of jobs paying less than the minimum. Employers offering less than the minimum, legally or otherwise, then find a flood of applicants whenever the minimum wage rises. These workers were displaced by dwindling opportunities in the larger, more formal businesses uniquely affected by the federal law.
Cutting off the lowest rung on the ladder of opportunity may please some members of labor organizations who are much higher on the ladder, because it reduces future competition for better jobs. But to attributing compassion to an increased minimum wage is the opposite of its most obvious effect. In reality, Mr. Kerry's proposal to raise the minimum wage to $7 an hour would shove hundreds of thousands of the young and unskilled into dead-end jobs paying less than the minimum.
Tuesday, March 8, 2005 ~ 10:50 a.m., Dan Mitchell Wrote:
Privatize the Postal Service. The Berlin Wall fell about
15 years ago, but that doesn't mean the dinosaurs of socialism have disappeared.
A good example is the U.S. Postal Service, which is a classic government
monopoly. As ridiculous as this sounds, you can go to jail if you try to
deliver a first-class letter. Moreover, the USPS has a plethora of other
government-provided advantages. Not surprisingly, this monopoly status
and favoritism translates into gross inefficiencies. Yet even though the
Postal Service has a demonstrated track record of failure, it wants to
use its monopoly status to subsidize expansion into new markets. While
more competition generally is a good thing, the rules should apply equally.
That is why the best result is privatization, a policy that actually has
been implemented in Europe. This National Review column thoroughly explains
the issue:
It's time to privatize
the U.S. Postal Service. We no longer need a federal agency to deliver
our junk mail. The facts are plain. Even with a locked-in monopoly, the
USPS can't make ends meet. Its accounting is so murky and convoluted it
makes our Enrons and WorldComs look like models of financial transparency.
We mail-users - and ultimately taxpayers - end up paying through the nose
for the increasingly obsolete privilege of "universal service," i.e., six-day-a-week
delivery to every household in the nation. ...If USPS were a competitive
company - as opposed to bloated federal bureaucracy - stamp prices would
be falling, not rising. Despite new technology - like modern reader/sorters
that process over 30,000 pieces of mail per hour - stamp prices have risen
with inflation since 1970. Imagine if the price of a phone call or sending
an e-mail rose with inflation for 30 years. ...he USPS envisions itself
as a future "Commercial Government Enterprise." The postal service's website
suffix was switched from dot-gov to dot-com, and the postmaster general's
title changed to "Postmaster General and CEO." But public posturing aside,
what exactly does "Commercial Government Enterprise" mean? ...There is
one side of private enterprise that's enticing the USPS though. It has
no qualms about jumping into markets that have been transformed by private
companies, like overnight package delivery. With all its special privileges
and some expensive fancy-dance advertising, it can grab new business from
the private sector. Remember, USPS is exempt from most taxes; it's free
from SEC financial-reporting requirements; it can borrow from the U.S.
Treasury at favorable rates, and, most importantly, it milks the cash cow
of a government-enforced monopoly on letter delivery. Having a captive
monopoly market means the USPS can cross-subsidize - that is, use profits
from letter delivery to fund expansion into other lines of business. Normally
this would be considered predatory monopolistic behavior, and illegal.
But the postal service is exempt from antitrust law. ...USPS is still massively
oversized, and waste abounds. Forget about the Pentagon's $600 toilet-seat
covers. The average postal worker earns over 25 percent more than his private-sector,
factory-worker counterpart. No wonder labor still accounts for two thirds
of USPS costs, compared to about 50 percent at private delivery companies.
...Across the Atlantic, such reforms are already underway. The European
Union aims to privatize all its national postal services by 2009. Yet here,
the U.S. postal service cries foul when it is faced with real market-based
reforms. Furthermore, declining mail volume, brought on by the e-mail revolution,
has resulted in more than $4.5 billion in lost USPS revenue since 2000.
