Commentary

Below the Minimum Wage

This article appeared on Townhall.com on January 19, 2006.
“What Is a Living Wage?” Jon Gertner’s overstuffed cover story in the New York Times Magazine, offers a guess that, “Probably only around 3 percent of those in the workforce are actually paid $5.15 an hour or less.” The last two words — “or less” — are absolutely critical, yet totally ignored as usual.

The Internet leaves no excuse for guessing about what is “probably” true. Just type “Statistical Abstract” into Google, and then click on Section 12, Table 636: “Workers Paid Hourly Rates.”

Table 636 reveals that only 520,000 were paid the $5.15 federal minimum wage in 2004. That was merely four-tenths of one percent (0.4 percent) of total non-farm civilian employment — far short of Gertner’s 3 percent adventure in probability. Nearly three times as many U.S. workers (1,483,000) were paid less than the minimum wage. Among full-time workers, only 177,000 earned the $5.15 minimum wage in 2004, while 3.3 times as many (583,000) earned less than $5.15. As I mentioned, the words “or less” after $5.15 are there for a reason.

Whenever the minimum wage has been increased, the most obvious result was an increase in the number earning less than the minimum.

If we ignore the 45 percent of full-time U.S. employees who earn salaries rather than wages, it might almost be true that “around 3 percent” of those paid by the hour are actually paid $5.15 an hour or less. But that is only because 2 percent of those paid by the hour earn less than $5.15 an hour. And that raises an obvious question: How on earth is an increase in the minimum wage supposed to help the nearly 1.5 million people who are not earning that much in the first place?

Gertner was handicapped in answering that question by his choice of sources. He lauds David Card and Alan Krueger, who managed to write an entire book about the minimum wage without even noticing 1.5 million people earning less than the minimum wage. Gertner even quotes Robert Pollin, whose appalling book, The Living Wage, claimed, “Only 8.9 percent of the workforce actually earns the minimum wage.” Either these experts are unaware of the Statistical Abstract, or they think facts are just a moral issue.

When the minimum wage was last increased in 1997, the number of workers earning less than the minimum jumped to 3 million. The percentage of teens working for less than the minimum rose from 7.2 percent to 19.8 percent (it was 4.6 percent in 2004).

I plowed this abandoned field once before in a July 2004 column, “When More Is Less,” which is still at cato.org under my bio. “Any employer with an annual income below $500,000 is free to ignore the minimum wage,” I explained. “The federal minimum wage does not apply to workers on small farms or at seasonal amusement or recreational facilities. It does not apply to newspaper deliverers, companions for the elderly, outside salesmen, U.S. seamen on foreign-flagged ships, switchboard operators or part-time babysitters.” Such handy loopholes aside, there is sure to be some outright evasion of any minimum-wage law, since it is impossible to monitor all the casual day labor and home care going on.

Gertner’s minimum wage story is local, rather then national, but the issues are the same. He offers the unusual example of Santa Fe, N.M., a town of “wealthy retirees and … movie stars,” where “the tight labor market has pushed up wages so that many entry-level workers were already earning more than $8 an hour.” We’re not talking about some sleepy little village in Mississippi or Montana.

In February 2003, the city council hiked the Santa Fe minimum wage to $8.50 an hour, and to $9.50 this year. That was not as bold as it sounds, since many entry-level workers were already earning more than $8 an hour. Yet Gertner managed to dig up 17 human interest stories, and all but two of those were supposedly earning much less than Santa Fe’s legal minimum last year, which was $8.50 an hour. They earned as little as $5.50 an hour, the story tells us, even as we are also told the minimum wage has just been increased from $8.50 to $9.50.

How could that be possible? Perhaps these people worked for little shops that are exempt from the law. But if that were true, then the questions they were asked about how they will benefit from $9.50 an hour would have been a cruel hoax. Well, it’s just supposed to be a morality tale.

Every minimum wage law, national or local, has loopholes big enough to drive a truck through. Santa Fe’s minimum wage does not apply to businesses with fewer than 25 employees. That means it excludes all the smallest businesses, the ones most likely to offer the worst wages and benefits. Count the workers at any Santa Fe drycleaner, gas station, convenience store or quaint little gift shop or bistro, and you won’t find one dozen employees, much less two dozen. To the extent that the Santa Fe minimum wage is binding (higher than the tight market would be paying anyway), its effect will be to divert more displaced job applicants into such small enterprises that are exempt from the law, and thereby depress wages and benefits in such small businesses.

If any little business happened to be approaching 25 employees, the author rightly notes, they’d have a perverse incentive to stay small. Supermarkets in Santa Fe will also have a greater incentive to invest in self-checkout lanes, or to relocate outside city limits.

“Is How Much You Pay a Worker a Moral Issue?” asks the magazine cover. Well, moralizing can easily substitute for economics among elitists who don’t really care how many more people they shove into the ranks of those paid less than some local or national minimum.

Those displaced from job opportunities by a higher minimum wage have to abandon the job search or they have to compete in larger numbers for scarce jobs that pay less than the minimum wage. Such intensified rivalry must push the lowest wages even lower. As moral issues go, this “living wage” crusade is purely malevolent.

Alan Reynolds is a nationally syndicated columnist and a senior fellow at the Cato institute.