The illusions of the minimum wage

[Tigermike 3,053]

Steve Chapman 

The illusions of the minimum wage

Hike in pay floor could result in a lot fewer jobs

Published March 6, 2005

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 Sen. 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 notes that it has not been lifted since 1997, 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 (R-Pa.).

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 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 Bill 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 Board 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 pay 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 wage 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 ...

E-mail: schapman@tribune.com

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[DKW 86 7,440]

Guys, raising the minimum wage is a great way iof paying back some, not all unions. Some unions have a minimum wage multiplier built into their contracts.

Example: Say they have wage X and it is 5.5 times the minimum wage. Their contract may state that they get a 5xMinimum wage as standard. A real minimum wage increase would mean 5x the new wage, which may give some union folks a wage boost.

Politics are everywhere.

[BamaGrad03 0]

I hate the argument that some use when they say "how can someone feed a family of 4 on minimum wage"...I want to say its not MY fault or the employer's fault that they have a family of four...but arent resonsible enough to have a job that pays more than it does the 14 year old that does the same job.

MINIMUM WAGE IS FOR KIDS! Therefore, it doesnt need to be 8 dollars an hour. It only screws the people who make just above minimum wage. You think the person who has a harder job and makes 8 dollars an hour is going to get a raise when they raise minimum to 8? Hell no.

[Auburn85 432]

If the wage was a mandatory $8.00 an hour, wouldn't jobs be lost or what about inflation?

I do understand that making $5.15 in Alabama is different that making $5.15 in New York or California.

[Piglet 0]

You want jobs, put money in the pockets of the workers.

They'll spend it, demand will go up, companies will have more orders to fill, and will hire more workers to meet demand.

That Card/Krueger study focused on waitstaff jobs in New Jersey v. Pennsylvania, and found that more jobs were created when the minimum wage went up. The reason was that better paid workers could afford to eat out more, therefore the restaurants did more business and needed more staff as the restaurant filled up. They did not lose money due to the higher wages because they got more total business.

Minimum wages ain't socialism, folks. It's the Henry Ford model of capitalism. Ford paid his workers well because he knew that only a worker with a decent income could afford to buy his cars.

[rexbo 104]

Minimum wages ain't socialism, folks.  It's the Henry Ford model of capitalism.  Ford paid his workers well because he knew that only a worker with a decent income could afford to buy his cars.

149659[/snapback]

Well, it's easy then, let's make the minumum wage $75/hour and we can all drive Expeditions!!!

[Piglet 0]

You're being fatuous, rexbo. We all know it's possible to have too much of a good thing as well as too little. You might as well say, turkey dinners are good therefore you should eat 25 of them in one day.

[rexbo 104]

You're being fatuous, rexbo. We all know it's possible to have too much of a good thing as well as too little. You might as well say, turkey dinners are good therefore you should eat 25 of them in one day.

149672[/snapback]

I would be fat if I ate 25 turkey dinners in one day!

[BamaGrad03 0]

Piglet, you didnt address any of my questions....

[TitanTiger 20,511]

My problem with not having any minimum wage at all is that is it the business owners who have the power in this scenario. There will always be someone whether it be a kid or someone willing to "underbid" the average worker who will work for less. It's the worker that gets taken advantage of in this situation.

I just don't honestly think that most people who say they oppose a minimum wage want to see the results of that come to fruition. Labor unions may not do much good anymore, but some of the things they fought for in the early days like 40 hour work weeks and a minimum wage are good things for society.

Now, we can argue about what that wage should be, but I don't think it should be abolished.

[Ranger12 46]

Piglet, your argument is very flawed. Yes, if the minimum wage goes up, there is more money in worker's pocket. However, wherre your point is flawed is to presume that there would be more spending which means more demad for products, which means more jobs. Don't know where you read that at, but that is the first time I have ever heard that reason to be used to raise minimum wage, but as Rexbo pointed out, if that was the truth and then it would be through the roof. The fact is, when minimum wage is increased, the cost of goods naturally increase as well. That does not translate into more demand and more jobs. Don't belieive it? Then I challenge you to go back and research the price of some common everday products and groceries relative to when minimum wage is raised. This also happens when the average household salary takes a leap up also.

[Auburn85 432]

I just thought of something........... apparently wages are too high for businesses to afford because they outsource jobs for CHEAPER labor. And don't forget the illegal aliens working for almost nothing

So I think it would hurt job creation