And a long-term volume decline is just a small piece of the problem. Few
Americans realize that the USPS already has accumulated over $70 billion
in unfunded liabilities - mostly money promised to employees in retirement
and health benefits.
http://www.nationalreview.com/comment/ryan200503070740.asp
March 7, 2005 DOL Home > ESA > WHD > FLSA > History of Changes
History of Changes to the Minimum Wage Law
http://www.dol.gov/esa/minwage/coverage.htm
Adapted from Minimum Wage and Maximum Hours Standards Under the Fair Labor Standards Act, 1988 Report to the Congress under Section 4(d)(1) of the FLSA.
Early in the administration of the FLSA, it became apparent that application of the statutory minimum wage was likely to produce undesirable effects upon the economies of Puerto Rico and the Virgin Islands if applied to all of their covered industries. Consequently on June 26, 1940, an amendment was enacted prescribing the establishment of special industry committees to determine, and issue through wage orders, the minimum wage levels applicable in Puerto Rico and the Virgin Islands. The rates established by industry committees could be less than the statutory rates applicable elsewhere in the United States.
On May 14, 1947, the FLSA was amended by the Portal-to-Portal Act. This legislation was significant because it resolved some issues as to what constitutes compensable hours worked under FLSA. Matters involving underground travel in coal mines and make-ready practices in factories had been decided earlier in a number of U.S. Supreme Court decisions.
Subsequent amendments to the FLSA have extended the law's coverage to additional employees and raised the level of the minimum wage. In 1949, the minimum wage was raised from 40 cents an hour to 75 cents an hour for all workers and minimum wage coverage was expanded to include workers in the air transport industry. The 1949 amendments also eliminated industry committees except in Puerto Rico and the Virgin Islands. A specific section was added granting the Wage and Hour Administrator in the U.S. Department of Labor authorization to control the incidence of exploitative industrial homework. A 1955 amendment increased the minimum wage to $1.00 an hour with no changes in coverage.
The 1961 amendments greatly expanded the FLSA's scope in the retail trade sector and increased the minimum for previously covered workers to $1.15 an hour effective September 1961 and to $1.25 an hour in September 1963. The minimum for workers newly subject to the Act was set at $1.00 an hour effective September 1961, $1.15 an hour in September 1964, and $1.25 an hour in September 1965. Retail and service establishments were allowed to employ fulltime students at wages of no more than 15 percent below the minimum with proper certification from the Department of Labor. The amendments extended coverage to employees of retail trade enterprises with sales exceeding $1 million annually, although individual establishments within those covered enterprises were exempt if their annual sales fell below $250,000. The concept of enterprise coverage was introduced by the 1961 amendments. Those amendments extended coverage in the retail trade industry from an established 250,000 workers to 2.2 million.
Congress further broadened coverage with amendments in 1966 by lowering the enterprise sales volume test to $500,000, effective February 1967, with a further cut to $250,000 effective February 1969. The 1966 amendments also extended coverage to public schools, nursing homes, laundries, and the entire construction industry. Farms were subject to coverage for the first time if their employment reached 500 or more man days of labor in the previous year's peak quarter. The minimum wage went to $1.00 an hour effective February 1967 for newly covered nonfarm workers, $1.15 in February 1968, $1.30 in February 1969, $1.45 in February 1970, and $1.60 in February 1971. Increases for newly subject farm workers stopped at $1.30. The 1966 amendments extended the fulltime student certification program to covered agricultural employers and to institutions of higher learning.
In 1974, Congress included under the FLSA all no supervisory employees of Federal, State, and local governments and many domestic workers. (Subsequently, in 1976, in National League of Cities v. Usery, the Supreme Court held that the minimum wage and overtime provisions of the FLSA could not constitutionally apply to State and local government employees engaged in traditional government functions.) The minimum wage increased to $2.00 an hour in 1974, $2.10 in 1975, and $2.30 in 1976 for all except farm workers, whose minimum initially rose to $1.60. Parity with nonfarm workers was reached at $2.30 with the 1977 amendments.
