Taking a Hike

During the presidential campaign Bill Clinton promised to raise the minimum wage by $1.00 and index it to inflation. The hike is on hold, but the Clinton administration seems prepared to argue that such a change would be cost-free.

Last winter Secretary of Labor Robert Reich appointed Harvard's Lawrence Katz as his department's chief economist. Katz, along with Princeton economists Alan Kreuger and David Card, has contested the long-held consensus among economists that minimum wages, rather than helping the poorest workers, make it harder for them to find jobs. But according to a recent study by University of Pennsylvania economist David Neumark, Katz's revisionist position is based on flawed research.

In 1992 Katz and Kreuger, examining fast-food restaurants in Texas, found no drop in employment in response to a 1990 increase in the federal minimum wage. Card, in two 1992 studies, found no job loss after the increase in California's minimum wage in the late 1980s or the 1990 increase in the federal minimum wage.

In his paper, which was published by the Employment Policies Institute, Neumark notes that Katz and Kreuger's study examined just one industry in one state over a two-year period in which the minimum wage changed only once. Furthermore, they and Card failed to look at the impact of minimum-wage changes after a year.

The effects of a rise in the minimum wage may not show up right away because employers need time to make personnel decisions and substitute machinery for workers. Failure to take this lag into account makes employment appear to decrease less than it actually did, or even to increase. Finally, these studies did not account for school enrollment, which tends to increase when employment opportunities for young people decline.

In their study, Neumark and his colleague William Wascher use data from all 50 states over a period of 15 years and account for both lagged effects and enrollment rates. They find that a 10-percent increase in the minimum wage reduces employment among teenagers and young adults (who tend to earn lower wages) by 1 percent to 2 percent.