Economics: Minimum Standards

A compassionate alternative to raising the minimum wage

Raising the minimum wage–or having one at all–is an idea that divides public opinion from social science. Economists aren't certain about many things, but on the minimum wage, most of them believe the case is open and shut. Other things being equal, if you raise the price of something (for instance, labor), then the demand for it (for instance, by employers) will decline. That's not just a theory; it's a law.

Hiking the minimum wage hurts the very people it is supposed to help–those low-skilled workers whose labor is worth only $4.25, not $5.15. Businesses have choices. They'll replace these workers with machines or with fewer but more skilled employees (whose wages aren't controlled by the government), or they'll buy their labor abroad.

Even textbooks written by such appointees of the Clinton administration as Alan Blinder and Joseph Stiglitz tell college freshmen this simple truth. Robert Shapiro of the Progressive Policy Institute, a centrist Democratic think tank, has concluded that "an increased minimum wage often takes from the poor to help the middle class." Liberals Robert Heilbroner and Lester Thurow admit that the minimum wage "may cause…people to lose their jobs." So it's no surprise that a 1993 survey found that 77 percent of the 22,000 members of the American Economics Association believe a higher minimum wage reduces employment. Unfortunately, however, surveys of the public find similar proportions in favor of a higher minimum wage. Why? Probably because the public simply sees benefits and not costs. But the costs are profound, not merely in lost jobs but in lost liberties.

Of course, if you're cynical–and, believe it or not, many politicians are–it's possible to acknowledge (tacitly) the unemployment effects of the minimum wage but still support an increase in it. One reason is that backing a higher wage makes you look "compassionate." Another is that a higher minimum wage helps unions, which typically represent skilled workers. When the minimum wage is low enough, businesses can resist pressure for higher pay from unions and hire more low-skilled workers and train them on the job. So, "passage of a minimum wage law reduces the competition faced by union members," writes Linda Gorman in the Fortune Encyclopedia of Economics.

The line from minimum-wage advocates is that hardly anyone can live on $4.25 an hour. But, then, hardly anyone does. According to the Bureau of Labor Statistics, 37 percent of minimum-wage workers in 1995 were teenagers, most probably living at home, and 59 percent were age 24 or younger. Two-thirds of minimum wage earners work part-time. And, in a work force of about 120 million, just 22,000 men and 191,000 women maintained families with a minimum-wage job.

While the economic case against raising the minimum wage is clear and convincing, the moral case is even more forceful–and completely ignored in Washington. That's particularly ironic because Washington was the site of the first big court decision on the subject. In 1923, the city adopted one of the earliest local minimum-wage laws. One immediate consequence was that Children's Hospital fired a group of women workers whom it could no longer afford. The women sued to overturn the law, and won.

The U.S. Supreme Court ruled that the government-mandated wage infringed on the right of individuals to determine the price at which they would sell their labor. It was unconstitutional, the Court said, for the state to interpose itself between an employer and employee who are engaging in a free and private transaction.

The Court has since changed its mind, and the United States has had a federal minimum wage since it was set at 25 cents an hour in 1938. Ever rising and ever broadening, it is now $4.25 and applies to 87 percent of the work force. "Minimum wages," wrote Michael Prowse recently in the Financial Times, "are the kind of dictatorial measure that one expects in a totalitarian society." Correct, but so far I haven't heard one member of Congress make that argument.

Some workers have so few skills that their value to employers is less than $5.15 an hour, the minimum wage proposed by Bill Clinton. But those workers are being told by the government: "You are not allowed to work. You're condemned to unemployment for the rest of your life–or until inflation diminishes the value of $5.15 sufficiently." These low-skilled workers could, of course, acquire enough skills to merit employment at $5.15–but the most likely venue for that education is the job itself. At $4.25, an employer might find such a worker worth training–to pull him up to $5.15 or well beyond. But at $5.15? Perhaps not.

Conservative politicians object to a higher minimum wage because it hurts restaurants and other employers of low earners. Raising the floor would cut the profits of these businesses, we're told. That's true. To achieve the social goal of a "livable wage" (even for teenagers living with their parents), the state confiscates the assets of certain employers and forces them to give those assets to certain employees. But a fast-food restaurant has alternatives: It can buy machines, shorten its hours, perhaps even raise its prices (though this is a doubtful proposition since prices are determined, not by costs, but by supply and demand; if a restaurant could charge more for a hamburger, it would be doing so already, whatever the minimum wage).

Low-skilled individuals have no such choices. They're the victims–as the 1923 suit against Children's Hospital (an event of a happier time, when courts had more respect for the economic liberties of law-abiding citizens) shows so clearly. That's why many economists oppose the minimum wage with so much passion. The late George Stigler called Michael Dukakis's support for a minimum-wage boost during the 1988 presidential campaign "despicable." And Finis Welch, a labor economist at Texas A&M, says the minimum wage is "one of the cruelest constructs of an often cruel society."

Labor Secretary Robert Reich, Sen. Edward Kennedy (D-Mass.), Rep. David Bonior (D-Mich.), and their cohorts see the source of the cruelty differently. To them, a cruel society is one that allows any of its members to make just $4.25 an hour. But the solution, it seems to me, is not to raise the minimum wage. Instead, we should allow low earners the chance to keep more of what they earn. Let's eliminate the minimum wage entirely and also eliminate the payroll tax on anyone who makes less than, say, $6.00 an hour.

The tax totals 15.3 percent, and it's paid on the first dollar of wages. Talk about cruel! The government forces a young worker, just starting out and making $10,000 a year, to transfer $1,500 to a retiree who may be perfectly well off. Even worse, the retiree may have contributed only a pittance to Social Security over his lifetime while, at the rate we're going, the young worker will probably never receive any benefits at all.

Of the 15.3 percent, employee and employer each pay half. So a worker who now makes the minimum wage actually takes home just $3.92 while he costs the business that employs him $4.58. If we eliminate the payroll tax on low earners, wages should rise to $4.58–since that is already the cost to the business. Therefore, the minimum-wage worker would get a raise, in his pocket, from $3.92 to $4.58; that's 17 percent. By contrast, the Clinton minimum wage would give the worker an in-pocket increase of 21 percent–not much higher than my end-the-payroll-tax plan, which has the advantage of actually keeping minimum-wage workers employed.

The Clinton plan would jack up costs to employers from $4.58 an hour to $5.54. My plan would not raise them at all. Which one will lead to more employment? Or less unemployment? The answer is obvious.

Yes, the government would not collect as much revenue. My strong preference is to meet the shortfall with spending cuts. But even raising taxes is much fairer than a minimum-wage increase. The burden would be shared by all Americans, rather than borne only by the low-skilled and their employers. Everyone would get to practice "compassion"–instead of just those who lose their jobs or are commanded by the government to pay higher wages than their employees are worth.

James K. Glassman ([e-mail]) is a columnist for The Washington Post.