The 1977 amendments, by eliminating the separate lower minimum for large agricultural employers (although retaining the overtime exemption), set a new uniform wage schedule for all covered workers. The minimum went to $2.65 an hour in January 1978, $2.90 in January 1979, $3.10 in January 1980, and $3.35 in January 1981. The amendments eased the provisions for establishments permitted to employ students at the lower wage rate and allowed special waivers for children 10to11 years old to work in agriculture. The overtime exemption for employees in hotels, motels, and restaurants was eliminated. To allow for the effects of inflation, the $250,000 dollar volume of sales coverage test for retail trade and service enterprises was increased in stages to $362,500 after December 31, 1981.
As a result of the Supreme Court's 1985 decision in Garcia v. San Antonio Metropolitan Transit Authority et.al., Congress passed amendments changing the application of FLSA to public sector employees. Specifically, these amendments permit State and local governments to compensate their employees for overtime hours worked with compensatory time off in lieu of overtime pay, at a rate of 1 1/2 hours for each hour of overtime worked.
The 1989 amendments established a single annual dollar volume test of $500,000 for enterprise coverage of both retail and no retail businesses. At the same time, the amendments eliminated the minimum wage and overtime pay exemption for small retail firms. Thus, employees of small retail businesses became subject to minimum wage and overtime pay in any workweek in which they engage in commerce or the production of goods for commerce. The minimum wage was raised to $3.80 an hour beginning April 1, 1990, and to $4.25 an hour beginning April 1, 1991. The amendments also established a training wage provision (at 85% of the minimum wage, but not less than $3.35 an hour) for employees under the age of twenty, a provision that expired in 1993. Finally, the amendments established an overtime exception for time spent by employees in remedial education and civil money penalties for willful or repeated violations of the minimum wage or overtime pay requirements of the law.
In 1990, Congress enacted legislation requiring regulations to be issued providing a special overtime exemption for certain highly skilled professionals in the computer field who receive not less than 6 and one-half times the applicable minimum wage.
The 1996 amendments increased the minimum wage to $4.75
an hour on October 1, 1996, and to $5.15 an hour on September 1, 1997.
The amendments also established a youth sub minimum wage of $4.25 an hour
for newly hired employees under age 20 during their first 90 consecutive
calendar days after being hired by their employer; revised the tip credit
provisions to allow employers to pay qualifying tipped employees no less
than $2.13 per hour if they received the remainder of the statutory minimum
wage in tips; set the hourly compensation test for qualifying computer
related professional employees at $27.63 an hour; and amended the Portal-to-Portal
Act to allow employers and employees to agree on the use of employer provided
vehicles for commuting to and from work, at the beginning and end of the
work day, without counting the commuting time as compensable working time
if certain conditions are met.
Where to Obtain Additional Information
This publication is for general information and is not to be considered in the same light as official statements of position contained in the regulations.
For additional information, visit our Wage-Hour website: http://www.wagehour.dol.gov and/or call our Wage-Hour toll-free information and helpline, available 8am to 5pm in your time zone, 1-866-4USWAGE (1-866-487-9243).
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MINIMUM WAGE HIKES HARM TEENAGERS
------------------------------------------------------------------------
Advocates of a minimum wage hike ignore the evidence
that it increases
unemployment among the least productive workers: unskilled
teenagers
whose employment opportunities are limited. This is unfortunate,
because
low wage jobs are the first rung on the economic ladder
of success for
workers entering the labor force, says Bruce Bartlett,
a senior fellow
with the National Center for Policy Analysis.
How Do Minimum Wage Increases Affect Minority Groups?
o From 1948 to 1955, unemployment
of black and white teenage males
was essentially
the same, 11.3 percent and 11.6 percent,
respectively.
o However, after the minimum
wage was raised from 75 cents to $1 in
1956, unemployment
rose significantly for both black and white
teenage males, with
blacks bearing more of the burden.
o By 1969, the unemployment
rate was 22.7 percent for black teenage
males and 14.6 percent
for white teenage males.
