Issues and Allegations: Minimum Wage

• Background
• Conservative Perspective
• Liberal Perspective
• Notes and Sources
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WHY WE USE "CONSERVATIVE" AND "LIBERAL"

Background

In 1938 the Fair Labor Standards Act (FLSA) established a national minimum wage and maximum hour standard. The initial minimum
wage was 25 cents per hour, about 40 percent of the 1938 average manufacturing wage. Today the minimum wage stands at $5.15 an hour, about 33 percent of the 2003 average wage.

Unlike social security payments, the minimum
wage does not automatically increase to keep pace with inflation. Congress must act for it to rise.
Since 1938 Congress has done so 17 times, the
last time in 1996. At times almost a decade has passed between increases. During that time the effective purchasing power of the minimum wage can drop significantly. In real (inflation-adjusted) dollars, the value of the minimum wage peaked in 1968 at $8.46 (in 2003 dollars). Click here for a chart showing the minimum wage in current and constant dollars from 1938 to 2004.

Originally the FLSA covered less than half the work force. Over the decades Congress expanded coverage several times. Today more than 90 percent of private employees are covered.[1]

All but seven states have their own minimum wage laws.[2] A majority sets the level equal to that of the FLSA. Twelve boast higher minimums.[3] Two states require lower minimum wages than the federal government.[4]

Where an employee is subject to both federal and state minimums, the employee is entitled to the higher of the two.[5]

About 7 million people currently earn the minimum wage. Millions more earn just above the minimum. About 8 percent of men and l3 percent of women earn the minimum wage. Sixty percent are below the age of 25. One third are teenagers.

The problem

The minimum wage has not increased in eight years. Its effective buying power has dropped to its lowest level since 1949.

The conservative perspective

Conservatives maintain that wage levels are best established by the market. Matthew Kibbe of the Center for the Study of Market Processes sums up the argument, "Employers attempt to purchase the specific skills they need at the lowest available price, while individuals selling their labor attempt to find the highest-bidding employer. Every market price, including a wage, is simply the outward expression of what employers perceived to be consumers' preference. If consumers do not value a particular good or service offered on the market, labor, as well as the other factors involved in producing the good, will be worth little. Thus, it is the individual—the sovereign consumer—who has the final say in determining wages."[6]

Conservatives contend that minimum wage laws are an inefficient and ineffective tool for fighting poverty. Some 60 percent of the poor do not work. Moreover, as Richard Vedder and Lowell Gallaway of the National Center for Policy Analysis note, "Minimum wage workers are not parents struggling to feed their children. Rather, they are high school or college students living at home. The level of the minimum wage is irrelevant for most people in poverty. Only 9.2 percent of poor people of working age have full-time jobs." Almost 60 percent of the minimum wage increase from $3.35 to $4.25 in the early 1990s went to families with incomes at least twice the poverty level. Only 17 percent went to families below the poverty level.[7]

For conservatives the Earned Income Tax Credit (EITC)[8] is a better tool for alleviating poverty than the minimum wage. It allows government to target assistance to the small portion of the workforce raising families on low incomes instead of inefficiently and indiscriminately distributing assistance to individuals without children or above the poverty level.[9]

Conservatives argue that people earning the minimum wage often need the experience and training offered by entry-level jobs more than the money itself. People who make $5.15 an hour are typically looking for experience or extra money not a "living wage" insists the Employment Policies Institute.[10] "The overwhelming majority of minimum wage earners are teenagers holding their first job which allows them the opportunity to 1) develop good work habits early in life; 2) gain experience in order to move on to better paying jobs; and 3) develop self-reliance", explained the Joint Economic Committee of Congress (JEC) in a brief issued in 1995.[11]

When the government artificially raises wages it actually hurts those most in need. "When wages are increased by fiat there is no accompanying increase in productivity. The employer can replace low wage workers with more productive workers. Or substitute machines or just cut back", observe economists Donald Deere, Kevin Murphy and Finis Welch in Regulation magazine..[12] They point to one study that examined the impact of the increase from $3.35 to $3.80 in the minimum wage in the early 1990s. The increase resulted in 4.8 percent fewer teenage men, 7.5 percent fewer teenage blacks and 6.6 percent fewer teenage women employed.

