THE $1.20-an-hour increase in the federal minimum wage over three years that has been passed by the House of Representatives is not as bad as the vast majority of economists say. It is much worse! Critics of the increase have focused their analysis on the harm done to the sizable number (100,00 to 750,000, depending on the study cited) of mainly disadvantaged workers who will lose their jobs because of the increase. But the statistical work that we and other economists have done in recent years shows that the increase will even penalize those covered workers who retain their jobs at the higher $4.55 wage rate.
Both proponents and opponents of the minimum-wage increase have misguided the public debate on two counts. First, analysts have failed to recognize that legal wage constraints do not suppress competitive market pressures that have kept the wages of workers with limited skills low. Wage constraints only redirect the competitive pressures and, by wiping out tens of thousands of job opportunities, worsen the competitive bind of workers covered by the wage law.
Second, the overwhelming majority of contemporary workers, even low-paid workers, are not compensated solely in terms of so many dollars an hour. Rather, they are paid in ``bundles of benefits'' - including money, but also including relaxed work demands and a variety of fringe benefits (insurance, rest breaks, flexible schedules, discounts on personal purchases, and on-the-job training, just to name a few).
Although Congress can legislate an increase in workers' money wage, it exerts little control over the many other nonmoney dimensions of employment. And to contain production costs in competitive markets, employers must respond to mandated money-wage increases with decreases in nonmoney benefits - for example, reductions in on-the-job training, the elimination of fringe benefits, and increases in work demands.
Unfortunately, the combination of mandated money-wage increases and reductions in nonmoney benefits makes workers relatively more costly to hire and, thereby, reduces the demand for - and worsens the competitive position of - covered workers. Though still controversial, this new perspective on the effects of minimum-wage laws is supported by a growing body of research:
Writing in the American Economic Review, Nori Hashimoto found that under the 1967 minimum-wage increase, workers on average lost $1.28 worth of training for every $1 increase in the minimum wage.
Linda Leighton and Jacob Mincer in one study and Belton Fleisher in another came to a similar conclusion: Increases in the minimum wage reduce on-the-job training - and, as a result, cause workers to lose more in future income growth than they gain from the new minimum wage.
One of the authors of this article (Mr. Wessels) found that an increase in the minimum wage caused retail establishments in New York to increase work demands. In most stores, fewer workers were given fewer hours to do the same work as before.
The research of Mr. Fleisher, William Alpert, and L.F. Dunn shows that minimum-wage increases lead to large reductions in fringe benefits and to worsening working conditions.
If the minimum wage does not cause employers to make substantial reductions in nonmoney benefits, then increases in the minimum wage should cause a decline in the rate at which covered workers quit their jobs. Wessels, however, found that the exact opposite occurs! Quit rates in many low-wage industries went up (and none went down).
Given the findings of various studies, we estimate that every $1-an-hour increase in the minimum wage will cause workers to give up a minimum of $1.20 an hour in employment benefits, making them 20 cents an hour worse off in terms of the money value of their total ``payment bundles.'' This means that the proposed $1.20-an-hour increase in the minimum wage will, on balance, make the covered workers worse off by at least 24 cents an hour. President Bush's proposed increase of 90 cents an hour would only moderate the harm.
In short, increasing the minimum wage is a political recipe for making many very low-income workers, even those who retain their jobs, worse off.