The minimum-wage solution

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Chicago Tribune
By: Michael Saltsman
August 19, 2011

We need jobs.

With a 9 percent unemployment rate and anemic labor market growth, this is one goal on which there's bipartisan consensus. Unfortunately, there's little agreement on how to best accomplish this goal. And there are few issues on which the parties are more diametrically opposed than the minimum wage.

Take Rep. Michele Bachmann, R-Minn., a GOP presidential hopeful who has testified that eliminating the minimum wage could eliminate unemployment altogether. Conversely, progressive advocates claim that raising the minimum wage could spur an economic recovery and create as many as 50,000 new jobs.

So who should we believe?

In this case, neither side has it quite right. Eliminating the minimum wage is not a quick fix for the country's employment woes -- but increasing the minimum wage won't boost the economy either, and might actually drag employment down further.

Let's start with Bachmann's claim that removing the federal wage floor "could potentially virtually wipe out unemployment completely."

Of the 14.5 million people out of work in the United States, millions were previously employed in high-wage sectors such as finance, information technology and utilities. Bachmann assumes that the only thing standing between would-be workers and a job is a wage floor set far above what their skills command. That's not necessarily true -- experienced job seekers can get gigs that pay minimum wage. They just don't want them. Even if they did, ending the minimum wage wouldn't create 14.5 million new jobs.

If Bachmann doesn't have it right, what of the opposing claim, that raising the minimum wage is a stimulus that will boost the labor market? Economists at the Federal Reserve Bank of Chicago found a temporary spending boost following a minimum-wage increase in households with an adult minimum-wage earner. This spending was primarily the result of a small number of households buying vehicles, and sometimes going into debt to do so.

Even though this research was modest in its claims, some progressive advocacy organizations have cited it as proof that a higher minimum wage stimulates the economy.

They're exaggerating. Nowhere does the Chicago study mention job creation or describe the minimum wage as economic stimulus. In fact, the authors are deliberately silent on the "aggregate effects" of the minimum wage, citing "compelling" evidence that an increase in the minimum wage makes it more difficult for young people to get hired. Indeed, a recent study from a labor economist at West Point found that past increases in the minimum wage provided no boost to the overall economy, and that industries with many jobs that pay minimum wage actually saw output decline.

If raising the minimum wage is neither a stimulus nor the cause of all our employment woes, what is it?

A minimum wage increase is a trade-off: Workers whose wages rise following a minimum wage increase are better off; on the other hand, those who lose their job because they're now more expensive to employ are worse off.

Research shows that the consequences outweigh the benefits. A 2005 study in the Journal of Human Resources found a higher minimum wage results in a net increase in the proportion of poor families or families near poverty. This means that raising the minimum wage might actually increase poverty.

If the goal is to stimulate the economy by boosting the purchasing power of low-income workers, there are better solutions. Expansions of the earned income tax credit for the working poor, as President Barack Obama proposed in his 2012 budget, have been shown to boost the earnings of families below the poverty line without job losses linked to wage mandates.

This may prove to be smarter policy -- and better stimulus -- than forcing employers to pay more and putting some of their employees out of work in the process.

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This page contains a single entry by CFED published on August 19, 2011 4:25 PM.

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