Moreover:
o Economists Donald Deere, Kevin
Murphy and Finis Welch found that
minimum wage increases
totaling 27 percent in 1990 and 1991
reduced employment
for all teenagers by 7.3 percent and for black
teenagers by 10
percent.
o A study of the 1996 and 1997
increases by economists Richard
Burkhauser, Kenneth
Couch and David Wittenburg also found a 2 to
6 percent decline
in employment for each 10 percent increase in
the minimum wage.
In a study published by the Federal Reserve Bank of San
Francisco, Couch
translated these conclusions into raw numbers:
o At the low end, he estimated
at least 90,000 teenage jobs were
lost in 1996 and
another 63,000 in 1997.
o At the high end, job losses
may have equaled 268,000 in 1996 and
189,000 in 1997.
Source: Bruce Bartlett, "The Minimum Wage Is Bad Policy,"
Brief Analysis
No. 499, National Center for Policy Analysis, February
4, 2005; Donald
Deere, Kevin Murphy and Finis Welch, "Employment and
the 1990-1991
Minimum Wage Hike," American Economic Review, May 1995;
Richard V.
Burkhauser, Kenneth A. Couch and David Wittenburg, "Putting
the Minimum
Wage Debate in a Historical Context: Card and Krueger
Meet George
Stigler," Center for Policy Research, June 1995; and
Kenneth A. Couch in
Federal Reserve Bank of San Francisco, Economic Letter
99-06; February
19, 1999.
For NCPA text:
http://www.ncpa.org/pub/ba/ba499/
For Deere, Murphy and Welch study (subscription required):
http://ideas.repec.org/a/aea/aecrev/v85y1995i2p232-37.html
For Burkhauser, Couch and Wittenburg text (subscription
required):
http://www-cpr.maxwell.syr.edu/incomsec/abstr10.htm
For Crouch study:
http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-06.html
For more on Economic Issues: Minimum Wage:
http://www.ncpa.org/iss/eco/
EFFECT OF MINIMUM WAGE INCREASE
Sen. Ted Kennedy and others are prepared to offer legislation
to
increase the minimum wage from its current $5.15 per
hour to $6.65.
But a report from the Employment Policies Institute based
on Census
Bureau figures finds that "the bulk of the benefits"
from raising
the minimum wage "will not reach poor families."
According to EPI:
o Just 15 percent of minimum
wage earners are sole earners in
families with children,
and each of these sole earners has
access to supplemental
income through the federal earned
income tax credit
(EITC).
o Nationally, the average family
income of employees who would
benefit from the
proposed minimum wage hike is $43,795 --
state averages reach
as high as $76,000.
o Fully 85 percent of employees
whose wages would be increased
either live with
working parents or another relative (41
percent), live alone
(23 percent) or have a working spouse
(21 percent).
Source: "Employment Policies Institute Report Concludes
Raising
Minimum Wage Does Not Help Poor Families," White House
Bulletin,
January 14, 2004; "Minimum Wage Statistics," Employment
Policies
Institute.
For text
http://www.epionline.org/mw_statistics_state.cfm
For more on the Minimum Wage
http://www.ncpa.org/iss/eco/
High Minimum Wage = High Unemployment
Published In: The Seattle Post-Intelligencer By: Craig Garthwaite
12/29/03
Why is it that Washington state's entry-level job applicants
faced one of the highest
rates of unemployment in the nation this year? The state's
unemployment rate is 15
percent higher than the national average and 42 percent
higher than it was five years
ago when the state introduced a minimum wage higher than
the federal minimum.
Washington state is not alone in experiencing this perpetual
high state unemployment.
Oregon, Washington and Alaska are among the five states
with the highest
unemployment rates. It is perhaps no coincidence that
these three states have the
highest state minimum wages in the nation. Decades of
research confirm Nobel
Prize-winning economist Gary Becker's observation: "A
higher minimum will further
reduce the employment opportunities of workers with few
skills."
