The Debate Over Minimum Wage
The Clinton Administration served notice in 1993 that it intended to seek an increase in the federal minimum wage. Liberal politicians applauded the new president, agreeing that an increase was overdue and deserved. However, their conservative counterparts lamented the policy proposal, fearful that a minimum wage
hike would further unsettle the economic recovery that was underway at the time. Both liberals and conservatives began to marshal their statistical forces to support the long held claims concerning the positive and negative consequences of a minimum wage increase. Since then, political rhetoric has often ruled the minimum wage debate
. (Mckenzie, 10, 1994)
Minimum wage is a contentious issue because it is debated in a wide and eclectic audience. Minimum wage is at the heart of the economist's interest; he is in pursuit of finding its connection to job loss
. Countries all over the world, including all members of the OECC, maintain minimum wage laws. For this reason, it is of obvious importance to policy makers. Because those that tend to earn a minimum wage are disproportionately from low income and minority families, the minimum wage has attracted attention from social activists as well. The topic is perhaps most interesting to the average American. At some point in our lives, almost everyone has been paid the minimum wage. Due to this fact, it is of popular debate over dinner, at restaurants, and in the typical American living room.
The people of the United States should support raising the federal minimum wage because empirical evidence proves that it does not lead to job loss. Americans know a raise in the minimum wage is one way to help make work pay. For many working Americans an increase in the minimum wage will make the difference between living in poverty and not. Furthermore, a higher minimum wage, a floor to ensure workers that they're getting a fair deal for their efforts, provides a foothold into the middle class for many other families who would otherwise not earn a middle class living.
America of the 1990's is a country of increasing disparity, where the wealthy are moving ahead while the working class is falling behind. In this economic phenomenon, the middle class is disappearing. One of our major defenses to ensure those in the working class receives a fair wage, is legislation providing for one. While many opponents of minimum wage cite labor supply and demand concerns with a legislated wage, we must look at the facts instead of the mere theory. Have raises in the federal minimum wage led to connected increases in unemployment? The evidence shows that the answer is an overwhelming "no". The federal minimum wage does not lead to unemployment; instead it raises the living standards of those most vulnerable in our society. As we enter the next century, it is incumbent upon our legislators to ensure that those at the lowest economic spectrum of our society receive a fair and livable wage.
In his 1995, State of the Union message, President Clinton proposed an increase in the federal minimum wage. In his weekly radio address on March 30, 1996, Clinton said, "it is hard to raise a family on $4.25 an hour. We must make sure that a minimum wage is a living wage " (Norlund, 1997, 208). Taking the challenge directly to the US Senate, the president argued that over the five past years "while the minimum wage has been stuck at $4.25 per hour, a senator's salary has gone up by a third from $101,900 to 133,600" (Norlund, 1997, 208).
Ask Adam Smith
"A man must always live by his work, and his wages must at least be sufficient to maintain him. They must, even upon most occasions, be somewhat more; otherwise it would impossible for him to bring up a family, and the race of workers would not last beyond the generation"
(Smith, 1789, 95)
Although we often identify Adam Smith with the "invisible hand" and complete market freedom including that of the labor market, Smith was highly critical of the control employers had over the labor market during his era. Smith firmly believed that high wages were an indication of a robust economy. Smith said that
Workers desire to get as much, the masters to give as little as possible It is not, difficult to foresee which of the two parties, must, upon all ordinary occasions, have the advantage in the dispute, and force the other into compliance with their terms. The masters being smaller in number can combine much more easily.
(Smith, 1798, 83)
Here Smith is suggesting the workers need some sort of aid in settling a dispute over wages with their more powerful employers. In my opinion, this aid could be a set minimum wage. However, it would be misleading to suggest that Smith was an advocate of government intervention in wages. In fact, Smith said that
The price of labour cannot be ascertained very accurately anywhere. When wages are not regulated by law, all we can pretend to determine what is most usual"
(Smith 95, 1798).
However, I believe that Smiths concern over government intervention was an aspect of the times in which he lived. I think that if Smith were alive today, his concern for wages may override his concern over government intervention. Since Smith was capable of being both a political scientist and economist, perhaps he would trade a marginal degree of market freedom in exchange for a livable wage for workers. Smith said that
" Where wages are high accordingly, we shall always find the workmen more active, diligent, and expeditious, than where they are low" "The same cause however, which raises the wage of labor, tends to increase its productive powers, and makes a smaller quantity of labor produce a greater quantity of work"
(Smith, 1798, 99 and 104).
