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Why the Minimum Wage Law Causes Unemployment
2 H. S. Perloff, Puerto Rico's Economic Future (Chicago: University of Chicago Press, 1950), Table 46, p. 154. That this was the result of the imposition of the minimum wage is indicated by the fact that it led to the establishment of separate subminimum wage rates for Puerto Rico. See Congressional Record (Washington, DC: United States Government Printing Office, 1940), Vol. 84, Part II, Appendix, pp. 1129-30..
3 P. H. Douglas and J. Hackman, "Fair Labor Standards Act of 1938, II," Political Science Quarterly, March 1939, pp. 29-55..
4 For a description of the legislation, see "Federal Wages and Hours Law of 1938," Monthly Labor Review, July 1938, pp. 107-12.
5 As the Monthly Labor Review (p. 108) description of the law explained, "The act requires the Administrator from time to time to convene the industry committees for the purpose of reaching as rapidly as 'economically feasible,' without curtailing employment, the 40-cent minimum wage rate."
6 George J. Stigler, "The Economics of Minimum Wage Legislation," American Economic Review, June 1946, pp. 358-65
7 See, for example, Jacob Mincer,"Unemployment Effects of Minimum Wages," Journal of Political Economy, Part 2, August 1976, pp. S87-104
8 See the survey in John M. Peterson, Minimum Wages: Measures and Industry Effects (Washington, DC: American Enterprise Institute, 1981)..
9 Charles Brown, Curtis Gilroy and Andrew Kohen, "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature, June 1982, pp. 487-528..
10 Mary Eccles and Richard B. Freeman, "What! Another Minimum Wage Study?" American Economic Review, May 1982, p. 227.
11 David Card, "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," Industrial and Labor Relations Review, October 1992, pp. 22-37; Card,"Do Minimum Wages Reduce Employment? A Case Study of California," Industrial and Labor Relations Review, October 1992, pp. 22-37. For a critical response to Card, see David Neumark and William Wachser, "Employment Effects of Minimum and Subminimum Wage Panel Data on State Minimum Wage Laws," Industrial and Labor Relations Review, October 1992, pp. 55-81.
12 "The Effect of the Minimum Wage on the Fast-Food Industry," Industrial and Labor Relations Review, October 1992, pp. 6-21.
13 See Neumark and Wachser,"Employment Effects of Minimum and Subminimum Wages: Reply to Card, Katz, and Krueger," Board of Governors of the Federal Reserve System Economic Activity Section Working Paper No. 144, October 1993 (23 pp.). The National Bureau of Economic Research published several working papers by Card, Krueger and Katz. The most important recent paper is David Card and Alan B. Krueger,"Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, September 1994, pp. 772-93.
14 A representative example: R.A. Zaldivar,"Minimum Wage Carries Baggage," Akron Beacon Journal, January 25, 1995,p. 1.
15 Ronald B. Ehrenberg, "New Minimum Wage Research," Industrial and Labor Relations Review, October 1992, pp. 1-4..
16 "The Cruelty of the Minimum Wage," Jobs & Capital, Summer 1993, p. 12..
17 Another study conflicting with Card and Krueger is Janet Currie and Bruce Fallick, "A Note on the New Minimum Wage Research," Working Paper No. 4348 (Cambridge, MA: National Bureau of Economic Research, 1993). A very readable summary of some of the problems with the new studies is provided by Linda Chavez, "Minimum Wage Hurts the Poor," USA Today, February 8, 1995.
18 Chavez, "Minimum Wage Hurts the Poor."
19 Neumark and Wachser,"... Reply to Card, Katz, and Krueger."
20 Lowell Gallaway and Richard Vedder,"The Employment Effects of Social Security Tax Changes and Minimum Wage Regulations: A Case Study of the American Restaurant Industry," Journal of Labor Research, Summer 1993, pp. 267-74.
21 Alan B. Krueger,"Have Increases in the Minimum Wage Reduced Employment?" Jobs & Capital, Summer 1993, p. 11.
22 The minimum wage in each quarter was converted to dollars of the purchasing power of the last quarter of 1994, using the Consumer Price Index for Urban Consumers (CPI-U) to adjust for the changing value of the dollar. We are indebted to James Coons of the Huntington (WV) National Bank, whose examination of the real wage/teenage unemployment relationship inspired this section.
23 The estimates prior to 1992 are described in Richard Vedder, Lowell Gallaway and David C. Klingaman,"Black Exploitation and White Benefits: The Civil War Income Revolution," in Richard F. America, ed., Wealth of Races: The Present Value of Benefits From Past Injustices (Westport, CT: Greenwood Press, 1990).
24 See Richard Vedder and Lowell Gallaway,"Racial Differences in Unemployment in the United States, 1890-1990," Journal of Economic History, September 1992, pp. 696-702. For other discussion of this issue, see Edna Bonacich,"Advanced Capitalism and Black/White Race Relations in the United States: A Split Labor Market Interpretation," American Sociological Review, February 1976, pp. 34-51; Robert Higgs, Competition and Coercion: Blacks in the American Economy, 1865-1914 (New York: Cambridge University Press, 1977); and Gerald D. Jaynes,"The Labor Market Status of Black Americans, 1939-1985," Journal of Economic Perspectives, Fall 1990, pp. 9-24.
