NCPA - National Center for Policy Analysis


July 11, 2007

The federal minimum wage went up on July 1 and hardly anyone noticed.  That's because the debate was always more about political posturing than economic reality.  An "effective" wage hike must actually raise someone's wages.  With labor-market wages already significantly above $5.85 an hour, this "hike" was largely ineffective in raising wages, says Bradley Schiller, a professor of economics at American University.

But what about those two million workers the Democrats said would get a pay boost from the legislated wage increase?  According to the U.S. Labor Department:

  • There were only 479,000 workers earning $5.15 an hour (the previous minimum wage) in 2005.
  • Those minimum wage workers represented only 0.35 percent of the 140 million-worker labor force -- and that was two years ago.
  • Today the labor force is larger and the number of minimum wage workers smaller.

The other 1.4 million workers cited by the Democrats were actually earning less than $5.15 in 2005.  But neither they nor their employers were breaking the law, says Schiller:

  • The Fair Labor Standards Act contains a long list of exemptions, including tipped employees, seasonal recreation workers, charitable organizations, mom-and-pop businesses, farm workers and Samoan laborers.
  • This huge "uncovered" (exempt) segment of the labor force not only restrains the wage impacts that Democrats promise but also obscures the disemployment effects that Republicans project.

For example:

  • A worker displaced by a legislated wage hike at McDonald's can take a waiter or busboy job in a sit-down restaurant.
  • In the process, uncovered employment becomes a substitute for increased unemployment.
  • The "beneficiary" of the legislated wage hike may actually experience a wage decline in the process.

As a result, the true displacement effects of an effective minimum wage hike are not easily observed, much less measured, says Schiller.

Source: Bradley Schiller, Min Wage, Max Politics," Wall Street Journal, July 11, 2007.

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