Economic Viewpoint
IT'S SIMPLE: HIKE THE MINIMUM WAGE, AND YOU PUT PEOPLE OUT OF WORK
BY GARY S. BECKER

03/06/1995
Business Week
22
(Copyright 1995 McGraw-Hill, Inc.)

Higher labor costs reduce employment. That is why President Clinton's proposal to raise the federal minimum wage should be rejected. A higher minimum will further reduce the employment opportunities of workers with few skills.

Teenagers, high school dropouts, immigrants, and other low-skilled workers frequently earn less than $5.15 per hour, the proposed new minimum. They find employment in small establishments, especially in fast-food chains and other retail sectors. Increasing the minimum, as the President wants, would put some of them out of work since their productivity is not high enough to justify the cost to employers.

During the past several decades, many studies found that raising the minimum wage does reduce the employment of teenagers and others with low skills. But minimum-wage laws have remained popular among trade unionists and many politicians. And periodically, some economists have contested the prevailing wisdom about harmful effects. SERIOUS FLAWS. A recent and widely cited challenge of this kind has come from several studies by two Princeton University economists, David Card and Alan B. Krueger--the latter now Robert B. Reich's chief economist at the Labor Dept. One study finds that the change in employment after a minimum-wage hike is generally not bigger in states with a larger fraction of low-wage workers--the group that should be most affected by higher minimums.

Another study is frequently mentioned by Reich and others in the Administration to bolster the argument that a higher minimum does not lower employment. That study compares employment changes in fast-food restaurants in New Jersey and Pennsylvania after New Jersey raised its own minimum in 1992. Card and Krueger argue that because employment fell in Pennsylvania as much as it did in New Jersey, the drop in both states must have been due to other causes than the raise in the minimum.

There are some, and I am one of them, who believe that these studies have serious defects. Several of these were spelled out by Donald R. Deere and Finis R. Welch of Texas A&M University and Kevin M. Murphy of the University of Chicago in research they reported at the January meetings of the American Economic Assn.

For example, the higher federal minimum in 1990 and 1991 caused a much larger drop in New Jersey's teenage employment than Pennsylvania's, which could explain why employment did not fall more in New Jersey when that state increased its own minimum in 1992. New Jersey employers presumably anticipated the increase in their state's minimum when they sharply cut employment in responding to the earlier wage hike. DUELING STUDIES. The Card-Krueger studies are flawed and cannot justify going against the accumulated evidence from the many past and present studies that find sizable negative effects of higher minimums on employment. The Deere, Murphy, and Welch study shows that the two-stepped increase in the federal minimum from $3.35 to $4.25 in 1990 and 1991 reduced employment of teenagers, high school dropouts, and other groups with low earnings.

The magnitude of these reductions sounds about right, particularly after the authors take into account the economic recession of that time. After the 27% increase in the minimum wage, employment of male and female teenagers lowered by 12% and 18%, respectively, while employment of high school dropouts shrank by about 6%. If Congress raises the rate by 18%, to $5.15 an hour, these results imply that employment of workers with few skills will fall by over 5%.

President Clinton justified the need for a higher rate of pay by noting that a family cannot live decently on minimum wage earnings. However, even Card and Krueger do not find that raising the minimum is an effective way to reduce poverty, since poor families typically get only a small fraction of their income from members whose wages are near the minimum.

The President also wants to increase current subsidization of the job training of less skilled workers, but these subsidies might be unnecessary if Clinton did not also advocate raising federal minimum wages. Higher minimums discourage on-the-job training of workers with few skills since they spend their time learning rather than producing.

Even a wizard would have a great deal of difficulty repealing the economic law that higher minimum wages reduce employment. Since politicians are not wizards, they should not try.