The Minimum Wage Trap by housework


									                                                                                                                                            BRIEF ANALYSIS
                                                                                                                                            No. 201
                                                                                                                                            For immediate release:
                                                                                                                                            Wednesday, April 24, 1996

                                                                                                            the law. However, for workers in low-wage industries,
  The Minimum Wage Trap                                                                                     those without skills, members of minority groups and
      President Clinton is asking Congress to raise the                                                     those living in areas where wages tend to be lower, the
  minimum wage by 90 cents over two years to $5.15 per                                                      impact can be severe.
  hour, a 21 percent increase. The president made the                                                             Reducing Opportunities for Youths. The unem-
  request even though most studies confirm a 1981 esti-                                                     ployment rate for black teenage males has tended to rise
  mate by the congressionally mandated Minimum Wage
  Study Commission that a 10 percent increase in the                                                        and fall with changes in the real minimum wage [see
  minimum wage reduces teenage employment by 1 per-                                                         Figure I].
  cent to 3 percent. This suggests that between 130,000                                                     • In 1948, when the minimum wage covered a much
  and 400,000 jobs will be lost if the Clinton plan is                                                            smaller portion of the labor force, the unemployment
  approved by Congress.                                                                                           rate for black males age 16 and 17 was just 9.4 percent,
      The Clinton administration has promoted studies of                                                          while the comparable unemployment rate for whites
  how increases in the state minimum wage in New Jersey                                                           was 10.2 percent.
  and California affected ,-----,-,---_ _----:-_~_~--___:_-__:_.,..___,.,..___,-c---:'-__:_-,---..........,. In 1995, unem-
  employment in fast'UnemploymentRateforBla.tkMale~                                                                                                              ployment among
  food       restaurants.                  Age 16;'19.andReal MininiuM\Vagell,ate                                                                                black teenage males
  Economists David                                                                                                                                               was 37.1 percent,
  Card       and     Alan                                                                                                                                        while the unemploy-
  Krueger, both of                                                                                                                                               ment rate for white
  Princeton, found no                                                                                                                                            teenage males was
  evidence the increases                                                                                                                                         15.6 percent.
  caused job losses.                                                                                                                                                 Current unem-
  However, other re-                                                                                                                                             ploymentisjustapart
  searchers found errors                                                                                                                                         of the long-term price
  in the data that cast                                                                                                                                          that teenagers of all
  serious doubt on the                                                                                                                                           races pay for the mini-
  validity of the Card-                                                                                                                                          mum wage. A num-
  Krueger conclusions.                                                                                                                                           ber of studies have
  Nobel Prize-winning                                                                                                                                            shown that increases
  economist          Gary       10%                                                                                                                              in the minimum wage
  Becker of the Univer-                                                                                                                                          lead employers to cut
  sity of Chicago con-           0% '-"'-l.....l...:-J....J-'-'-L-L-J....J-'--'-''-'--'-'--.............................,~'-'-'-'-LJ-'-'-'-'-'-'-'-'-J....J..CJ, back on work hours
  cluded that "the Card-           .1964       1958         1962      1966                                                                                       and training. Com-
  Krueger studies are                                                                                                                                            bined with the loss of
  flawed and cannot jus-                                                                                                                                         job opportunities, this
  tify going against the                                                                                                                                         means that many
  accumulated evidence from many past and present stud-                                                     youths, especially minorities, are prevented from reach-
  ies that find sizable negative effects of higher minimums                                                ing the first rung on the ladder of success, with conse-
  on employment."                                                                                          quences that can last a lifetime. Even some liberals
      With the exception of the Card-Krueger findings,                                                     recognize that this may be the worst effect of the mini-
  virtually every major study that has ever been done has                                                   mum wage law. For example, in 1992 former Senator
  found significant job losses from an increase in the                                                     and Democratic presidential candidate George McGovern
  minimum wage. But even if one accepts the Card-                                                          wrote in the Los Angeles Times:
