Republicans, Unemployment and the Minimum Wage

Less than a month later, on April 25, Newt Gingrich (R-Ga) and House Majority Leader Dick Armey (R-Tex) acted as their constituents wanted and declared that there would be no house vote this year on proposals to raise the minimum wage. The reason for this, of course, is that the Republicans don't want to suffer the political consequences of voting against such a proposal, which is what most of them would do.

Democrats and the citizens of the United States support a minimum wage increase. The value of a full-time minimum wage job has fallen to about $8800 a year--well below the poverty line. Minimum wage is at this point only 35 percent of the average wage in America, but it was 55 percent a decade ago (Business Week, Jan. 30, 1995). Additionally, "In 1968, the value of the minimum wage in today's dollars was $6.50 an hour. . . over 50 percent more than its value today," says Representative Martin Sabo (D-Minn). Clearly, the purchasing power of the minimum wage has eroded.

While conservatives acknowledge these facts, they argue with the straightforward principles of Econ 101 that boosting minimum wage will increase unemployment. The principle is no-nonsense: companies can't afford to hire more workers if the workers cost more. A minimum wage higher than the equilibrium wage rate counteracts the mechanisms of the free market and forces workers with low skills out of jobs. At least, that's what the conservatives' conventional wisdom says. However, "the Econ 101 model of the labor market doesn't apply here," says Princeton economist David Card.

Card collaborated with fellow Princeton economist Alan Krueger (now chief economist at the Department of Labor) in a study of employment rates in Pennsylvania and New Jersey fast food restaurants after New Jersey raised its minimum wage in 1992. The study found that NJ stores actually hired more after the increase. The study has left many other economists suspicious (and me, actually), as it's counter-intuitive to current economic thought. They have called it "flawed" and given it "minimum credibility," pointing out aberrations in the data. However, MIT economist Jim Rebitzer thinks such criticism is not entirely justified. "In economics, data often look like this. . . anyone who follows economics literature knows that Card is among the most careful and conscientious people doing empirical work in labor economics."

Even if the above study proves to be invalid (as it very well might), there are other indicators that a mild minimum wage hike will not seriously affect unemployment--not because Econ 101 principles don't hold, but because the wage rate is below the equilibrium rate determined by supply and demand. To borrow another concept from Econ 101, "higher productivity leads to higher wages," says Stephen Moore of the Cato Institute, or at least it should in a perfect marketplace. Nonfarm productivity had risen roughly 3.4 percent the year previous to last November, but "productivity is still rising faster than wages" (Business Week, Nov. 27, 1995). The reason for productivity outpacing wages is market flaws:

. . .economists have learned that labor markets are far from perfect. . . employers may refuse to offer the higher wage necessary to attract needed new workers if that higher wage rate necessitates the added expense of higher wages for current employees. If existing employee wages were already higher because of a higher minimum wage, the additional workers could and would be recruited without that extra cost (Robert Eisner, professor emeritus of Northwestern University, Wall Street Journal, April 24, 1996).

The current minimum wage rate is less than equilibrium, but the nature of the labor market provides no incentive to raise wages. An increase in the minimum wage forcefully removes wage upward-inflexibility without damaging the product market because "rising productivity means companies can pay higher wages without having to boost prices" (Business Week, Nov. 27, 1995).

Labor markets that more closely resemble perfect competition, those with high employee turnaround such as the fast food industry, demonstrate that the equilibrium wage has moved above the minimum wage. Take, for example, Marcus Corporation, a $278 million company that operates KFC franchises as well as movie theaters and Budgetel Inns. The company used to pay its entry-level employees minimum wage, but has recently raised such wages. "Now, there's very little minimum wage left in our operations," says chairman and CEO Stephen Marcus. A 90 cent boost in the minimum wage would clearly not force wages above equilibrium in today's market.

Suppose, however, that the conservatives in the House who refuse to even vote on this issue are right and that unemployment will rise. According to House Majority Whip Tom DeLay (R-Tex), "supporters of raising the minimum wage argue that no one can afford to raise a family on $4.25 an hour. That may be true. However. . . no one actually has to." DeLay's statement is more accurate than one might think.

The Congressional Budget Office (not to be confused with the OMB, part of the executive branch) estimates that only one in five minimum wage workers lives below the poverty line, far less than what most assume. And almost one-fifth of minimum wage workers live in households with combined income over $50,000 a year (New Republic, May 23, 1994). The latter group is almost exclusively composed of teenagers, who would be the first to go if minimum wage brought about unemployment. According to one study conducted by a trio of economists, for every ten percent increase in minimum wage at this stage, teen employment is reduced by less than one percent; but adult workers aren't affected (New Republic, May 23, 1994). Additionally, Harvard economics professor Robert Barro has this to say: "If the ratio of the minimum wage to average wage is small--as currently in the U.S.--then a rise in the minimum has small effects on aggregate employment" (Wall Street Journal, April 24, 1996).

With the United States mired in the largest income gap since the Census Bureau began keeping track in 1947 (Business Week, Aug. 15, 1994) and the purchasing power of minimum wage jobs still declining, something needs to be done. Some opponents of a minimum wage hike have suggested an increase in the earned income tax credit, a proposal that would more directly aid the working poor. . . without the danger of unemployment, however slight. Unfortunately, this solution would greatly increase government expenditures if instituted enough to have any great effect, making it irreconcilable with the Contract With America's pledge to balance the budget by 2002. And despite fears that an increase in the minimum wage from $4.25 to $5.15 would result in higher unemployment, the American public has clearly stated it favors such an increase. Unfortunately for 80 percent of Americans, "Republicans blocked the effort to drive up the wage" (CQ Weekly Report, April 29, 1996). Our representatives have failed to do just that: represent us.

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