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Jewish World Review Sept. 7, 2000 / 6 Elul, 5760

Amity Shlaes

Amity Shlaes
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Consumer Reports

Minimum wage, maximum cost

Caving in on the minimum wage is one of the Republican Party's worst habits -- CAVING IN on the minimum wage is one of the Republican Party's worst habits, and Congress is succumbing to temptation once again.

House Speaker Denny Hastert has announced he will trade a dollar hike in the minimum wage in exchange for President Clinton's assent to abolishing America's inheritance tax. George W Bush, for his sins, is going along.

Not surprisingly, the Republicans are busily telling themselves that they have pinpointed the right moment in the business cycle to ensure that the "minimum" hike will do minimum damage.

Thus Representative Pete King, one of the Grand Old Party's more egregious wets, on the $6.15 an hour proposal in Newsday: "Certain battles are worth making. This isn't one of them." Democrats from Ted Kennedy to Joe Lieberman are meanwhile crowing about the benefits - Mr Kennedy raising the political stakes by elevating the workaday minimum wage to "a civil rights issue" for the "working poor".

Wrong, say a thousand work-hours worth of fresh data churned out by a series of economic researchers, not all in the employ of the anti-minimum wage lobby.

The authors find that a minimum wage hike does terrific damage to workers-even during prosperous periods. Because it interacts with yet other government measures taken on behalf of the poor, the increase has the perverse effect of impoverishing families and sustaining an underclass and hurting blacks.

So much for "civil rights".

Some of the data even suggest that the minimum wage deters education.

The most extensive research comes from William Wascher of the Federal Reserve, David Neumark of Michigan State University, and Mark Schweitzer, a visiting economist at the Bank of England.

The authors looked specifically at workers earning near the minimum wage.* They found that these lower earners see both their hours of work and their overall earnings fall following a hike. Employers lay off workers or hire more slowly. The only workers who come out better are lower-wage union members, who "gain at the expense of lowest-wage non-union workers".

An earlier paper by the same trio goes further, indicating that minimum wage hikes actually push the non-poor into poverty: "the overall effects of increases in the minimum wage are to increase the proportion of families that are poor and near poor, and to decrease the proportion of families with incomes between 1.5 and 3 times the poverty level".

The business cycle, moreover, does not necessarily improve or worsen this. "People claim that the minimum wage increase has no effect during a booming economy," says Mr Neumark, "but there is no evidence that minimum wage effects vary across the business cycle. 100,000 fewer jobs is 100,000 fewer jobs."

US tax law and benefits programs also do their part to the make the minimum wage hurt, according to Daniel Shaviro of New York University's School of Law. **

Looking at low-income families in 11 states, Mr Shaviro shows that for each dollar a working parent gains from the minimum wage, he can lose 80 cents, a dollar, or more. This is because his new income removes him from the category eligible for Medicaid, food stamps, or tax breaks.

The change can be dramatic: in some states, calculates Mr Shaviro, "a single mother with two children could increase her earned income from $10,000 per year to $25,000 per year and actually find herself with $2,540 fewer dollars once she accounts for lost tax credits and benefits. Though her earned income more than doubles, she is worse off financially."

Most vulnerable of all, it is argued, are minority youth. Mark Turner and Berna Demiralp of Johns Hopkins looked at teenagers, a group who make up one third of all minimum wage workers, in the period of another minimum wage hike, the early 1990s.***

They found that a hike in the minimum wage does draw teens to work in overwhelming numbers - white teens. This dovetails with federal data, which show that a good share of the minimum wage earners live in households that may not need the increase.

In Mr Lieberman's state, Connecticut, the average income of households where at least one earner collects the minimum wage is $60,000. Black and Hispanic teens by contrast are 33 per cent more likely to become idle following a minimum wage increase, according to Turner-Demiralp.

Although their study doesn't delve into the reasons for this, Mr Neumark says it is a simple shift in relative demand towards workers who-employers think-are more skilled. Undereducated workers, a group heavy with minorities, lose out.

Yet sadly, as Mr Turner and Ms Demiralp found, an increasing number of young people of all races abandon school and training following a minimum wage increase. This at a time when more education is universally acknowledged, even by the ultraliberal Kennedys, to be the key to higher wages and social mobility. "

If you could really convince Ted Kennedy that these findings are true," says Mr Neumark, "he should change his mind on the minimum wage". But with America's unions playing such a key role in election 2000, don't hold your breath.

*"The Effects of Minimum Wage Through the Wage Distribution" Working Paper 7519 National Bureau of Economic Research **"Effective Marginal Tax Rates and Low Income Households" (***Higher Minimum Wages Harm Minority and Inner-City Teens"(

JWR contributor Amity Shlaes is a columnist for Financial Times . Her latest book is The Greedy Hand: How Taxes Drive Americans Crazy and What to Do About It. Send your comments by clicking here.


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