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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Steve Chapman

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