Special Report

Minimum Wage Myths

Naturally, Sen. John Kerry, devoted friend of the working poor, buys into every last one of them.

By 6.25.04

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Predictably, John Kerry has picked up the perennial call of Washington Democrats to increase the minimum wage, supporting a bill to increase the federal minimum wage from $5.50 to $7.00 an hour over three years. He proclaims that, unlike George W. Bush, who focuses on providing tax "breaks" to the "rich," he will devote himself to helping the working poor. Furthermore, he derides criticism from business groups that a minimum wage increase would decrease employment opportunities and raise prices, saying "it never has."

Senator Kerry's knowledge of history is as weak as his grasp of economics. In fact, most economists -- regardless of political stripe -- are at far greater odds with Kerry's pronouncement than the September 11 commission is with the Bush administration's assertion that there were ties between al Qaeda and Saddam Hussein's Iraq. Being the type of politician he is, it is quite likely that Kerry knows better, but is just playing politics. He knows that most Americans are not well schooled in economics, that no one in the news media will call him on it, and that proposals to raise the minimum wage are always popular. But the myths that Kerry and other pandering politicians promulgate about the minimum wage need to be vigorously countered.

Myth #1: "Increases in the minimum wage do not cause increases in unemployment."

Proponents of this myth point to the fact that the unemployment rate decreased during President Clinton's second term despite a two-part increase in the minimum wage in 1996 and 1997. They also point to studies such as one from the Keystone Research Center that concluded that "job losses that were detected [from the 1996-1997 raises] were small and statistically insignificant." The fact is, however, that a strong economy only hid the job killing effects of those minimum wage increases. A study by the Employment Policy Institute, for instance, showed that despite the overall rise in employment, employment for teenagers -- which largely make at or near minimum wage -- actually fell in the year after the initial minimum wage increase in October 1996. And most studies of previous rate hikes (such as 1990-1991) show clear evidence of job losses. One reason why some have found the data from 1996-1997 more ambiguous is that the minimum wage has lagged behind inflation and real wage growth so that the relatively modest 1996-1997 raises pushed the minimum wage above the "fair market value" of fewer workers than in the past.

You will be hard pressed to find more than a few economists, either in industry or in academe, who will argue that meaningful minimum wage increases do not result in increased unemployment. The common sense notion that if you increase the price of something, all other things being equal, you will decrease the demand for that something, has been demonstrated through empirical evidence and theoretical equations and is not a matter of controversy among members of the economics profession.

Think of it this way. An increase in the minimum wage is essentially an employment tax levied on businesses that hire lower skilled workers. Environmentalists have long advocated increases in gasoline taxes because an increase in gas prices will reduce gas consumption. Many people also argue for an increase in cigarette taxes as a way to discourage teenagers from smoking. The same logic applies to increasing the cost of labor.

Myth #2: "The cost of minimum wage increases will be absorbed by business and will not be passed along to consumers."

It is hard for me to understand how anyone with any memory of recent minimum wage increases could still believe this. Like many restaurants, one of my favorite "casual dining" establishments raised its prices as a direct result of the last raise in the California minimum wage (which is higher than the federal minimum wage) a few years ago. But it is not just affordable restaurants and their largely middle class patrons who would feel the squeeze (to use a Kerry term) from another minimum wage increase.

Making my living in the commercial real estate industry, I know that every increase in the minimum wage (state or federal) over the past two decades has resulted in an immediate increase in the prices of a wide range of services from janitorial to landscaping to security. As Kerry correctly points out, an increase in the minimum wage would increase the labor cost associated with not just minimum wage workers, but also the millions of other low-wage workers whose compensation is tied to the minimum wage. When these costs are incurred in the real estate industry, they are typically passed through to tenants either directly, or indirectly through higher rents.

When wages increase due to higher productivity, there is no added "cost" to be passed on to consumers. But when wages rise because of government edict beyond what productivity gains warrant, there is a cost that is paid by the employer and, usually, depending on specific economic conditions, passed on in whole or in part to consumers.

Myth #3: "Minimum wage workers deserve wage increases on a regular basis, just like other workers."

This sounds reasonable. But most minimum wage workers do receive wage increases as they gain experience. In the labor market, wage increases are driven by productivity. As the productivity of labor increases due to experience, training, and other factors, wages increase. People who started working at the minimum wage one or two years ago have very likely already achieved wage increases through the workings of the market --not by government decree.

Thanks to Ronald Reagan, we have a historical record that proves this point. If low wage workers were really dependent on action by the government to obtain wage increases, the number of workers earning the minimum wage would have steadily increased during the period 1981 to 1990 when the minimum wage did not increase. What occurred, however, was dramatically different. The number of Americans earning the minimum wage fell by 50%. Despite nine years' worth of new entrants in the job market, the number of minimum wage workers fell by some 4 million as the workings of the market rewarded workers for the value of their productivity.

Similarly, the last rise in the federal minimum wage was almost seven years ago (September 1997) and the statistics are just as dramatic. In 1997, 4.75 million Americans were earning at or below the minimum wage (6.7% of the hourly paid workforce), versus 2.1 million (2.9% of the hourly paid workforce) in 2003. Again, the evidence shows that the labor market does not need government inducement to increase wages. Indeed, when Senator Kerry announced his support for a minimum wage increase to a hand-selected group in Virginia, only one person responded when the senator asked to see the hands of those making the minimum wage; and as it turned out, she wasn't making the minimum wage but was already making $7.00 per hour.

Myth #4: "Increasing the standard of living of the working poor is part of the American Dream. It is what America is all about."

The proponents of this last myth believe that the government, not the labor market, should set wage levels -- that the government, not employers, should be responsible for bestowing wage increases to workers. They believe that the free market in labor should give way to government control (and that working people should look to elected officials as their benefactors).

This is not what America is all about. America is about liberty, not government control. If we want to live in a free society, we should be very careful about the demands we make on government to compel our fellow citizens to do certain things.

The essence of good leadership is to shun popular policies that are harmful and to support sound policies even when they are not popular. Senator Kerry is showing that his leadership on economic issues is every bit as shaky as his leadership on foreign policy.

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About the Author
Brandon Crocker is the chief financial officer of a commercial real estate development and management company in San Diego.