Adam Smith was perhaps the first classical economist. He believed that higher wages led to higher productivity and in the long run, a better economic outcome. I believe that Smith was entirely accurate.
The History of A Legislated Wage
Like Adam Smith, from the early part of the century, American legislators were concerned about the wages paid to laborers and the control that employers had on wages. Although separated by over a century, Smith and Roosevelt agreed that something must be done to give workers more power over their employers in determining their wage. The role of government in this determination however, differed drastically.
Although many people associate a rise in wages with Roosevelt's 1938 Fair Labor Standard Act, concern over a minimum wage in the US developed much earlier. In 1895, American feminist Florence Kelly went into sweatshops and tenements to find out how women and children were being unfairly paid and exploited. (Evans, 1998, 78) She won landmark wage and employment reforms in Illinois only to see the US Supreme Court voice its opinion that they offended the employers' private property rights. In 1899, living in New York, she developed the "sociological" brief and devised a model statue of minimum wage laws. In 1912, Massachusetts passed the first minimum wage law, and in the next decade, 16 states including the District of Columbia adopted legislation establishing minimum pay standards for minors and women in a variety of industries and occupations. (Evans, 1998, 79) The constitutionality of minimum wage increases was challenged almost immediately, and in 1923, the United States Supreme Court declared the law setting a minimum wage in the District of Columbia unconstitutional. The court reconsidered its decision several times over the nest decade, in the 1937, the high court finally reversed its decision effectively upholding a Washington state law and setting the stage for the Fair Labor Standards Act of 1938. (Evans, 1998, 80)
A guaranteed minimum hourly wage and maximum workweek were important issues during the 1930s, and the Fair Labor Standards Act of 1938 was a milestone in the history of American labor. It was designed to prevent the exploitation of workers and provide unskilled and part-time workers with a wage floor. The original minimum wage had many exclusions, the major exclusions being farm and household domestic workers, so that the primary effect was on urban and manufacturing workers. Part of their idea of minimum wage was t ople of this country, by an overwhelming vote, are in favor of having the Congress, this Congress, put a floor below which industrial wages shall not fall, and a ceiling beyond which the hours of industrial labor shall not rise"
(Norlund, 1997, 50)
Roosevelt went on to show his support of a federal minimum wage increase by proclaiming,
"No reasonable person seeks a complete uniformity in wages in every part of the United States; nor does any person seek an immediate and drastic change from the lowest pay to the highest pay. We are seeking, of course, only legislation to end starvation wages and intolerable hours; more desirable wages are and should be the product of collective bargaining"
(Norlund, 1997, 40)
Within the first eleven years of the minimum wage the nation participated in one world war, emerged as a safe harbor for millions of immigrants, experienced one of the fastest periods of growth in the nation’s history, and underwent many other economic and social changes. The minimum wage legislation was set in place with little apparent economic disruption. Part of the reason for the smooth implementation may have been that the nations' interests were focused elsewhere. More probably however, the program addressed the critical needs of the times.
The Economic History of the Minimum Wage
Minimum wage legislation also has an interesting economic history. The view that a minimum wage reduces employment was not always as strongly held by economist as it is today. Economist who led the field of theoretical economics during the beginning to middle half of the 20th century believed that the minimum wage could actually increase employment in certain situations, although they conceded it could lower employment in other situations. They believed that higher wages could reduce worker turnover and increase productivity. Alternatively, increases could shock some firms into adopting better management practices, leading to gains in output and employment.
With the emergence of the neoclassical view of economics during the 1960's, the consensus view on minimum wages changed radically. The idea of the neoclassical model is that each worker is contributing to his or her marginal product of labor. Therefore, if a worker is earning $3.50 per hour and contributing the same amount to the firms revenue, and the federal government then imposes a minimum wage of $4.25, it becomes no longer profitable for the employee to work. Employers would be tempted to adjust their new operations so workers were worth at least as much as the new minimum wage. The theory states that these changes would cut low skilled employment and replace it with machinery and high skilled labor. Minimum wage tests the foundation of the neoclassical model. This many be one reason why so many economists believe that minimum wage does lead to unemployment; they do not want to have to abandon this model. Many alternative economists find the neoclassical model outdated; its predictions sometimes silly. Many economists feel that the model may be a good tool, however it simply makes too many assumptions to be effective in today's complex economy ( Card and Krueger 55-57, 1995).
