A Higher Minimum Wage: Minimal Damage?

The minimum-wage debate has become numbingly familiar in the 55 years since Franklin D. Roosevelt signed the law that puts a floor under pay. Companies--backed by most economists--say raising the minimum destroys jobs by forcing employers to scale back hiring. Proponents point to people such as Betty J. Hilliard, 44, who sews ladies' underwear in a garment factory in Rocky Mount, N.C. After 19 years there, she still earns the minimum $4.25 an hour. "It's hard to make [ends meet]," says Hilliard. "It's a disgrace."

As the Clinton Administration prepares a new campaign to raise the minimum, however, something unprecedented is happening: The debate is edging, ever so slightly, toward a middle ground. The Clintonites grant that a higher minimum could hurt employment growth temporarily. But they think that such a setback will be outweighed as rising wages force companies to buy new equipment, improve productivity--and eventually create jobs requiring higher skills that raise the standard of living and boost the total economy. Grudgingly, minimum-wage opponents are ceding this point. Richard Berman, executive director of the Employment Policies Institute, will vigorously fight a higher wage floor on behalf of hotels and fast-food industries. His argument: "We're concerned about people from welfare families who can't get a job." Yet, he adds, "if you want to take the macro view, you can argue that productivity gains [from a higher minimum wage] are good in the long run."

It won't be clear for a while where this modest consensus may lead: Labor Secretary Robert B. Reich says he plans to hold off on proposals to raise and index the minimum until the recovery is for real. Still, it already seems likely that a separate initiative--the Administration's so-called high-skills job strategy--will lend a new dimension to the standard debate. The high-skills argument has been made most cogently by economists such as former Labor Secretary Ray Marshall. He holds that high interest rates drove up the real cost of capital in the 1970s and 1980s, creating an incentive to compete against overseas rivals on the basis of pay just as baby boomers and women flooded the labor market and drove down the relative price of labor. That effect was heightened by a dramatic drop in the inflation-adjusted minimum wage, which remains at historically low levels (chart).

TEST CASE. In Thinking for a Living, a book he co-authored last year, Marshall argues that competing on wages is dumb. The key to winning in world markets while raising living standards at home, he says, is to rely on higher-skilled, more productive workers. He believes that indexing the minimum wage will help to spur this transition. And if that hurts young workers, who are the most vulnerable minimum-wage employees? "I don't want them in those jobs anyway," says Marshall. "I want them in school or in apprenticeship programs" that Clinton plans to expand.

Minimum-wage critics have trouble countering such logic. Berman agrees, for instance, that higher labor costs force companies to improve efficiency. And higher productivity produces long-term job gains, says Thomas A. Gray, the senior economist at the National Federation of Independent Business, which represents small employers. But both still oppose a higher minimum, based on its assumed short-term drawbacks.

Even those effects are not as clear as most economists have assumed, however. For example, Princeton University economist David Card recently thought of a clever way to simulate something lacking in most minimum-wage analyses: a controlled experiment. Previous studies have identified lower job growth primarily by making statistical correlations between minimum-wage hikes and national employment levels. But this approach provides no comparison sample to show what job growth would be if the minimum weren't raised.

Card made California his control group. Like many states, California has its own wage law, and in 1988 it raised its minimum to $4.25 an hour, while the federal level remained at $3.35. When Card compared California with states where the minimum didn't change, he found no evidence that its employment growth had slowed. The story was even more startling for teenagers, who make up a third of all minimum-wage workers and are the first to go if the wage rises. The employment-to-population ratio for California teens rose by 5.6%.

'NO EVIDENCE.' "Even in the low-wage retail trade industry, I can find no evidence of an adverse employment effect," says Card. Lawrence F. Katz, the Labor Dept.'s chief economist, came to a similar conclusion when, as a Harvard University professor, he looked at fast-food restaurants in Texas. Card and Katz speculate that the minimum had fallen so low by 1987 that raising it only lifted wages to where the free labor market would have set them anyway.

The jousting hasn't ended, of course. Two other recent studies, including one of California, found lower job growth from higher minimums, mainly among teens and young adults. "We found that teen employment falls by 1.5%" when the minimum rises 10%. "But if you ask me does that imply the minimum wage is horrible, I'd say no," says David B. Neumark, a University of Pennsylvania economist who co-authored one study. The bottom line is this, says Rudiger W. Dornbusch, an economist at Massachusetts Institute of Technology and a BUSINESS WEEK columnist: "The average economist believes that raising the minimum reduces employment. Now, you have to say it's uncertain."

Even advocates agree that raising the minimum to ridiculous heights would cause big job losses. Reich has told Katz to determine how big an increase is wise and whether indexing is a good idea. Then, an interesting debate will develop--not just on raising the minimum but on whether the long-term gain is worth the short-term pain.

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