25 However, not all those pushing for wage floors had altruistic motives, and the record of the debate contains accusations from Southern legislators that the proposed rules would help higher-wage Northern businesses compete with those in the low-wage South. During an earlier abortive minimum wage experiment discussed below, differential minimum wages by region were commonplace. See note 39 for details.
26 At this writing, the unemployment rate of 5.4 percent is slightly above the post-1975 low. However, correcting for the impact of the 1994 change in methods of measuring unemployment, the current rate is probably at or very near the low for the past 20 years.
27 About 60 percent of the poor people of working age in 1992 did not work at all. See U.S. Bureau of the Census, Poverty in the United States: 1992, Current Population Reports, P-60, No. 185 (Washington, DC: Government Printing Office, 1993).
28 These statistics come from the 1992 Current Population Survey. For a summary, see The Low-Wage Workforce (Washington, DC: Employment Policies Institute Foundation, 1994), especially tables 2, 6 and 10.
29 There were 223,000 non-teenage householders in households with incomes over $20,000, compared with 193,000 with incomes less than $10,000. Ibid., Table 9.
30 Interview on CNN, February 4, 1995.
31 Ibid., Tables 5, 19 and 31.
32 Ibid., Tables 3 and 19.
33 Ibid., Table 15. >
34 The source of the statistics in this discussion is the 1992 Economic Report of the President (Washington, DC: Government Printing Office, 1992), various tables.
35 In December 1978 the federal minimum wage was $2.65 per hour; in January 1981 it was $3.35 per hour. In real terms, the wage increase was far more modest because of high inflation.
36 The statistics used in this discussion come from the 1976 Economic Report of the President (Washington, DC: Government Printing Office, 1976), various tables.
37 For a fuller description of the nature and character of the Great Depression in America, see our Out of Work: Unemployment and Government in Twentieth-Century America (New York: Holmes and Meier, 1993) and Murray Rothbard, America's Great Depression (Kansas City: Sheed and Ward, 1963).
38 Herbert Hoover had a particular fascination for this notion. See our Out of Work, pp. 89-97, for details.
39 As the industry codes under the National Recovery Administration were approved, the agreed-upon minimum wages clustered about the 40-cent figure. They were not uniform, though. There often were special, i. e., lower, minimums for women and for Southern workers. The key features of 109 different approved codes are described in"Summary of Permanent Codes Adopted Under National Industrial Recovery Act Up to November 8, 1933," Monthly Labor Review, December 1933, pp. 1333-43.
40 The estimate of average hourly earnings in the United States for June 1933 is 43.5 cents. Monthly Labor Review, September 1933, p. 728.
41 By December 1933, the average hourly wage had risen by 19.3 percent from the previous June and stood at 51.9 cents. The driving up of average wage rates by the introduction of the 1933 minimum wage is recognized in the economics literature. See Paul A. Samuelson and Robert M. Solow,"Analytic Aspects of Anti-Inflation Policy," American Economic Review, May 1960, pp. 177-94; and Michael M. Weinstein, The Great Depression Revisited, Karl Brunner, ed. (Boston: Martinus Nijhoff, 1981), pp. 262-81; or Weinstein's Recovery and Redistribution Under the National Industrial Recovery Act, 1933-1936 (New York: Elsevier, 1980).
42 The monthly estimates of unemployment rates are taken from our Out of Work, Table 5.1, p. 77. The accompanying text explains how the estimates were derived.
43 An examination of the approved codes described in the December 1933 issue of the Monthly Labor Review reveals a very broad agreement on the 40-hour figure
44 In June 1933 the average workweek was estimated to be 43.3 hours. By December it was down to 37.7 hours. See, respectively, Monthly Labor Review, September 1933, p. 728, and Monthly Labor Review, March 1934, p. 798
45 The subsequent rise in unemployment in late 1937 and 1938 reflected a wage shock of another sort, largely resulting from the implementation of the National Labor Relations Act, the Social Security Act and other 1935 legislation that passed constitutional muster in 1937. See our Out of Work, chapter 7.
46 Isabel Sawhill and Mark Condon,"Is U.S. Inequality Really Growing?" Policy Bites (Washington, DC: Urban Institute, 1992).
47 Experience that comes from work increases the productivity of older workers relative to younger ones. We assume money earnings are a measure of productivity. In 1992 the mean earnings of males with less than a ninth-grade education was $21,966 for those 45 to 54 years of age, but only $13,237 for those 18 to 24. See U.S. Department of Commerce, Money Income of Households, Families and Persons in the United States: 1992 (Washington, DC: Government Printing Office, 1993), p. 145
The higher unemployment rate in the recessions of 1990-91 and 1974-75 helps explain why, over the past two decades, the poverty rate rose in the year after the completion of each minimum wage increase.
In short, the evidence suggests that raising the minimum wage would not reduce poverty. Instead, it would increase unemployment among America's most disadvantaged, and it would increase the probability of a recession within a year of its passage.