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: email@example.com 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.
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