Dr. Peter Brandon of the Institute for Research on Poverty found that in those states that raised the minimum wage mothers remained on welfare 44 percent longer than in states where it was not raised.[13] A Joint Economic Committee brief explains, "The reason for this result is that raising the minimum wage induces some people to enter the labor market who would not apply if not for the higher level. With a larger labor market, employers choose higher-skilled applicants. Thus raising the minimum wage hurts low skilled workers in two ways. First, there are fewer jobs available. Second, with a larger pool of applicants, competition is stiffer."

In 1981 the Congressionally-mandated Minimum Wage Study Commission issued its seven- volume report. Some of its studies estimated a reduction in teenage employment of 1-3 percent for every 10 percent increase in the minimum wage.[14] Thus the 90 cent increase in the minimum wage, from $4.25 to $5.15 an hour, a 21 percent increase, would result a loss of 130,000-400,000 teen jobs.[15]

After examining many past academic studies of the relationship between minimum wages and employment the Joint Economic Committee concluded, "The impact of raising the minimum wage has been studied since its inception. All credible research has come to the same conclusion: raising the minimum wage hurts the poor. It takes away jobs, keeps people on welfare and encourages high-school students to drop out."[16]

The liberal perspective

Liberals maintain that minimum wage hikes can help alleviate poverty. As Henry J. Aaron, an economist at the Brookings Institution notes "If your objective is to make work pay well enough so that it takes fewer earners in a family to keep the family out of poverty, then raising the minimum wage is a worthy goal."[17]

Liberals note that just under half (46%) of those earning minimum wages in the mid 1990s worked full time. Another third worked 20 to 34 hours per week. The average minimum wage worker is responsible for providing more than half (54%) of his or her family's weekly earnings. The two stage increase in 1996-1997 disproportionately benefited low-income households. While households in the bottom 20 percent of the income distribution (average income $15,728) receive only 5 percent of total family income, they received 35 percent of the benefits from the minimum wage increase.[18]

Liberals note that minimum wage increases benefit not only those earning the minimum wage but millions more in modestly higher wage brackets. The Economic Policy Institute concluded that the two step minimum wage increases in 1996 and 1997 raised the wages of almost 10 million workers.[19]

As for the minimum wage's impact on employment, EPI maintains, "Not only are the estimated employment effects generally economically small and statistically insignificant, they are also almost as likely to be positive as negative." Nobel Laureate economist Robert Solow of MIT observes, "The main thing about the research is that the evidence of the job loss is weak…And the fact that the evidence is weak suggests the impact on jobs is small."[20]

Liberals point out that even if the figure widely used by conservatives of a 1 percent reduction in teen employment from a 10 percent increase in the minimum wage were valid it would indicate that the benefits far exceed the costs.

A growing number of economists, spurred on by the studies of David Card and Alan B. Krueger in the late 1980s and early 1990s, are accepting that higher minimum wages could boost employment.[21] Former Vice Chairman of the Federal Reserve and Princeton economist Alan S. Blinder observes that some 20 different studies by two dozen authors have produced similar results to those of Card-Krueger. Blinder explains why jobs might not be lost despite the increase in wages. Paying a higher minimum wage might reduce job turnover enough to pay for itself by avoiding the high costs of training new workers, leaving companies with no incentive to reduce employment. Also employers might not be willing to offer higher pay to attract new workers if all existing workers have lower wages. Raising the minimum wage makes this potential problem moot. Finally, minimum wage labor may constitute such a small and relatively fixed proportion of costs that an increase only marginally affects overall costs.[22]

A recent survey of 1,000 economists found a significant change in their position on the tradeoff between the minimum wage and unemployment in the last decade.[23] In 1990 almost 63 percent of those surveyed agreed with the statement, "Minimum wages increase unemployment among young and unskilled workers." By 2000 agreement had fallen to about 45 percent.

Proponents of higher minimum wages also see it as an effective strategy for generating employment in a sluggish economy. Low-income workers are more likely to spend any additional resources they might receive. Therefore, higher minimum wages would "result in greater immediate economic stimulus per dollar of cost than tax cuts for high-income individuals."[24]

Liberals support current legislation (HR 965 and S 224) that would raise the current $5.15 minimum wage in two stages to $6.65.