Another more recent economic model investigates the monopsony situation. The assumption of the model is that firms operate with ongoing vacancies. Although each firm would like to hire more workers at the current wage, it is not worthwhile to offer a higher wage because the firm would have to increase the wage of all their current employees. Current employees would not be satisfied if new hires made more than their initial wage. In this situation, a small increase in the minimum wage will lead employers to increase employment because a higher minimum wage enables formerly low wage firms to fill vacancies quickly. (They have an excuse not to pay the "higher ups" more because it is now the law to pay new hires more) Of course, if the minimum wage is raised too many firms will choose to cut employment, just as in the conventional model. (Card and Krueger, 102-110, 1995)
. Today, minimum wage is the standard for the lowest wage that is acceptable in our society. Some people have argued in the last thirty years that the minimum wage has become less of a safety net for primary earners in poor families than a floor for the wages of teenagers and other secondary earners from Higher-income families. To the extent that this has become the case, it
is largely the result of the failure of the Reagan administration to propose an increase during the 1980s.
As an antipoverty tool the minimum wage undoubtedly is inefficient; it is not as well targeted as the Earned Income Tax Credit, and very large changes may have adverse effects on the employment opportunities of new entrants to the labor force and lower-skill workers. However, the
minimum wage is an important link between the pay of these workers and the higher-wage jobs in the economy. It also has a significant spillover effect onto the wages of workers who are paid just above the minimum. In addition, it directly rewards work and attachment to the labor force.
Dr Leete: You ask me how we regulate wages; I can only reply that there is no idea in the modern social economy which at all corresponds with what was meant by wages in your day.
Julian: By what title does the individual claim his particular share? What is the basis of allotment?
Dr Leete: His title is his humanity. The basis of his claim is the fact that he is a man
(From Richard Bellamy’s Looking Backward ( Bellamy, 1798, 62)
Estimates suggest that more than sixty percent of workers have worked for the minimum wage at some time in their career. In 1994, more than 4.8 million people worked for wages at or below the minimum wage, 3.4 million were adults and 1.4 million were teenagers aged 16 to 19. (Democratic Leadership Homepage. www.house.com/democrats) The group of those working for the minimum wage represented 7.36 percent of all workers who were working for an hourly wage. When the wage rate increase of the Clinton Administration took effect, 11.8 million people were earning the new minimum wage of $5.15 per hour. Some analysts suggest that the actual amount of people earning the minimum wage is actually higher because the government only counts those paid hourly in its calculations. They do not count those paid by the week, month, year, or at piece rates (wages based on how much you sell etc). The government statistics tend to disprove the popular myth that a minimum wage increase only effects teenagers working at and other low paying fast food chains. Since 1991, the purchasing power of the minimum wage has dropped by more than 10%. Most of the deterioration occurred during the nine years when it was held at $3.35 per hour under the Reagan Administration during the 1980's. The increases of the 1990's have still left the minimum wage at more than $1.00 below the average of the 1970's. (Norlund 95-98, 1997) Economists at the Economic Policy Institute have analyzed the effects of the fall in the real value of the minimum wage on the overall wage structure. They found that for workers without a college education (75% of the labor force), maintaining the minimum wage at its 1979 purchasing power would have resulted in a significantly smaller decline in the real hourly wage rate of those earning above the minimum. The widening inequality of the overall wage structure in America is reflected in the fact that in 1989 the minimum wage had fallen to the lowest level relative to the average wage in fifty years and is rapidly declining again after a small gain in 1990 and 1992. For most of the past four decades, the minimum wage averaged 45 and 50 percent of the average wage in the economy.
Raising the minimum wage is one way to make work pay. A recent study concluded that the decline in the real value of the minimum wage since 1979 accounts for 20% of the rise in wage inequality for men, and 30% for women. According to the study,3.66 million workers paid by the hour earn at or below the minimum wage. An increase in this living wage is a strong response to the stagnant incomes that many of these workers face. Contrary to popular opinion, the average worker affected by an increase in the minimum wage is not just a teenager flipping hamburgers. Only one in fourteen is a teenage student from a family with above average earnings. The fact is, almost two-thirds of minimum wage workers are adults, and four in ten are the sole breadwinner of their family. (Department of Labor Homepage-www.dol.gov)
Recent analysis by the Economic Policy Institute and preliminary work by the Department of Health and Human Services suggests that 300,000 people would be lifted out of poverty when the minimum wage was raised to $5.15 per hour. This figure includes 100,000 children who are currently living in poverty. The current poverty line for a family of 4 is $15,600. A family of 4 with one worker earning $4.25 an hour and working full-time year round ($8,500) would receive a tax credit of $3,400 under the 1996 provisions of the EITC, will collect food stamps worth $3,5l6, and will pay $650 in payroll taxes. This family would end up $1018 below the poverty line. On the other hand, for a family of 4 with one worker earning $l0, 300 (a full-time year round worker at $5.l5 per hour), the EITC would provide the maximum tax credit ($3,560), food stamps would provide $2,876, and they would pay $788 in payroll taxes. The increase in the minimum wage, along with EITC and food stamps would lift this family out of poverty. The President's proposal to raise the minimum wage by $.90 would generate $1800 in potential income for minimum wage workers.
