Maximum Debate On Minimum Wage
DISAGREEING economists do give legislators a hard time.
One economist, Princeton University's David Card, says the minimum-wage hike President Clinton proposed last week will not chop the number of jobs. Another, Donald Deere of Texas A&M University in College Station, says it will significantly reduce employment for teenagers.
If Congress holds hearings on the proposed legislation, it will try to sort out such contrary views. The Department of Labor hopes hearings take place. But a minimum-wage increase is probably not high on the Republican list of ``things to do.''
Here's a review of the academic debate: A federal Minimum Wage Study Commission found in 1981 that a 10 percent boost in the minimum wage raises unemployment among teenagers by about 1 percent, but doesn't affect the jobs of anyone older.
``There was quibbling about the exact magnitude of the effect, but not much discussion about whether negative employment effects existed,'' notes Professor Deere in a new paper. The thesis was that a jump in the price of something (in this case, of minimum-wage labor) reduces the demand for that something.
But this consensus has been shattered. More than a year ago, Professor Card and Alan Krueger, a Princeton colleague now working in the Department of Labor, took a new tack. Rather than looking at nationwide statistics for employment, they studied the impact of changes in the minimum wage by individual states on one industry - the fast-food establishment.
Harvard University's Lawrence Katz (also hired by Labor Secretary Robert Reich) looked at an increase in California's minimum wage. Card and Krueger examined similar situations in Texas and New Jersey. In 1992, they compared New Jersey with a ``control group'' of restaurants in Pennsylvania where the minimum wage was not raised. They found the wage hike in New Jersey produced no job losses for either teenagers or adults. Nor did the minimum-wage rise result in restaurants closing their doors.
``It was an Epiphany for Larry and then for Alan,'' recalls Card. Bosses must have more leeway on wages than realized before.
In another study, student economist Alison Wellington, now at Davidson College in North Carolina, studied the decline - after inflation - in the minimum wage between 1981 and 1989. She found a surprisingly small job increase among teenagers.
Then last month Deere, Finis Welch, a colleague at A&M, and Kevin Murphy from the University of Chicago, delivered a paper looking at the last increase in the minimum wage - from $3.35 to $3.80 on April 1, 1990 and then to $4.25, the present level, on April 1, 1991. They found that the 27 percent jump chopped teenage jobs 8 to 9 percent - an apparently big employment loss.
One problem with such a study using nationwide figures is that the effect of the business cycle (an economic slump in 1990-91) on jobs must be segregated from the impact of the minimum wage change. ``It is very difficult,'' says Card.
Gary Burtless, a Brookings Institution economist, finds the Card-Krueger research ``convincing.'' If, however, the Deere paper is right, the Clinton-proposed rise in the minimum wage from $4.25 to $5.15 might reduce teenage jobs by about 150,000 spread over a year or two. That number is equal to about half the number of jobs added per month in the last year or so, he notes.
``It would be barely noticeable given the fluctuation in the labor market we have anyways,'' Mr. Burtless reckons.
Monetary policy, Card says, is much more important for the level of teenage jobs than the minimum wage. So Congress will have to consider the measure's merits on other grounds than losing teenage jobs.
Another factor is that the Clinton measure would put from $5 billion to $7 billion into the pockets of the 11 million workers now paid between $4.25 and $5.15 an hour. Some of that would be covered by higher prices; some by lower business profits than otherwise, Card says.
Among the 11 million, those now paid $4.25 an hour would see their annual pay (at 2,000 hours a year) go from $8,500 to $10,300. Nearly all 11 million, 75 percent of them adults and 40 percent sole wage earners, would be better off. But not so many would rise above official poverty levels. As for jobless teenagers, many should really be in school, Burtless says.