THE MINIMUM WAGE TRAP

President Clinton is asking Congress to raise the minimum wage by 90 cents over two years to $5.15 per hour, a 21% increase. In 1981, the congressionally-mandated Minimum Wage Study Commission concluded that a 10 percent increase in the minimum wage reduced teenage employment by 1 percent to 3 percent. This estimate is confirmed in more recent studies by David Neumark of Michigan State and William Wascher of the Federal Reserve Board, and Kevin Murphy of the University of Chicago, and Donald Deere and Finis Welch of Texas A&M. This suggests that between 130 thousand and 400 thousand jobs will be lost if the Clinton plan is approved by Congress.

The Clinton Administration has challenged the widespread view among economists that an increase in the minimum wage will reduce jobs by referring to the recent work of economists David Card and Alan Krueger, both of Princeton. Their studies of fast food restaurant employment after New Jersey and California increased their state minimum wages found no evidence of job loss.

However, there were flaws in the data that cast serious doubt on the validity of the Card-Krueger conclusions. In a paper published by the National Bureau of Economic Research, Neumark and Wascher reexamined their data, which originally came from telephone surveys. Using actual payroll records from a sample of the same New Jersey and Pennsylvania restaurants, Neumark and Washer concluded that employment had not risen after an increase in the minimum wage, as Card and Krueger had claimed, but in fact had fallen. A review of the Card study of California by Professor Lowell Taylor of Carnegie Mellon University found that the state minimum wage increase had a major negative effect in low-wage counties and for retail establishments generally. Thus Nobel Prize winning economist Gary Becker of the University of Chicago concluded that "the Card-Krueger studies are flawed and cannot justify going against the accumulated evidence from many past and present studies that find sizeable negative effects of higher minimums on employment."

The fact is that virtually every major study that has ever been done has found significant job losses from an increase in the minimum wage, with the rare exception of those done by Card and Krueger. (Krueger served as chief economist for the U.S. Department of Labor under Robert Reich.) A survey of earlier studies by the U.S. General Accounting Office in 1983, for example, "found virtually total agreement that employment is lower than it would have been if no minimum wage existed."

But even if the minimum wage had no effect on overall employment, there are still strong arguments against raising it. First, it is important to understand that the impact of the minimum wage is not uniform. For 98.2 percent of wage and salary workers, there is no impact at all, because they either already earn more than the minimum or are not covered by it. However, for workers in low-wage industries, those without skills, members of minority groups, and those living in areas of the country where wages tend to be lower, the impact can be severe. This is why, historically, economists have always found that the primary impact of the minimum wage has been on black teenagers.

In 1948, when the minimum wage covered a much smaller portion of the labor force, the unemployment rate for black males age 16 and 17 was just 9.4 percent, while the comparable unemployment rate for whites was 10.2 percent. In 1995, unemployment among black teenage males was 37.1 percent, while the unemployment rate for white teenage males was 15.6 percent. The unemployment rate for black teenage males has tended to rise and fall with changes in the real minimum wage.

But current unemployment is just a part of the long-term price that teenagers of all races pay for the minimum wage. A number of studies have shown that increases in the minimum wage lead employers to cut back on work hours and training. When combined with the loss of job opportunities, this means that many youths, especially minority youth, are prevented from reaching the first rung on the ladder of success, with consequences that can last a lifetime. Even liberals now recognize that this may be the worst effect that the minimum wage has. For example, in 1992 former Senator George McGovern wrote in the Los Angeles Times:

Unfortunately, many entry-level jobs are being phased out as employment costs grow faster than productivity. In that situation, employers are pressured to replace marginal employees with self-service or automation or to eliminate the service altogether. When these jobs disappear, where will young people and those with minimal skills get a start in learning the "invisible curriculum" we all learn on the job? The inexperienced applicant cannot learn about work without a job.

When people cannot get legitimate jobs, it is not surprising that they turn to crime and the underground economy. Studies by Professors Masanori Hashimoto of Ohio State and Llad Phillips of the University of California, Santa Barbara both show that increases in the minimum wage increase teenage crime. And a study by Professor William Beranek of the University of Georgia found that the minimum wage increases employment of illegal aliens, who are unlikely to report any violations of the Fair Labor Standards Act to the Department of Labor.

Research also shows that the minimum wage increases welfare dependency. A recent study by Peter Brandon of the University of Wisconsin, for example, looked at welfare rates in states that increased their minimum wages in the 1980s with those that did not. In those that did, the average time on welfare was 44% higher than in states that did not. Much of the reason is due to reduced employment opportunities for welfare mothers. In states not raising the minimum wage, half of welfare mothers worked during the years surveyed, while in states that raised the minimum wage only 40% reported working.

Intuitively one would have expected a higher minimum wage to make work more rewarding for those on welfare. However, the interaction of the welfare and tax systems means that some working people are actually worse off after an increase in the minimum wage. Economist Carlos Bonilla of the Employment Policies Institute found a dramatic example of this in California after the minimum wage rose from $3.35 to $4.25. After accounting for the phase-out of AFDC (Aid to Families with Dependent Children), Medicaid, and food stamps, and federal, state, and local taxes, it turned out that a single parent earning the minimum wage was $1,800 per year worse off after the increase than before.

Finally, the latest research has shown that increases in the minimum wage encourage high school students to drop-out--enticed by the lure of higher pay for unskilled work. This has the effect of reducing their lifetime earnings and displacing lower-skilled workers at the same time.