Current Wage Proposed Wage
Salary 8500 10300
Tax Credit 3400 3560
Food Stamps 3516 2876
Payroll Taxes -834 -788
Total Wage 14582 15984
Poverty Line 15600 15600
Below/Above Poverty -1018 384
An analysis of low-wage workers shows that the main beneficiaries of this one-dollar increase would be working women, almost one million of whom are single mothers. In fact, of the 11.8 million workers who would receive a pay increase as the result of his higher minimum wage, 58% would be women, simply because, as a group, they earn lower wages than men. (Norlund, 1997, 83) As a result, a minimum wage increase would help to reduce the overall pay gap between women and men. Since the minimum wage is not indexed to inflation, when Congress fails to raise the minimum wage, these workers' purchasing power declines, as was the case over the 1980s. Even with the two increases thus far in the 1990s, the minimum wage remains 19% below its inflation-adjusted 1979 level. This decline in the minimum wage helps to explain the growth of wage inequality and the diminished earnings of low-wage female workers over the last two decades. The states with the largest numbers of working women who would benefit from the increase are: Texas (669,000), California (572,000), Florida (414,000), New York (372,000), Ohio (345,000), and Pennsylvania (338,000). (Norlund, 1997, 85) Parents with children under 18 years old represent 32.9% of the beneficiaries of the proposed increase, while such workers represent 40.4% of the total workforce. More than two million married men and women with children would benefit from the proposed increase (and within these families, women are disproportionately the direct beneficiaries). Almost one million (967,000) single mothers would receive a pay increase as a result of a one-dollar rise in the minimum wage. Note that single mothers are over-represented in the affected workforce - they represent 10% of those affected by the increase but are only 5.7% of the overall workforce. About 18% of the benefits of a one-dollar increase would go to households with incomes below $10,000 per year; another 32% of the benefits would go to households with annual incomes between $10,000 and $25,000. In total, households making less than $25,000 a year would receive half of the benefits of a one-dollar increase. (Card and Krueger, 150-172. 1997)
According to the model presented in nearly every introductory economics textbook, increases in minimum wage lowers the employment of minimum wage workers. This assumption is derived from simply supply and demand equations, where a price floor in wages, would cause an excess supply in the labor market, lowering demand, and causing unemployment. This logic has convinced most economics, polls show over 90% of professional economists agree with the prediction that a higher minimum wage reduces employment. However a new body of evidence shows that there may be a positive effect of the minimum wage on employment and more importantly, previous minimum wage studies finds little support for the prediction that minimum wages reduce employment. Two recent empirical studies prove this case. First, a study of employment in the fast food industry, where minimum wage work is common, after the recent 1992 increase in the New Jersey minimum wage shows that employment was not affected adversely by the law. Relative to restaurants in Pennsylvania, where the minimum wage remained unchanged, employment in New Jersey actually expanded with the increase in minimum wage. Employment growth was higher at restaurants that were forced to increase their wages to comply with the law. (Norlund, 100-130, 1997)
Second, a cross-state analysis found that the 1990 and 1991 increases in federal minimum wage did not affect teenage employment adversely. In high wage states such as California and Massachusetts, relatively few teenagers were in the range where a minimum wage increase would affect pay rates, whereas in low wages states such as Mississippi and Alabama, as many as 50% of teenagers were in the minimum wage category. On the basis of the previously described textbook model of the minimum wage, one would expect teenage employment to decrease in the low wage states, where the federal minimum wage raised pay rates, relative to high wage states, where the federal minimum wage had a far less effect. However, statistical results show no meaningful difference between high wage and low wage states after the change. If anything, the states with the largest fraction of workers affected by the minimum wage had the largest gains in teenage employment. Again, the evidence shows that increases minimum wages does not cause an increase in unemployment as the textbook models suggest. (Norlund, 132-150, 1997)
