The Trade-offs Involved In Increasing The Minimum Wage

Posted: April 10, 1988

WASHINGTON — Ask any worker earning the minimum wage if he or she would like a pay raise, and odds are good the answer will be yes.

After all, at $3.35 an hour - $134 a week, $6,968 a year - the federal minimum wage isn't much. And because it hasn't been raised since January 1981, inflation has eroded its buying power by 30 percent.

Ask the same worker if he or she would like to be fired or have work hours

cut back, however, and the answer probably will be no.

But the worker can't have the raise without risking the loss.

Economists agree that raising the minimum wage will mean fewer minimum-wage jobs and hours; experts disagree, however, over how many jobs and hours might be lost.

Many business people and Republicans say the impact would be severe.

"A total of almost 1.3 million employee hours, or nearly 1,500 salespersons, would have to be eliminated to maintain our current payroll costs," James B. O'Donnell, executive vice president of the Gap Stores, a national retail chain, said in congressional testimony.

Democrats and labor leaders say the effect would be imperceptible and that, in any case, it is the right thing to do.

"No one who works eight hours a day, five days a week, 52 weeks a year should be condemned to poverty wages," said Sen. Edward M. Kennedy (D., Mass.), chairman of the Senate Labor and Human Resources Committee and sponsor of the legislation.

In testimony, AFL-CIO president Lane Kirkland said, "Congress has been subjected to the same doomsday predictions every time the issue is considered. Those predictions didn't come true before, and they won't come true this time."

Higher hourly wages, but fewer jobs and hours - those are the essential stakes as Congress wrestles this month over whether to raise the minimum wage. Liberals want to raise it, conservatives don't, and economists as usual come down squarely on both sides.

If there were a "typical" minimum wage earner, she would be a white, unmarried female, age 24 or younger, a high school graduate, a part-time retail worker, probably in a restaurant - and a member of a family whose household income is well above the official poverty line.

That's the "typical" profile that emerges from federal labor and census statistics. It masks tremendous variety among individuals, however; 35 percent of minimum-wage workers are male, for example, and 34 percent work full-time.

Last year, 4,697,000 Americans earned the minimum wage or less. That's 7.9 percent of the total workforce that is paid at hourly rates.

The House is expected to vote, perhaps this week, on whether to raise the minimum wage in four stages to $5.05 by Jan. 1, 1992. The Senate labor panel also expects to act soon, partly because the federal minimum wage is lower than that of 11 states and the District of Columbia. Many in Congress want to impose national uniformity. Meanwhile, whichever law's minimum is higher governs.

In some areas, including around Philadelphia, employers have had to pay well above the legal minimum to attract workers to entry-level jobs such as fast-food work.

Labor Secretary Ann McLaughlin underscored the Reagan administration's pro- business tilt by warning that unless Congress lowers its target wage she will recommend a veto to President Reagan.

Today the federal minimum wage is only 37 percent of the average wage- earner's hourly pay - the lowest ratio since the mid-1950s. Raising it to $5.05 by 1992 is intended to restore the ratio to about 50 percent of the

average hourly wage, the traditional goal.

The pivotal question upon which the argument turns, however, is how many jobs that would cost. Both sides marshal heavily documented studies.

Which is correct? It is difficult, perhaps impossible, to measure precisely the economic consequence of raising the minimum wage, because an increase cannot be isolated from other factors affecting the economy.

Nevertheless, one authoritative source quoted by both sides - selectively - is Charles Brown, a University of Michigan economics professor. He was the senior staff economist on the U.S. Minimum Wage Study Commission appointed by President Jimmy Carter in 1978. After exhaustive research, the commission issued a seven-volume report in 1981.

The commission concluded that each 10 percent increase in the minimum wage ''leads to a 1 to 3 percent reduction in teenage employment," Brown told the House Education and Labor Committee. Each 1 percent equals about 65,000 jobs, he said.

Boosting the minimum wage to $5.05 would be a 50 percent increase. That would cost between 325,000 and 975,000 teenage jobs, according to the formula. If Brown's low-range estimate is correct, and he believes it is more plausible, about one teenager in 20 would lose a job opportunity. If his high estimate held true, it would be one in seven.

The commission's estimates measure loss of both current and potential minimum-wage jobs and hours, Brown said.

That's an important distinction. It explains why economists say raising the minimum wage results in fewer jobs, even though national employment, as AFL- CIO leaders have pointed out, typically has not fallen after the minimum wage was increased.

Opponents say that overall economic growth masks declines in minimum-wage jobs and that low-skill workers priced out of minimum-wage jobs don't get the better ones created by growth.

Opponents also insist that raising the minimum wage sends an inflationary ripple through the workforce and translates into higher product prices.

Yet the Minimum Wage Study Commission concluded that "the effect of a 10 percent sustained annual rise in the minimum wage over its historical level

from 1974 to the second quarter of 1979 would have increased wages 0.8 percent and consumer prices somewhat less than 0.3 percent. This effect is small. . . . "

The other major point of contention is whether minimum-wage workers necessarily are poor.

In 1985, 69.8 percent of minimum-wage recipients - 3.6 million people - lived in households in which at least one other person held a job, and whose 1984 family incomes were "well above the poverty line," according to a June 1987 study by Ralph E. Smith and Bruce Vavrichek, economists with the nonpartisan Congressional Budget Office.

The poverty level for a family of four is $11,617; for a single person, $5,776.

Dry statistics, however objective, do not begin to measure the depth of sentiment on this issue.

To liberals, raising the minimum wage is simply social justice.

"For 50 years (the minimum wage) has been a social contract to protect the standard of living of the working poor," states a Feb. 20 letter supporting the legislation signed by Nobel Prize-winning economist Lawrence R. Klein of the University of Pennsylvania and 55 other prominent economists.

"Six times this nation has raised the minimum wage," their letter states, ''and the historical experience offers NO evidence of significant employment and business disruption."

Richard Berman spearheads opponents at the Minimum Wage Coalition to Save Jobs, made up of 135 trade associations, including the U.S. Chamber of Commerce.

"The only question is how many people are you pricing out of the labor market," Berman says. "You tend to focus on the social or moral side, but you lose sight of the economics of it. And the person who loses on that side is the person with the least skills."

Sen. Kennedy scoffs at such arguments.

"As we have all learned in past battles on the minimum wage, no one fears more for the future of the country than a well-paid executive about to be required by law to raise the minimum wage for his lowest-paid employees," Kennedy said when introducing the legislation.

"Six times we have made this fight, and six times the sky has not fallen in."

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