No. 35
November 10, 1999
Joanna Elachi*

Congressional voting took place yesterday morning on two proposals to increase the minimum wage from $5.15 to $6.15 per hour. The GOP proposal, which was passed by the Senate, would implement the increase over 28 months and cut business taxes to help soften the blow. President Clinton, who endorses a quicker implementation and smaller tax cuts, has already extended his customary veto threat. But either way, it’s just two sides of the same bad coin.

In his last State of the Union address, the President characterized a minimum wage hike as a "simple, sensible step to help millions of workers struggling to provide for their families." Not only would the increase hurt rather than help the very families the President is concerned about, but this policy disregards more effective strategies already in place.

The President’s "millions" reduce to approximately 250,000 minimum wage-earning heads of households. No doubt there are, in fact, millions struggling to provide for their families, but only 250,000 earn minimum wage. A full 85.1% of those affected by the 1996 wage hike lived with their parents, were single and lived alone, had a working spouse, or were extended family members. This statistic alone reveals the ineffectiveness of minimum-wage policies in targeting poor families.

Not only is it inefficient, raising the minimum wage can also be detrimental. Michigan State University Economics Professor David Neumark, in testimony before Congress, confirmed economic consensus that even a 10% increase (Clinton proposes a 20% raise) reduces employment of minimum wage workers by one to two percent. This may seem small, until opportunity cost (the number of jobs not created because of the increase) is also taken into account. Low-skilled, adult workers are disproportionately affected by the decrease in number of minimum wage jobs available, and this carries implications well beyond loss of an income.

The primary advantage of first and second jobs lies in training and job skills attainment. Most Americans use their minimum-wage jobs as stepping stones, increasing their incomes by 30% within the first year of employment, according to research conducted by the Employment Policies Institute. If we implement policies that will decrease the number of minimum wage jobs available, low-skilled adults and teenagers will also be less exposed to the training that comes with those jobs and therefore less likely to acquire the skills that can then enable them to move beyond the minimum wage bracket.

When government mandates that labor costs be artificially increased, employers are left with several options—few advantageous to workers. Consider a small business with 10 minimum-wage workers, each working full time. The federal mandate of a dollar per hour increase in those wages will cost that business an additional $20,800 per year. How does the business find that money?

The options are: cut workers; hire fewer, but higher-skilled and more productive workers who can get the same amount of work done with decreased risk and training costs; reduce other benefits, such as health care, flexible hours or employee discounts; reduce on-the-job training; reduce working hours for minimum-wage earners; and/or purchase machinery to automate processes that were formerly manned by low-skilled workers. Even if the business would be able to survive the increased labor costs without making any of the above mentioned cuts, plans for future expansion—and thus additional available jobs—would likely be set aside.

Decreasing poverty is a noble ideal, but a minimum wage increase is a misguided approach. First, less than 18% of minimum wage earners live in families with incomes below the poverty level. Second, it is detrimental to the workers it does affect—often they lose more through benefit reductions, not to mention higher taxes and possible loss of eligibility for federal subsidy programs, than they gain through the increased wage.

The Earned Income Tax Credit (EITC) is a less damaging and target-specific tool for providing aid to poor families. The program provides a refundable tax credit—payable monthly—that rewards the work efforts of low-wage individuals. The program is designed to provide the most generous benefits to low-wage workers with children, and can be worth an additional $1.75 per hour, depending on hours worked, wage level, and number of children. This program effectively increases a low-wage worker’s income without minimizing job prospects. Even Clinton acknowledged this point in a 1992 address to the National Association of Manufacturers, when he proposed an increase in the EITC, stating that it was a better method of addressing the needs of poor families than an increase in the minimum wage.

The burden on low-wage workers should be decreased, not at the expense of small business and low-skilled workers, but rather through policies that promote job and economic growth. Congress should allow workers to keep more of the money they already earn, instead of artificially—and ineffectively—augmenting their per hour wage.