Although theory indicates minimum wages increases cause adverse employment effects, studies of the fast food industry where one state has increased its minimum wage and a neighboring state has not, tend to prove that a higher wage has a negligible effect on the number of people employed. An increased minimum wage could help to narrow the steady widening of wage differentials between low and high skilled workers and have a favorable effect on the overall problem of increasing income inequality. The most recent increase in the minimum wage the $0.90 increase phased in over the 1996-97 period is a case in point. The study noted above examined the short-term effects of the increase and found that the policy had its intended effect: it raised the wages of low-wage workers from low-income families without leading to job losses. However, many critics of the last increase argued that the negative effects take a few years to materialize. If so, the current low-wage labor market should certainly be providing this evidence. Yet, month after month, low-wage and minority workers post historic gains. In recent months, the unemployment rates of African Americans, Hispanics, and 16 to 24 years olds (who are statistically more likely to be low-wage earners) all hit 30-year lows. Similarly, the employment rate of young (16-25 year old) African American women with a high school diploma increased by 6.6 percentage points in 1995-98, and their unemployment rate fell by 4.2 percentage points. These gains are much larger than the average changes in these labor market indicators. This last group (young minority females with high school degrees) is especially relevant in light of welfare reform, which has required many of these women to move from the welfare rolls and into the job market. Due to welfare reform and the growing economy, welfare caseloads have fallen precipitously since 1996, a trend that coincided with the most recent minimum wage increase. The relevant question is whether the increase has made it more difficult for these women to find work. If this were the case, we would expect the growth in their employment rates to have been dampened by the wage increase. However, the data show that, even with the 1996-97 minimum wage increase, the employment rates of single moms, after stagnating for many years, rose steeply from 62% in 1995 to 69% by 1998. (Norlund, 170-175, 1997) Of course, not all single mothers were on welfare, but among those who were, employment rates grew from 40% in 1995 to 49% in 1997, by far the highest level on record.
In discussing the minimum wage, Robert M. Solow, a Nobel laureate in economics at the Massachusetts Institute of Technology, recently told the New York Times, "The main thing about (minimum wage) research is that the evidence of job loss is weak. And the fact that the evidence is weak suggests that the impact on jobs is small." (Norlund, 176, 1997) The American public supports increasing the minimum wage by a solid margin. Nearly every survey finds overwhelming support for raising the minimum wage. For example, a national poll conducted in January 1995 for the Los Angeles Times found that 72% of Americans backed an increase in the wage, confirming a December 1994 Wall Street Journal/NBC News survey that found raising the minimum wage is favo ton). (Smith, 1, 1999)
Opposition to an increase in the minimum wage is centered on two arguments. First, it is claimed that a legislated increase will reduce employment opportunities for lower skill workers and new labor force entrants. This is based primarily on the MPL theory explained previously. However, recent studies including the Pennsylvania and New Jersey study suggests that when the real value of existing minimum has deteriorated over a long period, the actual effects on employment or hours worked are less clear than the theory predicts. A second argument is that raising the minimum wage is an ineffective way to raise the incomes of workers at the lower end of the wage scale because it is poorly targeted, because many affected workers are either teenagers from non-poor families or secondary workers. Although more than three-fourths of the workers who are affected by the minimum wage are adults, and a majority of those living in either poor families or families in which the primary earner has low wages, a modest minimum wage increase would not put them above the poverty line. This leaves many that oppose minimum wage increases to instead support the earned income tax credit. Unfortunately, the current majority of Republicans in the House and Senate oppose both minimum wage increases and the EITC.
The employment effects of a minimum wage change are currently under hot debate in the economics profession. Although theory indicates minimum wages increases cause adverse employment effects, studies of the fast food industry where one state has increased its minimum wage and a neighboring state has not, tend to prove that a higher wage has a negligible effect on the number of people employed. Those opposed to increasing the minimum wage assert that they do care for the American worker. They cite studies that show a link between increasing the minimum wage and higher unemployment. The added payroll and benefits costs of further increases to the minimum wage may be too much for many employers, particularly small businesses, to bear. Many opponents to minimum wage hikes advocate technical training and education to increase the marketability of America's workers, investing in their future by elevating many of them out of minimum-wage status rather than simply ratcheting up the bottom end. staunchly opposes increases to the federal minimum wage, and accuses President Clinton of "political pandering." The president, they allege, publicly supports the minimum wage during election years and periods when Congress is Republican-controlled, but remains quiet on the issue at other times.