Despite Washington state's relentless high unemployment,
the state's minimum wage is
set to rise for the fifth time in as many years on Jan.1,
making it 39 percent higher
than the federal minimum - the highest minimum wage in
the nation. This job-killing
increase is built into the system, thanks to a ballot
initiative that increases the state's
minimum wage regardless of job market conditions.
In many parts of the state, the jobs situation is worse
than the headline statewide rate
would have you believe. No fewer than 16 Washington cities
and counties with a
population of at least 10,000 posted an unemployment
rate of between 9 percent and
more than 14 percent last year. These areas include Lakewood
city, where the
unemployment rate was 10.9 percent; Longview city, where
it was 11.3 percent, and
Klickitat County, which had an unemployment rate of 14.3
percent.
More than 1.2 million people now live in these high unemployment
areas with
unemployment rates that have not been experienced nationwide
since the recession of
the early '80s.
Those who initiated this ill-advised indexing proposal
may believe that the latest
minimum wage increase will help those workers who have
managed to hold on to a
minimum-wage job in difficult economic times. Hard evidence
suggests a reality where
the increase will deprive many vulnerable employees of
the only opportunity they have to
earn a living and increase their wages.
Research at Michigan State University found that increases
in the minimum wage attract
more highly skilled applicants to traditionally low-skill
jobs. The study's author, David
Neumark, concluded: "Increases in the minimum wage raise
the probability that
more-skilled teenagers leave school and displace lower-skilled
workers from their jobs."
Employers prefer to hire talented young people over less-skilled
adults to offset the
increased labor costs brought on by a minimum wage increase.
Another study, from the University of Wisconsin, revealed
that this displacement of
adults by teenagers following a minimum-wage increase
was especially pronounced among
women on welfare. "Mothers on welfare in states that
raised their minimum wage left
welfare for work 20 percent less than welfare recipients
in states where the minimum
wage was not raised," the study's author, Peter Brandon,
found. The teenagers who are
competing with these women usually live with working
parents and their need for
employment is arguably not as great.
Even wage-increase proponents acknowledge this displacement
effect. Wage mandate
activist and union organizer David Reynolds says that
high minimum wages cause
businesses to "attract and retain the best workers" -
who take the jobs of the less
skilled. The union-backed Economic Policy Institute has
admitted that higher minimum
wages "will attract good workers" - meaning less-skilled
workers need not apply.
Yet while less-skilled workers do not benefit from a minimum-wage
increase, academic
research demonstrates they can get a raise without one.
Economists at Miami University
of Ohio and Florida State University found 65 percent
of minimum-wage workers
increase their wage between one and 12 months on the
job. This refutes the outdated
notion of minimum-wage workers perpetually dependent
on government to get a raise.
More than undermining their prospects for employment,
raising the minimum wage
imperils an important benefit that helps less-skilled
workers escape poverty. The federal
earned-income tax credit is a successful anti-poverty
program that supplements the
income of the working poor. But it disappears the moment
employees lose their job,
forcing the least skilled among us to depend on welfare
for as long as those benefits
last.
Exchanging the ability to provide for oneself with welfare
checks has unfortunate
consequences that reach far beyond the newly unemployed
person's pocketbook.
Research by Casey Mulligan of the University of Chicago
found that for every extra
year a mother spent on welfare, her child spent an additional
274 days on welfare as an
adult. Sad to say, raising the minimum wage not only
harms the job prospects of those
whose alternative is welfare but also their ability to
pass a strong work ethic onto their
children.
For Washington state's most vulnerable workers, many of
whom have remained in
depressed localities after business and industry have
left the area, raising the minimum
wage will deprive them of the jobs, training and increased
earnings they so obviously
need. This is surely not what supporters of indexing
the state minimum wage intended.
