Commentary

Minimum Wage Redux

Reprinted from Copley News Service, October 26, 1999.
With control of the House in the balance, congressional Democrats are pushing for a big minimum wage hike. The Republicans, desperate to defuse a potential political issue, are doing what they do best: preparing to surrender. Instead, the GOP should push to allow states to decide whether to accept any increase, thereby tailoring the minimum to their own unique economic circumstances.

No serious economist doubts that the minimum wage destroys jobs. The only question is how many. Economists Richard Burkhauser, Kenneth Couch and David Wittenberg estimate that every 10 percent increase in the minimum reduces employment by between 2 percent and 6 percent. They figure Congress’ 1996 minimum wage hike cost between 153,000 and 457,000 teens their jobs.

These ill consequences have been moderated by America’s booming economy. But those with the least education, experience and training would be most harmed by any new increase. Particularly vulnerable are welfare recipients attempting to become self-sufficient.

The 1996 welfare reform law has helped to dramatically cut the welfare rolls. However, recipients with the best employment prospects have already found jobs. The National Governors’ Association warns that remaining beneficiaries face ”significant challenges to workplace success.”

Unfortunately, many of those on welfare are effectively illiterate.

According to the National Adult Literacy Survey, nearly half of welfare recipients have trouble performing basic arithmetic, reading and writing tasks. The Educational Testing Service says one of three has only ”minimal skills,” essentially the level of high school dropouts. Yet, just 10 percent of new jobs are open to people with so little expertise.

Companies do help train welfare recipients. Indeed, Michael Weinstein of The New York Times warns that even those who find work might find themselves trapped in low-paying jobs ”unless work and training are combined.”

However, firms can’t afford to do as much when the minimum wage rises. Especially when they can choose other workers with better skills.

Peter Brandon of the Institute for Research on Poverty has found that minimum-wage hikes draw new workers, particularly teens and students, into the labor force, who in turn displace those on welfare.

As a result, welfare recipients in states that hiked their minimum wages remained on welfare 44 percent longer than those in states that did not increase their minimums.

The minimum wage most reduces employment prospects in low-growth communities. The unemployment rate in Luna, N.M., is 36.1 percent — nine times the national average. Five more localities suffer from joblessness in excess of 20 percent. In another 266 communities, unemployment exceeds 9 percent. Inner cities are the worst off; 30 municipalities have jobless rates of 30 percent or more.

The result is a combustible combination. The federal government is demanding that states push welfare mothers into the work force.

”We will hold (states) accountable, insisting that they fulfill their duty to move people from welfare to work,” says the president. But welfare recipients have few job skills and many live in high unemployment areas. A higher minimum wage will make firms even less likely to hire and invest in the most disadvantaged.

The obvious answer is not to hike the minimum wage. Raising it to the proposed $6.15 would entail a 45 percent increase since 1996, compared to inflation of barely 5 percent. If the political imperative nevertheless proves overwhelming, Rep. Jim DeMint, R-S.C., suggests a second best: allow states to set a lower minimum.

Many states already implement their own standard, but the federal level is currently the mandatory floor. Congress could approve an increase, while allowing individual states to say yes or no to the hike. The seven states that currently have no minimum wage of their own could also act to pre-empt a new federal increase.

This approach would represent the best of federalism. The original 1938 minimum wage exempted a variety of workers, including those in agriculture and retail positions. Even today, most federal lawmakers know little about the economic circumstances of individual states, let alone localities.

Yet, the minimum wage is an important component of a state’s overall business climate and, thus, a state’s ability to generate jobs, high- as well as low-wage. A flexible minimum would allow officials familiar with regional labor conditions and welfare populations to develop policies that best fit states’ unique circumstances.

Of course, organized labor would likely oppose state flexibility. But the Washington, D.C.-based Employment Policies Institute points to several polls that show overwhelming popular support for leaving minimum wage decisions up to states.

The persistence of poverty in an age of plenty is a genuine tragedy. Unfortunately, raising the minimum wage would make the problem worse. Leaving the decision to the states would make the best of a bad policy choice.

Doug Bandow is a senior fellow at the Cato Institute.