Given these kinds of effects, it is not surprising, therefore, that the minimum wage has almost no impact on poverty or increasing the incomes of the poor. Although some poor people are better off because they get higher wages, others are worse off because they lose their jobs. Thus one study found that the 22 percent increase in the minimum wage in 1976 added just $200 million to the aggregate income of those in the lowest 10 percent of the income distribution. Indeed, much of the benefit of the minimum wage actually accrues to the well-off, whose children get paid more for part-time jobs.

Although proponents of a higher minimum wage often talk about the difficulty of supporting a family on the minimum wage, only a very small number of workers earning the minimum wage actually do so. In 1993 only 22 thousand men and 191 thousand women nationwide maintained families on a minimum wage job, according to the Bureau of Labor Statistics.

According to the latest BLS data for 1995, 37 percent of minimum wage workers were teenagers, probably living at home, and 59 percent were age 24 or younger. About 17 percent of minimum wage workers are wives, and thus likely to be secondary earners, and 66 percent only work part-time. These include students, the elderly with pension or Social Security income, and those simply looking for a little extra cash.

Moreover, these data overstate the number of workers earning only the minimum wage. Some 49 percent of minimum wage workers, for example, work in retail trade, such as restaurants, where tips and commissions may add to their income, but are not counted as wages. Also, data on minimum wage workers is based solely on money wages, excluding fringe benefits. Such benefits on average increase money incomes by better than 40 percent, according to the U.S. Chamber of Commerce, thus pushing the total income of most minimum wage workers well above the minimum. As a consequence, many employers respond to increases in the minimum wage by cutting back on benefits.

Employers also respond by cutting back on hours, installing labor-saving equipment and by changing the mix of part-time and full-time workers. This is why it is difficult to find a bank teller or someone to wait on you at the local department store. Between 1963 and 1995 average weekly hours worked in retail trade, the industry most affected by the minimum wage, fell from 37.3 to 28.9, while hours worked in higher paid industries such as mining and construction, that are basically unaffected by the minimum wage, increased.

The case against the minimum wage is strong. In fact, it should be abolished. Even the New York Times, that bastion of liberalism, has said so. As the headline on its January 14, 1987 lead editorial put it: "The Right Minimum Wage: $0.00." Indeed, according to Professors Robert Meyer of the University of Chicago and David Wise of Harvard, abolition would actually increase the aggregate income of youth in this country. Raising the minimum wage simply moves us further in the wrong direction.

Academic Research Showing Lower Employment from the Minimum Wage

Many studies have been done on the minimum wage over the last 50 years. Virtually all show that increases in the minimum wage reduce employment. Following is a fairly comprehensive list of studies that have appeared in respected academic journals showing a negative relationship between employment and the minimum wage. Economists generally give more weight to articles appearing in such journals because they are refereed by fellow economists. The articles are presented in chronological order.

1. George Stigler, "The Economics of Minimum Wage Legislation," American Economic Review (June 1946).

2. John M. Peterson, "Employment Effects of Minimum Wages, 1938-50," Journal of Political Economy (October 1957).

3. H.M. Douty, "Some Effects of the $1.00 Minimum Wage in the United States," Economica (May 1960).

4. Marshall Colberg, "Minimum Wage Effects on Florida's Economic Development," Journal of Law and Economics (October 1960).

5. Yale Brozen, "The Effect of Statutory Minimum Wage Increases on Teen-age Employment," Journal of Law and Economics (April 1969).

6. Thomas G. Moore, "The Effect of Minimum Wages on Teenage Unemployment Rates," Journal of Political Economy (July/August 1971).

7. Marvin Kosters and Finis Welch, "The Effects of Minimum Wages on the Distribution of Changes in Aggregate Employment," American Economic Review (June 1972).

8. Douglas Adie, "Teen-Age Unemployment and Real Federal Minimum Wages," Journal of Political Economy (March/April 1973).

9. Finis Welch, "Minimum Wage Legislation in the United States," Economic Inquiry (September 1974).

10. H.F. Gallasch, Jr., "Minimum Wages and the Farm Labor Market," Southern Economic Journal (January 1975).

11. Jacob Mincer, "Unemployment Effects of Minimum Wages," Journal of Political Economy (August 1976).

12. Edward M. Gramlich, "Impact of Minimum Wages on Other Wages, Employment, and Family Incomes," Brookings Papers on Economic Activity (No. 2, 1976).

13. James F. Ragan, "Minimum Wages and the Youth Labor Market," Review of Economics and Statistics (May 1977).

14. Finis Welch and James Cunningham, "Effects of Minimum Wages on the Level and Age Composition of Youth Employment," Review of Economics and Statistics (February 1978).

15. Peter Linneman, "The Economic Impacts of Minimum Wage Laws: A New Look at an Old Question," Journal of Political Economy (June 1982).

16. Daniel S. Hammermesh, "Minimum Wages and the Demand for Labor," Economic Inquiry (July 1982).

17. Robert H. Meyer and David A. Wise, "The Effects of the Minimum Wage on the Employment and Earnings of Youth," Journal of Labor Economics (January 1983).

18. Robert H. Meyer and David A. Wise, "Discontinuous Distributions and Missing Persons: The Minimum Wage and Unemployed Youth," Econometrica (November 1983).

19. James C. Cox and Ronald L. Oaxaca, "Minimum Wage Effects With Output Stabilization," Economic Inquiry (July 1986).

20. David Neumark and William Wascher, "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws," Industrial and Labor Relations Review (October 1992).

21. Donald Deere, Kevin Murphy, and Finis Welch, "Employment and the 1990-1991 Minimum Wage Hike," American Economic Review (May 1995).