Minimum Wage Hike and the Uninsured

Commentary by John C Goodman

Unless President Clinton vetoes the legislation, Congress is set to increase the minimum wage a dollar an hour, from $5.15 to $6.15, over the next two to three years.

Proponents argue that a single mother with children who earns only the minimum wage is still living in poverty. As an antipoverty program, they say, a higher minimum wage is better than welfare. The problem with that argument is that very few poor people are earning the minimum wage and very few people who do earn the minimum wage are poor.

Only 8 percent of people living in poverty are working full time at the minimum wage. Even if we raised the minimum wage to $100 an hour, only a tiny portion of poor families would actually be helped. Most people who do earn the minimum, moreover, are far from poor. In fact, the average family income of employees who would benefit from a wage hike is $37,782.

Almost 12 million workers would be affected by a minimum wage increase. The majority of these are young. Only 2.8 percent of minimum wage workers are over the age of 30. Many are part-timers. Minimum wage employees also are typically newcomers to the labor market who need to learn the basics of showing up on time and shouldering responsibilities. And pay increases as new skills are mastered. According to the Census Bureau, the average income of minimum wage employees increases 30 percent within one year of employment.

Although a hike in the minimum wage will do almost nothing to reduce poverty, it will have other, harmful consequences. When the minimum wage goes up, the first thing that employers do is cut back on other forms of compensation, including health insurance, day care, job training and working conditions.

In a recent study for the Board of Governors of the Federal Reserve System, economist Louise Sheimer concluded that in most cases the trade-off between wages and employer-provided health insurance is dollar for dollar. Thus, for low-paid employees with health insurance, a $1 per hour increase in the minimum wage could result in a $1 per hour decrease in employer-provided health insurance.

If employers can't reduce other spending, they start laying people off. And that's bad news for teenagers, especially minority teenagers. Although the unemployment rate for the nation as a whole is low, for teenagers its in double digits and almost one in three black teenagers is unemployed.

Economic studies find that a 10 percent increase in the minimum wage lowers the employment of teen-agers by as much as 3 percent. With about eight million teen-agers in the workforce, this implies that a $1 increase in the minimum wage would result in as many as 240,000 more young people unemployed.

The best solution is to have no minimum wage. Barring that, employers should be able to count spending on health insurance for their employees against any minimum wage increase. For a person working full time, for example, a $1 increase in the minimum wage amounts to $2,000 a year - enough to purchase an individual health insurance policy in most places. A couple, both working at the minimum wage, would have a wage increase of $4,000, enough to purchase a family policy in most places.

Market forces will largely neutralize the impact of a minimum wage increase, and the minimum-wage employee is unlikely to be much better off than before the increase. Society will be worse off, however, if the wage increase comes at the expense of increasing the number of uninsured. Minimum wage workers deserve a better option.