The Minimum-Wage Scam
Presidential politics is in full bloom, and so too is the Democratic push for an increase in the minimum wage. Sen. Edward Kennedy (D) of Massachusetts is leading the effort to embarrass presumed Republican presidential nominee Bob Dole, who has so far blocked a Senate vote on the measure. The House leadership is also under pressure, and Republican defections make passage likely if the increase comes to a vote.
But leading Republicans should be embarrassed not at opposing a minimum-wage hike, but at failing to articulate why. Simply put, the minimum wage is awful policy, punishing firms for employing low-wage workers and locking the least-educated and skilled people out of the workplace.
Unless businesses operate as charities, and most do not, they will hire fewer workers at higher wages. Even advocates of the minimum wage implicitly understand this, else they would propose a minimum of $51.50 an hour rather than $5.15. After all, if Congress can overturn economic reality by fiat, then why not make everyone rich?
People receive low wages for a reason - they typically lack the training to earn more. Unfortunately, government wage-setting does not give them the necessary skills. Rather, it tells employers not to hire anyone who can't produce the official minimum. As a result, there are fewer jobs, especially for society's most disadvantaged, such as urban teens.
Many studies, including those by the Congressional Budget Office, General Accounting Office, and President Carter's Minimum Wage Commission, have concluded that raising the minimum wage costs jobs. Despite this evidence, minimum-wage advocates have argued that "fairness" requires a hike.
But now there is a contrary study, an analysis of a 1992 New Jersey minimum-wage increase. Senator Kennedy, Labor Secretary Robert Reich, and others have loudly touted this report, all the while continuing to ignore the larger body of work amassed over the years. Moreover, the study's conclusion, that New Jersey's wage hike had no employment impact, has been severely criticized by a number of economists. For instance, Michigan State University's David Neumark and William Wascher of the Federal Reserve Board contend that New Jersey's 18.8 percent hike actually cut jobs by 4.8 percent. The problem, explains an analysis by the Employment Policies Institute, is that "the employment numbers in the data set used" for the New Jersey report were "catastrophically wrong." EPI has also published studies showing minimum-wage increases cut retail employment and encourage substitution of better-educated white teens for disadvantaged minorities.
The best argument for the minimum wage is that the preponderance of peer-reviewed economic studies show only a modest negative impact on employment from small wage hikes. But the Democrats' proposed hike of 90 cents an hour is not small. At the least, it would certainly cause companies to pause before adding new employees.
Moreover, there's the issue of fundamental fairness to employers. Helping those in need should be a concern of everyone in society, not just firms that hire the most unskilled labor. For all of the problems with the Earned Income Tax Credit, it at least holds the overall public, and not just selected businesses, accountable for poverty relief.
However, the real answer to low wages is to improve education and to lower taxes. Today's educational monopoly is warehousing rather than teaching inner-city kids; why not give parents a choice in schools? Why not ease the payroll-tax burden, which falls most heavily on those who earn the least?
Presidential politics notwithstanding, Republicans are right to stand firm against Democratic grandstanding.