'Living wage' kills jobs
Thomas Sowell (archive)
November 5, 2003 | Print | Send
Give credit where credit is due. The political left is
great with words. Conservatives have never been able
to come up with such seductive phrases as the left
mass produces.
While conservatives may talk about a need for "judicial
restraint," liberals cry out for "social justice." If
someone asks you why they should be in favor of judicial restraint, you
have got to sit them down and go into a long explanation about
constitutional government and its implications and prerequisites.
But "social justice"? No explanation needed. No definition. No facts.
Everybody is for it. Do you want social injustice?
The latest verbal coup of the left is the phrase "a living wage." Who is
so
hard-hearted or mean-spirited that they do not want people to be able to
make enough money to live on?
Unfortunately, the effort and talent that the left puts into coining great
phrases is seldom put into facts or analysis. The living wage campaign
shows that as well.
Just what is a living wage? It usually means enough income to support a
family of four on one paycheck. This idea has swept through various
communities, churches and academic institutions.
Facts have never yet caught up with this idea and analysis is lagging even
farther behind.
First of all, do most low-wage workers actually have a family of four to
support on one paycheck? According to a recent study by the Cato
Institute, fewer than one out of five minimum wage workers has a family
to support. These are usually young people just starting out.
So the premise is false from the beginning. But it is still a great phrase,
and that is apparently what matters, considering all the politicians,
academics and church groups who are stampeding all and sundry toward
the living wage concept.
What the so-called living wage really amounts to is simply a local
minimum wage policy requiring much higher pay rates than the federal
minimum wage law. It's a new minimum wage.
Since there have been minimum wage laws for generations, not only in
the United States, but in other countries around the world, you might think
that we would want to look at what actually happens when such laws are
enacted, as distinguished from what was hoped would happen.
Neither the advocates of this new minimum wage policy nor the media --
much less politicians -- show any interest whatsoever in facts about the
consequences of minimum wage laws.
Most studies of minimum wage laws in countries around the world show
that fewer people are employed at artificially higher wage rates.
Moreover, unemployment falls disproportionately on lower skilled
workers, younger and inexperienced workers, and workers from minority
groups.
The new Cato Institute study cites data showing job losses in places
where living wage laws have been imposed. This should not be the least
bit surprising. Making anything more expensive almost invariably leads
to
fewer purchases. That includes labor.
While trying to solve a non-problem -- supporting families that don't exist,
in most cases -- the living wage crusade creates a very real problem of
low-skilled workers having trouble finding a job at all.
People in minimum wage jobs do not stay at the minimum wage
permanently. Their pay increases as they accumulate experience and
develop skills. It increases an average of 30 percent in just their first
year
of employment, according to the Cato Institute study
http://www.cato.org/pubs/pas/pa-493es.html
. Other studies show
that low-income people become average-income people in a few years
and high-income people later in life.
All of this depends on their having a job in the first place, however.
But
the living wage kills jobs.
As imposed wage rates rise, so do job qualifications, so that less skilled
or less experienced workers
become "unemployable." Think about it. Every one of us would be "unemployable"
if our pay rates
were raised high enough.
I would love to believe that the Hoover Institution would continue to hire
me if I demanded double my
current salary. But you notice that I don't make any such demand. Third
parties need to stop making
such demands for other people. It is more important for people to have
jobs than for busybodies to
feel noble.
THE SPREAD OF THE "LIVING WAGE"
The "Living Wage" movement has become the latest effort
to impose
socialism on the United States, one city at a time.
After a slow
beginning in the 1990s, living wage ordinances--which
impose
minimum wages much higher than the federal one--have
now been
adopted in over 100 municipalities, from Somerville,
Mass., to
Portland, Oregon, from Minneapolis to San Antonio, says
William
Tucker, columnist for the New York Sun.
Cities as large as New York, Boston, Chicago, St. Louis,
and
Denver have adopted living wages, as well as towns and
villages
as small as Taylor, Mich., Bellingham, Wash., Oyster
Bay, N.Y.,
Lakewood, Ohio, and Port Hueneme, Calif.
