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Why We Shouldn't Hike The Minimum Wage



To raise, or not to raise, the minimum wage: That is the question being debated in Washington. Both Democrats and Republicans are rolling out their big academic guns to prove that raising the wages of those on the bottom rung of the ladder would (a) boost income and not hurt job creation and (b) boost income and kill job creation. Who knows?

We think the timing is bad for a new tax on labor--which is what a legally enforced, rather than market-induced, hike in wages really amounts to. After two decades of stagnation, real wages are poised to take off on their own, without government interference. Indeed, real wages stopped falling in early 1994 and began rising.

Why the turnaround after 20 years? Productivity. Rising wages have almost always been associated with rising productivity. The 1960s was a decade of high corporate profits, strong 2% annual productivity growth, and hefty pay hikes. The 1990s are beginning to look a lot like that. Profits are up, and productivity growth is running at 3% for the corporate sector--4.5% for manufacturing--and 1.5% to 2% for the economy as a whole (page 86). Wages can't be far behind.

It is true that the minimum wage (now $4.25 an hour) is only 35% of the average wage--far lower than the 55% of a decade ago. Those at the bottom clearly have less buying power than in 1985. But it's also true that a much smaller percentage of the workforce labors at minimum wage today than a decade ago. In 1981, 7.8 million workers got the minimum wage--15% of all hourly workers. In 1993, only 4.2 million workers were receiving minimum wage, a mere 6.6% of all hourly workers.

The solution to boosting real wages is not to raise employers' cost of hiring. If Washington wants to fight poverty, the earned income tax credit is a more effective weapon. But economic policies that promote high productivity and fast growth with low inflation are the paths to new employment and, after a lag, higher wages. It happened in the '60s. It's working in the '90s.

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