Another point that those who often oppose minimum wage suggest is that an increase in the minimum wage causes wage spillovers. In other words, when a company increases the minimum wage it pays, it was also institute a higher wage throughout the entire hierarchy of workers to make their pay more equitable. The idea is that long time workers will be dissatisfied if new hires are making significantly more than they made when they were hired. The argument does seem to carry a lot of merit. Jeffrey Stoller of the New Jersey Business and Industry Association said " it is not just what happens to minimum wage earners; it is the ripple effect. People earning above the minimum expect more once the wage goes up because they are upset if someone just starting earns as much as they do" ( Krueger, 1995, 160). Again, we must look at the evidence. A study was conducted in 1991 to see if minimum wage increases were more likely to grant raises to workers who were already earning $4.50 per hour. Among restaurants with the lowest initial starting wage " only 9 percent granted wage increases to workers earning $4.50 per hour when the minimum rose to $4.25" (Krueger, 1995, 162). Although there is some evidence that wage spillover does occur, it seems to be mainly concentrated at firms where the starting wage is already initially higher then the minimum wage.
In a recent article published on the Internet, Mr. Cox, Associate Professor of Economics and Politics at the Gwinnett Campus of DeKalb College said
"Just as a worker will only offer his labor time for a wage he finds beneficial, an employer will only be willing to pay workers a wage that permits him to earn a profit. The higher the wage, the fewer workers the employer will employ. This is what economists mean when they invoke the law of supply and demand". (Cox, 1, 1999)
Unfortunately, there are hundreds of thousands of low-skilled workers and potential workers who will not find jobs at a higher wage rate" (Cox, 1, 1999) However, it is not surprising that Mr. Cox offers little actual data to prove his theory. He clearly and concisely explains the laws of supply and demand, so that that it seems to make sense for unemployment to rise with wages, but offers no empirical data to prove his case.
Matthew Kibb of the Cato Institute says
Members of Congress who support an increase in the minimum wage have all but monopolized the ethical high ground, using an appeal to simple economic justice as the single important justification for their position. The proponents argue for a "fair" minimum wage, as though government could simply legislate wealth into existence. Kennedy finds it "unacceptable" that the present minimum wage "does not permit full-time workers to provide the bare necessities for their families.
(Kibb, 1, 1999)
Kibb goes on to cite teenage employment rates (although teenagers do not make up the majority of minimum wage earners) and suggests that minimum wage causes a high unemployment rate. Unlike Cox, Kibb does cite a recent study by Clemson University economists Richard B. McKenzie and Curtis Simon. They estimated that an increase in the minimum wage to $4.65 by 1990 would cost 764,000 jobs by that year-end. Now 754,000 jobs sounds like a lot of jobs. It may even scare some people into reconsidering the minimum wage issue and that is exactly what it is intend to do. However, we must consider that we are in an economy of over 100 million jobs. Even if we accept McKenzie and Simons math, we can divide 764,000 jobs lost by the total number of US jobs (100 million) and we can clearly see that the effect is clearly negligible. AFL-CIO economist John L. Zalusky disputes the findings that minimum wage leads to unemployment. He predicts that a $1 increase in the minimum wage would eliminate very few jobs, and his "hunch is that a wage hike would provide a mild stimulus" to economic growth. According to Zalusky's model, created by the econometrics firm Data Resources Inc. (DRI), a $1 increase would eliminate 450,000 jobs during the next eight years. However, Zalusky says, this loss has little importance when compared with the 11 million jobs that the model predicts would be created in the same period. Zalusky claims that such "real world evidence" casts doubt on the "theoretical constructs" of economics. (Kibb 5-10, 1999)
I like economic theory and I enjoy being an economics student. However, I once had a professor who warned me not to become so caught up in the theory that I lose sight of what is occurring in the world around me. It was very good advice. Theoretical economic models are good tools that help us make certain predictions under a controlled environment, but realists do admit that simple economic models have not been all that accurate in the real world. For decades economic models tried to prove to us that there is a positive relationship between inflation and unemployment and then the 1990s came, and we have experienced a decade of low inflation and LOW unemployment, effectively proving the theory inaccurate. The same holds true for minimum wage. Theory clearly states in the Law of Supply and Demand that a higher wage will result in job loss. We cannot put all of our trust in the theories and forget that a new body of empirical evidence is beginning to prove that theory dead wrong!
