March
6, 2005
The Illusions of the Minimum Wage
By Steve
Chapman
Asking Democrats
if they favor an increase in the minimum wage is like asking Martha
Stewart if she'd mind sharing some decorating ideas. There are
few things they'd rather do, and Ted Kennedy thinks it is high
time.
The Massachusetts
Democrat is offering a measure that would boost the wage floor
from $5.15 to $7.25 an hour over the next two years. He noted
that it has not been lifted in eight years, during which time
senators have gotten seven pay raises. "If the Senate is serious
about an anti-poverty agenda," he said, "let's start by raising
the minimum wage." Republicans, meanwhile, might accept an increase
of $1.10, as proposed by Sen. Rick Santorum of Pennsylvania.
It may seem
like an inescapable truth that if you increase the amount employers
pay their lowest-wage workers, you will have fewer poor people.
Money, after all, is what they lack, and a higher minimum wage
means more money to those in the worst-paying jobs.
In fact,
this is one of those obvious facts that turns out not to be a
fact at all. The available evidence suggests that raising the
minimum wage doesn't do what it's supposed to do.
How can that
be? Although you can force employers to pay their workers more,
you can't force them to employ people. If you raise the tax on
cigarettes by $2.10 a pack, people will smoke fewer cigarettes.
The minimum wage functions as a tax on hiring low-wage workers
-- which means companies will look for ways to do without some
of them.
Economists
have always taken this effect as an unfortunate reality. But a
few years ago, ardent proponents of wishful thinking hailed a
study that seemed to confirm their hopes.
Princeton
economists David Card and Alan Krueger looked at what happened
in New Jersey when it raised its minimum wage and neighboring
Pennsylvania didn't. Far from losing jobs, they reported, New
Jersey enjoyed a boom in hiring compared to its neighbor -- suggesting
that companies would much rather pay higher wages than lower ones.
President Clinton even cited their work as proof that we could
boost the minimum wage without fear.
If this
claim were to prove accurate, says Hoover Institution economist
David Henderson, we should expect stores to start raising prices
instead of cutting them when they want to clear out unsold merchandise.
As it happens, the study fared poorly under scrutiny.
Economists
David Neumark of Michigan State University and William Wascher
of the Federal Reserve System got more comprehensive data and
found that actually, New Jersey didn't gain jobs compared to Pennsylvania
-- it lost them. Not only that, but in both states, rain continued
to travel downward rather than upward. Even the most vigorous
supporters of the minimum wage don't really believe that the higher
the wage, the more jobs there will be. If they did, they wouldn't
propose an increase of $2 an hour -- they'd be pushing for a raise
of $10 or $20 an hour. What harm could it do?
It's conceivable
that the minimum wage could be a boon to the poor even though
it destroys some jobs. Those low-wage workers who keep their jobs
are better off, after all, and they are bound to outnumber the
losers. The net effect could be beneficial to those at or below
the poverty line. Neumark and Wascher, however, have found that
for every poor family that gets out of poverty thanks to a change
in the minimum wage, there is a non-poor family that falls into
poverty.
Neumark,
now with the Public Policy Institute of California, says that
many low-wage workers aren't poor, or even close to it. About
a third of them, including a lot of middle-class teenagers, live
in households with above-average incomes. Raising the wage floor
makes it easier for them to buy gasoline and movie tickets, but
it does nothing to combat poverty.
What's more,
he's found, the people most likely to lose their jobs because
of the minimum wages are not middle-class teens but poor adults.
The federal floor has the perverse effect of inducing companies
to lay off the very people it is supposed to help -- while channeling
money to those who need it least. The bottom line, Neumark writes,
is that "minimum wages deliver no net benefits to poor or low-income
families and, if anything, make them worse off."
Kennedy
and his fellow Democrats may think they're doing poor people a
favor. But with friends like these . . .
©2005
Creators Syndicate
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