  Krueger findings, evidence of other unfavorable effects                                                                 Unfortunately, many entry-level jobs are
  makes an overwhelming case that the minimum wage                                                                  being phased out as employment costs grow
  should not be raised and that, in fact, abolishing it would                                                       faster than productivity. In that situation,
  do more for those it is intended to help.                                                                         employers are pressured to replace marginal
      Among wage and salary workers, 98.2 percent al-                                                               employees with self-service or automation or
  ready earn more than the minimum or are not covered by                                                            to eliminate the service altogether. When
Dallas Headquarters: 12655 N. Central Expy., Suite 720' Dallas, TX 75243-1739' 214-386-6272' Fax: 214-386-0924' E-Mail:
                  Washington Office: 727 15th St. N.W., 5th Floor' Washington DC 20005' 202-628-6671' Fax 202-628-6474
                           For more information: Curt Erickson in Dallas at 214/386-6272 or Jan Faiks in Washington at 202/628-6671
      these jobs disappear, where will young people                         income of those in the lowest 10 percent of the income
      and those with minimal skills get a start in                          distribution. Indeed, much of the benefit of the mini-
      learning the "invisible curriculum" we all                            mum wage actually accrues to the well-off whose chil-
      learn on the job? The inexperienced applicant                        dren work part-time.
      cannot learn about work without a job.                                    Little Impact on Families. Talk about the difficulty
    Other Bad Effects. When people cannot get legiti-                       of supporting a family on the minimum wage ignores the
mate jobs, it is not surprising that they turn to crime and                fact that only a very small number of workers earning the
the underground economy.                                                   minimum wage actually support a family. According to
• Studies by Professors Masanori Hashimoto of Ohio                         the Bureau of Labor Statistics:
    State and Llad Phillips of the University of California                • Only 22,000 men and 191,000 women nationwide
    at Santa Barbara both show that increases in the                            maintained families on a minimum wage job in 1993.
    minimum wage increase teenage crime.                                   • Thirty-seven percent of minimum wage workers in
• A study by Professor William Beranek ofthe Univer-                            1995 were teenagers, probably living at home, and 59
    sity of Georgia found that the minimum wage in-                            percent were age 24 or younger.
    creases employment of illegal aliens, who are un-                      • About 17 percent of minimum wage workers are
    likely to report any violations of the Fair Labor                           wives, and thus are likely to be secondary earners.
    Standards Act to the Department of Labor.
                                                                           • Sixty-six percent of minimum wage workers work
    Research also shows that the minimum wage in-                               only part-time; these include students, the elderly
creases welfare dependency. For example, a recent                              with pension or Social Security income and people
study by Peter Brandon of the University of Wisconsin                          simply looking for a little extra cash.
found that the average time on welfare among states that
raised the minimum wage was 44 percent higher than in                          These data actually overstate the number of minimum
states that did not. Much of the reason is reduced                         wage workers, because 49 percent work in retail trade,
employment opportunities for welfare mothers.                              such as restaurants, where tips and commissions may
                                                                           add to their income but are not counted as wages.
   Intuitively, one would expect a higher minimum                          Further, the data include only money wages and exclude
wage to make work more rewarding for those on welfare.                     fringe benefits, which push the total income of most
However, the interaction of the welfare and tax systems                    minimum wage workers well above the minimum. As a
means that some working people are actually worse off                      consequence, many employers respond to increases in
after an increase in the minimum wage. Economist                           the minimum wage by cutting back on benefits.
Carlos Bonilla of the Employment Policies Institute
found a dramatic example of this in California after the                       Employers also respond by cutting back on hours,
minimum wage rosefrom $3.35 to $4.25. After account-                       installing labor-saving equipment and by changing the
ing for the phase-out of AFDC (Aid to Families with                        mix of part-time and full-time workers. This is one
Dependent Children), Medicaid and food stamps, and                         reason why it is difficult to find a bank teller or someone
for federal, state and local taxes, a single parent earning                to wait on you at the local department store. Between
the minimum wage was $1,800 per year worse off after                       1963 and 1995, average weekly hours worked in retail
the increase than before.                                                  trade, the industry most affected by the minimum wage,
                                                                           fell from 37 .3 to 28.9, while hours worked in higher-paid
   Finally, the latest research has shown that increases in
                                                                           industries that are basically unaffected by the minimum
the minimum wage encourage high school students to
                                                                           wage, such as mining and construction, increased.
drop out - enticed by the lure of higher pay for unskilled
work. This reduces their lifetime earnings and displaces                       Even the New York Times, a bastion ofliberalism, has
lower-skilled workers at the same time.                                    called for the abolition of the minimum wage. The
   Given these kinds of effects, it is not surprising that                 headline on its January 14, 1987 lead editorial said, "The
the minimum wage has almost no impact on poverty or                        Right Minimum Wage: $0.00." Indeed, according to
on increasing the incomes of the poor. Although some                       Professors Robert Meyer of the University of Chicago
poor people are better off because they get higher wages,                  and David Wise of Harvard, abolition would actually
others are worse off because they lose their jobs. One                     increase the aggregate income of youth in this country.
study found that the 22 percent increase in the minimum                       This Brief Analysis was prepared by NCPA Senior
wage in 1976 added just $200 million to the aggregate                      Fellow Bruce Bartlett.
           Note: Nothing written here should be construed as necessarily reflecting the views of the National Centerfor Policy Analysis
                                         or as an attempt to aid or hinder the passage I!f any legislation.

To top