Hiking minimum wage: Be careful with wish

Posted: April 22, 2005

Craig Garthwaite is director of research at the Employment Policies Institute

As Gov. Rendell and state legislators consider a proposal for a $7 an hour minimum wage, they should also bear in mind Federal Reserve Board Chairman Alan Greenspan's warning that such a move "prevents people who are at the early stages of their careers . . . from getting a foothold in the ladder of promotions."

Wage-hike proponents often argue that minimum-wage employees haven't had a raise since Congress last increased the national rate. But few entering the workforce at the minimum wage stay there for long. Nearly two-thirds get a raise within one to 12 months. Most low-wage earners simply don't need a mandated pay raise; they get one on their own.

That leaves us with a small group of the least skilled, which may remain at a minimum-wage salary for extended periods. A wage boost for these people might seem like an attractive option - except that they are actually the people most likely to lose their jobs following a wage hike. Duke University researchers have found that after an increase in the minimum wage, the lowest skilled adults are crowded out of their jobs as better-educated teenagers (frequently from wealthier families) are drawn into the workforce. Their "need"? Simply to earn money for video games and iPods. But because they require less training, employers eagerly hire these higher-skilled teenagers to get the most out of their higher payroll costs.

Because of disparities in education, job losses often exact a crippling toll on minority communities. Cornell University researchers have determined that after a minimum-wage hike, young African Americans bear four times the employment loss of non-blacks.

In the years following World War II, the unemployment rate for young black males averaged lower than their white counterparts'. But in 1956, a 33 percent increase in the minimum wage precipitated an alarming turnaround. By 1960, unemployment for young black males had nearly doubled to 22.7 percent while increasing only slightly for young whites. By 1981, nearly annual minimum-wage increases had greatly contributed to their 40.7 percent unemployment rate.

Artificially high-wage mandates continue to price many less-educated African Americans out of the labor market. Today, the unemployment rate for young blacks is 93 percent higher than for white youth. Nobel laureate economist Milton Friedman rightly notes that joblessness among so many young blacks "is both a scandal and a serious source of social unrest. Yet it is largely a result of minimum-wage laws."

Proponents of minimum-wage increases typically frame their efforts as a way to rescue society's most economically vulnerable - seniors trying to supplement their Social Security checks or single parents struggling to raise their children. But in Pennsylvania, individuals earning $7 an hour or less have an average family income of nearly $50,000. Even former Clinton Labor Secretary Robert Reich observed that "most minimum-wage earners aren't poor."

A Cornell University study found only 15 percent of prospective wage-hike beneficiaries across the nation are in poor families. Poverty is becoming a phenomenon confined largely to nonworkers. None of them will benefit from a minimum-wage increase.

But they will be hurt by one. As any economist will tell you, businesses with many low-wage employees frequently increase their prices after a minimum-wage hike. Researchers from Stanford University have found that these price increases disproportionately affect the poor. There are more effective approaches to improving the lives of Pennsylvania's low-wage employees. Legislators should consider adopting a state earned income tax credit (EITC) to supplement the hugely successful federal program. The EITC provides substantial tax-free income, but only to those with a job. Economists from the Federal Reserve and Michigan State University have found that beneficiaries increase their work output and enjoy higher earnings, leading them toward self-sufficiency. And unlike minimum-wage increases, the EITC doesn't result in unemployment.

Contact Craig Garthwaite at garthwaite@epionline.org.

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