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Thursday, August 1, 1996

Minimum Wage Plus

Fixing Wages Destroys Jobs

Doug Bandow is a senior fellow at the Cato Institute and a nationally syndicated columnist. He is the author and editor of several books, including The Politics of Envy: Statism as Theology (Transaction).

What could be more appropriate in Washington than a bipartisan congressional majority pushing to increase the minimum wage? Legislators always move with alacrity when they are giving away other people’s money.

But while the public might be tempted to celebrate an increase as a victory for working people, it will help only those who remain employed. Decades of research demonstrate that fixing wages destroys jobs; the only question is how many. Nearly two dozen studies during the 1970s and 1980s reached a rough consensus that a ten percent rise in the minimum cuts teen employment by one to three percent. The Minimum Wage Study Commission, created in 1977 by a Democratic Congress and staffed by President Jimmy Carter, concluded that a ten percent increase in the minimum reduces employment opportunities by between .5 and 2.5 percent. Indeed, the nonpartisan General Accounting Office stated that it found virtually total agreement that employment is lower than it would have been if no minimum wage existed. In 1988 the Congressional Budget Office warned, in a report which some opponents attempted to suppress, that a proposed hike to $5.05 would destroy between 250,000 and 500,000 jobs.

Moreover, the Progressive Policy Institute issued its first policy paper on the minimum wage, concluding that certainly, employers will hire fewer minimum-wage workers when they have to pay more for them. The Employment Policies Institute (EPI) has published a dozen or more studies documenting the ways in which a minimum-wage hike would hinder job creation, reduce the number of hours worked by those who stay employed, and encourage companies to substitute better-educated, middle-class employees for disadvantaged, lower-skilled workers seeking to escape poverty. Even the few economists who favor the proposed increase don’t dispute that it will throw some people out of work. They just say the number will be small.

This should come as no surprise. Unfortunately, however good the politicians’ intentions, government fiat cannot erase economic reality. People who earn little do so for reasons other than employer greed: lack of education, skills, and experience. Indeed, many minimum-wage workers are young people just entering the labor force.

Unfortunately, setting a legal minimum does not address the reasons people receive low salaries. It simply tells employers not to hire anyone who can’t produce that amount. The result is higher unemployment, concentrated among the most disadvantaged, particularly urban teens. No one who understands economics disputes this central point: arbitrarily raising the minimum above a worker’s productivity level means the person won’t be hired.

For years advocates of the minimum wage—labor unions, whose skilled members benefit from the wage floor; liberal politicians seeking to buy votes from poorer workers; and left-wing ideologues, who prefer social engineering to improving people’s lives—simply ignored the facts. Confident that anyone who lost his job would blame something else, perhaps capitalism or Reaganomics, Congress steadily raised the minimum wage even as teen unemployment soared.

But now, after disdaining academic inquiry their entire careers, minimum-wage advocates have suddenly become interested in the facts. They finally found a report that fit their political preconceptions.

Alas, the analysis of a 1992 New Jersey minimum-wage hike, by Princeton’s David Card and Alan Krueger (the latter later hired by the Department of Labor), was, according to a detailed review by EPI, based on ludicrously flawed data. EPI Executive Director Richard Berman explains that his organization studied the actual number of employees and found that the payroll records do not match the Card-Krueger data. Only a handful come anywhere close. Michigan State University economist David Neumark and William Wascher of the Federal Reserve Board figure the actual impact to have been a 2.7 percent decrease in employment for every ten percent minimum-wage hike.

Indeed, minimum-wage advocates should avail themselves of EPI’s extensive body of work, conducted by a host of outside economists. For instance, in 1993 Bruce Fallick, from UCLA, and Janet Currie of MIT, concluded that teenagers whose earnings were raised by increasing the minimum were more likely to lose their jobs. The larger the gap, the greater the probability that there will be a loss of employment.

In the same year, Lowell Taylor of Carnegie Mellon reported on California’s most recent minimum-wage hike. His conclusion: every one percent hike cut retail employment by .8 to .9 percent. Also released in 1993 was a review of recent studies by David Neumark. He reported that the best estimate of the range of effects is that a 10 percent increase in the minimum wage reduces employment of teenagers by 1 to 2 percent, with the effect generally closer to 2 percent.

A 1994 study by two University of South Carolina economists, John Addison and McKinley Blackburn, found that raising the minimum wage did nothing to lower poverty rates. In another EPI paper in early 1995, David MacPherson from Florida State University and William Even of Miami University showed that for every dollar in minimum-wage increases going to single parents, about $4.50 goes to single individuals and $6.80 to children and others living in their parents’ homes.

Another 1995 study by David Neumark found that minimum-wage increases lure additional higher skilled teens into the workforce, supplanting disadvantaged kids. Those displaced, he warns, are more likely to end [up] neither enrolled nor employed, a prescription for social disaster. Also last year, Kevin Lang of Boston University discovered a similar phenomenon when studying eating and drinking establishments. This is the real research record.

There’s also the little matter of principle—of fundamental fairness to employers. Helping those in need should be a concern of every individual in society, not just firms that hire the most unskilled labor. Yet raising the minimum wage penalizes the very companies that are doing the most to assist the disadvantaged by providing them with jobs.

However, if Congress really believes that it can repeal economic reality, it should consider the proposal by John McClaughry, head of Vermont’s Ethan Allen Institute. Let workers sue the federal government if they lose their job, or fail to find a job, because of the increase. And take any awards out of the Labor Department’s budget and the office accounts of legislators who voted to raise the minimum.

Of course, the right method to raise wages is to improve education and lower taxes. Today’s educational monopoly is warehousing rather than teaching inner-city kids; why not give their parents a choice in schools, increasing the likelihood that future workers will be prepared for higher-wage jobs? If federal officials really care about the earning power of minimum-wage workers, why not ease the payroll tax burden, which falls most heavily on those who earn the least? Unfortunately, they won’t do either one, because doing so would reduce their power.

Hiking the minimum wage was neither fair nor efficient. But then, so what else is new? Yet again, politicians are crying crocodile tears over the plight of workers, blaming the private sector for the consequences of their own failed policies.

  • Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.