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COMMENTARY: A MINIMUM-WAGE HIKE SPELLS MAXIMUM DAMAGE
When Labor Secretary Robert B. Reich in early January revived the idea of raising the minimum wage, he set a rhetorical trap for Republicans--and House Majority Leader Richard K. Armey (R-Tex.) quickly took the bait. The minimum wage shouldn't be increased, Armey said, it should be eliminated, because it harms both the economy and the poor. The exchange broadcast exactly the message the Clinton Administration wants to send: compassionate Democrats up against heartless Republicans.
Trouble is, Armey's right. The preponderance of economic evidence still holds that the minimum wage keeps low-skill, low-productivity workers from getting the jobs they need. More important, new research shows that raising the minimum wage hurts exactly those people the Clintonites are trying to help. It tempts more teenagers to drop out of school. And it raises the barriers that keep welfare recipients from finding work. When it comes to fighting poverty, Clinton should turn to a more effective weapon: the Earned Income Tax Credit.
FAULTY MODEL. Reich's call for a higher minimum wage--the White House is likely to propose raising it from $4.25 an hour to $5--leans on studies showing that boosting the minimum wage in 1990 and '91 didn't put a crimp in employment. In fact, Princeton University economists David Card and Alan B. Krueger found that New Jersey fast-food stores hired more workers after the state raised its minimum to $5.05 in 1992. During the same period, employment fell at franchises in neighboring Pennsylvania, where the wage remained at $4.25.
Card and Krueger--now Reich's chief economist--argue that low-wage employers can fill vacant jobs and retain more productive workers when a higher minimum forces them to pay more. "The Econ 101 model of the labor market doesn't apply here," says Card.
But don't count out Econ 101 yet. In a study of dozens of federal and state minimum-wage hikes since the 1970s, David Neumark of Michigan State University found that total employment consistently dropped by 1% to 2% for every 10% rise in the minimum. Texas A&M University economist Finis R. Welch compared job data from 1989 and 1992 and found that employment fell most steeply among the groups most likely to be affected by the 1990-91 minimum-wage increases, such as teenagers or high school dropouts.
A 2% drop may not sound like much--except that those losses are concentrated among poor, low-skilled workers. And teenagers, Neumark finds, face a double whammy. Higher minimums tempt high school students to sacrifice education and long-run income by dropping out and taking jobs. And the new entrants push aside less educated working teens--who end up with neither schooling nor jobs.
Welfare mothers also suffer. University of Wisconsin poverty researcher Peter D. Brandon has found that when their states raised the minimum wage, mothers on welfare stayed on the dole an average of 19.5 months, six months longer than mothers whose states didn't impose an increase.
EXPENSIVE MEDICINE. A minimum-wage hike does help some poor workers--but it's an expensive way to attack poverty. Of the $9.7 billion cost of a 75 cents hike, only about one-quarter--$2.7 billion--would go to poor or near-poor households, says Syracuse University economist Richard V. Burkhauser. A bigger chunk--$3.3 billion--would line the pockets of spouses or teenagers in families with incomes above $43,000.
With the GOP in control of Congress, Reich has probably missed his opportunity to win a minimum-wage hike. Instead, he should follow up on Clinton's 1993 strategy of raising the Earned Income Tax Credit. Thanks to the credit, low-income workers with two children have an effective minimum wage of $5.78 this year. The EITC costs a lot--$16 billion a year--but nearly all the money goes to the poor. And studies show it actually boosts work among welfare recipients. Unlike the minimum wage, the EITC is an antipoverty program that works.By Mike McNamee