Commentary: The Case For Another Minimum Wage Hike

Whether or not Bill Clinton decides to endorse a proposed increase in the minimum wage in his State of the Union address on the evening of Jan. 27, the idea will already be on the agenda. That day, Senator Edward Kennedy (D-Mass.) plans to introduce a bill to lift the minimum wage in three increments from the current $5.15 an hour to $6.65 in 2000.

Many employers no doubt will think this scheme crazy. After all, we just hiked the minimum in 1996 and 1997. But today's healthy economy provides a good opportunity to help low-wage workers make up more ground. Unemployment is the lowest it has been in a generation. And welfare reform is creating more job seekers at the bottom of the labor market. Even if you still believe a minimum-wage boost means fewer jobs--which is no longer the consensus among economists--there's less reason to worry when employers everywhere are begging for help.

A FEW RISKS. True, there are risks. A higher minimum wage could hurt if the Asian mess drags down the American economy. And no matter what, some smaller employers will be hard pressed to pay more so soon after being hit with the last increase. Still, even economists who staunchly opposed the last hike concede that another one may not cost many jobs this time either. "In a very tight labor market like today, there might be less of an unemployment effect," says David Neumark, an economics professor at Michigan State University who was a staunch opponent of the 1996 and 1997 increases.

Here's why Neumark has softened his opposition. Congress lifted the minimum by 50 cents in October, 1996, to $4.75, and by another 40 cents last September. The double-barreled hike produced no blip in inflation. More increases would add to wage pressures, but slower growth in 1998 still should keep inflation in check, says Bruce Steinberg, chief economist at Merrill Lynch & Co. And while many considered the 1996 and 1997 increases substantial, they didn't even bring low-end workers back to the inflation-adjusted levels they enjoyed throughout the 1960s and 1970s (chart).

Also, unemployment fell after the hikes, from 5.5% in the summer of 1996 to 4.7% today. More telling, employment rates remained the same or increased for groups with the largest share of minimum-wage workers--teenagers and 20- to 24-year-olds, including minorities--according to a mid-1997 study of the first increase by the Economic Policy Institute, a Washington think tank.

Now, Princeton University economist Alan B. Krueger and David Card, an economist at the University of California at Berkeley, bolster the EPI findings with a study of the fast-food industry in Pennsylvania. "There's no indication that the last increases have had an adverse impact on employment," asserts Krueger.

Other work by Card and Krueger has also challenged the decades-old assumption that higher minimums inevitably cost jobs. In 1994, the pair looked at the fast-food industry after New Jersey raised its state minimum in 1992 to $5.05 an hour, up from $4.25, while Pennsylvania kept its own at $4.25. Result: Employment grew at about the same rate in both states. Michigan State's Neumark and a colleague challenged the study. But Card and Krueger have reconfirmed its conclusions in a new paper that draws on confidential employer data collected by the Bureau of Labor Statistics.


A MILLION MOTHERS. The basic lesson: Economic context matters. True, raising the price of labor at any time may force some employers to hire fewer workers. But the findings of Card and Krueger as well as the impressive job growth of the past year show that modest hikes aren't necessarily destructive to an already booming economy.

Welfare reform is the other relevant factor. Experts say that a million or so welfare mothers will be pushed into the workforce by 2000. This is likely to lift the jobless rate for unskilled workers or lower their wages. New minimum-wage hikes would offset the downward pressure on their pay. What's more, unless recipients earn enough to live on, society will be forced to pick up the tab one way or another. And nobody likes higher taxes.