In practice, the living wage resembles a minimum wage
enforced at
the local level:
o The federal minimum wage is
now $5.15 an hour.
o Living wage bills typically
up this to anywhere from $7 to
$11 an hour.
In New Orleans, a $6.15 citywide minimum wage was adopted
by
popular referendum, but hotel owners sued and had it
overturned
by the Louisiana Supreme Court.
o Wary that municipal minimum
wages will run into such state
constitutional impasses,
most living wage ordinances apply
only to city workers
and contractors -- and sometime to
companies that have
received tax abatements from the city
government.
o In addition to requiring vendors
to pay $3 to $5 above the
minimum wage, some
cities are starting to mandate health
benefits, extended
vacations and other extras.
Still, since the smallest competitors cannot meet the
new wage
standards, and since the costs are imposed on all bidders,
any
increased expense is quickly passed through to the municipal
government. In the end, the living wage is
funded by taxpayers.
This doesn't bode well for the financial health of municipal
governments, which are already growing at nearly three
times the
rate of inflation, says Tucker.
Source: William Tucker, "Socialism in Every City: The
spread of
the "living wage," Weekly Standard, November 2, 2003.
For more information
http://www.weeklystandard.com
For more on Living Wages
http://www.ncpa.org/iss/min/
Indexing the Minimum Wage:
A Vise on Entry-Level Wages
Author:
The Employment Policies Institute
Date:
March 2003
PDF Version:
study_IndexingMW_03-2003.pdf
http://www.epionline.org/study_Indexing_MW_03-2003.html
Introduction
Indexing the minimum wage is a rising trend at the state and local levels.
Whether through a ballot initiative, as in Washington and Oregon, or state
legislature, as was the case in Alaska, efforts have increased in the recent
years to tie minimum wage increases to specific economic indicators such
as
the Consumer Price Index (CPI).
Washington, Oregon, and Alaska all have minimum wages exceeding the
federal standard that also increase annually based on changes in the CPI.
In
the 2001 legislative session, 24 other states considered increasing their
minimum wages, and 15 of these considered linking those increases to
indexing.
The arguments in favor of indexing are deceptively simple. Advocates argue
indexing helps low-wage workers keep up with inflation and gives “certainty”
to employers about wage increases. And besides, raising the minimum wage
every year keeps a divisive issue off the legislative calendar.
But mandated wage increases are proven to be vastly inefficient. Moreover,
there is a general consensus that forced wage hikes lead entry-level employers
to eliminate jobs or reduce work hours. Even if jobs are not cut, employers
respond to higher labor costs by shifting their hiring focus to better
skilled
employees or more capital-intensive production, leaving the least skilled
out of
the labor market.(1)
Automating minimum wage increases shifts these negative effects from a
once-in-a-while occurrence to an annual event, albeit in an incremental
fashion. Indexing is little more than an effort to institutionalize on
auto-pilot a
cycle of rising labor costs leading to reduced job growth, annual harm
to job
opportunities for the least skilled, and constant inflationary pressure,
all
without any measurable reduction in poverty.(2)
(1) See David Neumark, Mark Schweitzer and William Wascher, The Effects
of Minimum
Wages Throughout the Wage Distribution, Working Paper 9919 (Cleveland:
Federal
Reserve Bank of Cleveland, December 1999), for an overview of current minimum
wage
research on displacement and substitution effects of minimum wage increases.
(2) See Richard K. Vedder and Lowell E. Gallaway, Does the Minimum Wage
Reduce
Poverty? (Washington, D.C.: Employment Policies Institute, 2001), which
concludes that
changes to the minimum wage have not had an effect on poverty.
For a full copy including tables and charts:
Download our PDF version: study_IndexingMW_03-2003.pdf [413KB]
Santa Monica Min wage
http://www.epionline.org/study_Sander_10-2002.pdf