Ask The Politicians
On August 20, 1996, Secretary of Labor, Robert Reich voiced his opinion on minimum wage. Reich said
Today we are affirming that the American dream is possible for everyone-the people who lean offices at night, file the papers, answer the phones, serve the food, care for our children, sick, and elderly. Next month, 10 million hard working Americans will get the raise they deserve"
(Reich, 1996, 1)
Reich went on to point out that minimum wage legislation is supported by 85 percent of the American public. Several key politicians have weighed in on the minimum wage issue. Barbara Boxer (D CA) expressed deep disappointment in the failure to increase the US minimum wage to $6.15 per hour by 2000. Boxer said
" A vote to increase the minimum wage is a vote for fundamental economic fairness. At a time of sustained economic growth and historically low unemployment rates, many Americans must still struggle day to day just to make ends meet. Increasing the minimum wage would greatly improve the quality of life of these hard working Americans."
Boxer had a valid point that the current economic high times should be another argument to aid those who have not benefited from the economy.
(Senate Press Release, 1999, 1)
According to Edward Kennedy of Massachusetts
"In recent days, members of Congress have voted to raise their own pay but not the pay of minimum wage workers. In the past week, Congress voted to increase congressional salaries by $4,600 a year, and to give a significant pay raises to federal employees and members of the armed forces.
(Kennedy, 1999, 3)
Kennedy went on to explain that raising the minimum wage is a women's issue. Almost 60 percent of minimum wage workers are women. 7 million women across the nation -- 12.6% of all working women -- would benefit from this increase. According to Kennedy raising the minimum wage is a children's issue. Over two million married couples and almost a million mothers would receive a pay raise as a result of our increase. Eighty-five percent of these single mothers have total household incomes below $25,000 a year. In addition, raising the minimum wage is a civil rights issue. Over two million Hispanic workers and almost as many African Americans will receive a raise. Together, they make up one-third of those who will benefit from the increase. Finally, Kennedy suggests that the minimum wage is a family issue. The average minimum wage worker brings home half the family earnings. Half the benefits of our one dollar increase will go to households earning less than $25,000 a year. Parents need this raise so they can provide their children with food, clothes, and a decent place to live. The country as a whole is enjoying an unprecedented period of prosperity. But for millions of Americans it is someone else's prosperity. Working 40 hours a week, 52 weeks a year, a person earning the minimum wage would earn only $10,700-- almost $3,200 below the poverty guidelines for a family of three agreed with Boxer that minimum wage legislation was of optimum importance. He said, " You can't raise a family on $5.15 per hour. You can't house a family on $5.15 per hour. You can't put a decent roof over your head for $5.15 per hour. ( Bonier, 1999, 1). Congressman Bonior said that 30 percent of income is the generally accepted standard for home affordability established by Congress and the Department of Housing and Urban Development. Throughout Michigan, according to the report, minimum wage earners would need to work 86 hour per week to afford the fair market value for a two-bedroom unit. He went on to conclude " for millions of families in our country, the American dream is out of reach" ( Bonier, 1999, 1). Congressman Bob Filner said " the minimum wage is losing value every day. A one dollar increase in the minimum wage is enough for a family of four to buy groceries for 7 months or pay rent for 5 months" ( Filner, 1999, 1).
Of all the contentious issues in politics, minimum wage is one of the most partisan. With a Republican leadership in Congress, recent minimum wage proposals have been voted down. Most Republicans contend that a higher minimum wage hurts small businesses and leads to increased rates of unemployment. Although theoretically true, most recently evidence disputes their claims. In addition, most Republicans are not in favor of the earned income tax credit, another incentive to economically aid families working for low and minimum wages. If we truly want to lower the amount of Americans who received federal income assistance through welfare, we must support those Americans who are working hard for low wages, and need some legislated help to pay their bills.
If we imagine the total output of the economy as a pie, then the minimum wage can accomplish two things. First it can alter the overall size of the pie. Second, it can change the size of the slice that different groups receive, including low wage workers, high wage workers, and business owners. Conservative economists generally argue that the minimum wage helps no one. Their argument is that minimum wage substantially shrinks the size of the overall pie and reduces the size of the slice that low-income people receive. Many liberal economists worry that even though the minimum wage might give a slightly larger slice of the pie to some low wage workers, other equally deserving workers are shut out of the labor market by the new minimum. In 1987, Economist Lester Thurow wrote, " minimum wages have two impacts. They raise earnings for those who are employed, but may cause other people to lose their job" (Norlund, 1997, 89) On the other side of the debate, social activists, policy makers, and non-economists often argue for an increase in the minimum wage. Advocates of the minimum wage have included Roosevelt, ML King, and Bill Clinton, just to name a few. Many non-economists are skeptical of economic theory and downplay the predicted employment losses associated with a higher minimum wage, while emphasizing the potential pay increases for low wage workers. Most significantly, the general public does not widely share the negative opinion of minimum wage that most economists hold. A 1987 for that 75% of the American population favored an increase. Many of those who economists argue are most hurt by the increase, and those who most actively support an increase. Most Americans simply do not associate minimum wage increases with increased unemployment.
Smith clearly argued that a higher wage would increase enthusiastic participation in the labor market. Despite the generally negative opinion of the minimum wage held by most professional economists, minimum wages remain politically popular. Opinion polls consistently show that 65 to 90 percent of the general public favor an increase in the minimum wage. An October 1993 NBC- Wall Street Journal poll found that 64 percent of adults in favor of another increase in the minimum wage. Many economists view minimum wage legislation as a highly inefficient transfer program and usually recommend its repeal. However, Norlund's set of data suggests that there is no evidence to support negative employment effects on minimum wage increases. The 1990 and 1991 increases in the federal minimum wage transferred about 5.5 billion per year to low wage workers. If all the costs of a higher minimum wage were passed through to consumer prices, the net effect would be a once a for all increase in retail prices of only about 0.3 percent. An increase in the minimum wage clearly effects the value of work for a sizable fraction of less skilled workers in the economy. Relative to some other transfer programs, the minimum wage has the feature of "making work pay" (Norlund, 1995, 394) rather than discouraging labor market participation. The intensity of surrounding minimum wage is out of proportion with its real importance in the economy. Minimum wage is overall a rather modest transfer program with relatively small efficiency losses. Opponents tend to exaggerate its employment effects, and we must also face the fact that proponents often tend to exaggerate the effects that a small wage increase has on poverty.
The minimum wage has historically enjoyed bipartisan support. Senators Dole and Kassenbaum, Speaker Gingrich and Rep. Goodling voted for the last Minimum wage increase to $4.25 an hour in 1989. Inflation has eroded the minimum wage so much that it is currently at its second lowest level since the 1950s. The economy has been very strong, but wages have not grown as much as they need to for the middle class to keep up. The problem is that low- wage and middle class workers have not shared fully in this recovery. On Tuesday, Nov 9, 1999, Congress approved a proposal to raise the minimum wage by $1.00 to $6.15 per hour. ( Smith, 1, 1999) This increase should help millions of families climb out of poverty. Although approved, the Democrats called the Republican measure a "scam loaded with tax cuts for the wealthy" (Smith, 1, 1999).
Although Adam Smith may not have endorsed the role of government in establishing a federal minimum wage, Smith clearly saw a strong correlation between high wages and high worker productivity. Also, Smith showed great concern over the power employers could exert over workers in setting their wage. Federal minimum wage laws not only serve to protect the wages of those most vulnerable in our so rt Solow. Although some people who earn the minimum wage are teenagers, almost two-thirds are adults age 20 and older. The average minimum wage worker brings home about half of his or her family's earnings. Increasing the minimum wage will help these workers to make up for lost ground due to inflation -- it will help make work pay. As the New York Times reported, most economists agree that raising the minimum wage increases the incomes of low wage workers, which more than offsets any effect on jobs.
The dramatically positive economic times that America has experienced in the last decade of the 20th century has been astounding. America has more wealthy citizens than ever before. However, many Americans have not taken part in this newly amassed wealth. For these Americans, we must support programs such as minimum wage to further promote a healthy economy and a decrease in poverty. Minimum wage is one program that promotes active participation in the labor market. If we want the amount of citizens on welfare to decline, we must offer them a job that can pay a livable wage. It is good to have a healthy debate about the minimum wage. However, on such a fundamentally important issue we must not be blinded by and rely solely on political rhetoric and unsubstantiated economic claims. We must rely on the empirical evidence; studies have tested the implications of an increased wage, and found clear information. Minimum wage legislation helps to increase the income of the lowest age earners in our country while having little or no effect on unemployment. For this reason, the United States should embrace minimum wage legislation in the new century.
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Smith, Donna. "US Senate Agrees to $1 Hike in Minimum Wage CNN.com Nov 9, 1999 pg 1