Think Tank Wars and the Minimum Wage
Minimum-Wage Advocates Can't Repeal the Law of Supply and Demand
APRIL 01, 1999 by DOUG BANDOW
Doug Bandow, a nationally syndicated columnist, is a senior fellow at the Cato Institute and the author and editor of several books, including Tripwire: Korea and U.S. Foreign Policy in a Changed World.
True to form, Senator Edward Kennedy is pushing legislation to hike the minimum wage 41 percent, to $7.25 per hour by September 2002. President Bill Clinton has naturally jumped on the bandwagon, though he only wants to go to $6.15 an hour. He declared before last November’s election: “We are fighting hard for the dignity of living wage [sic] in the face of partisanship that refused us last time.”
But thanks to groups like the Employment Policies Institute (EPI), which regularly exposes junk research, the mirage that Uncle Sam can set wages without destroying jobs is starting to dissipate. Even some people who backed the raise three years ago are starting to have second thoughts.
Few economists doubt that artificially hiking wages lowers employment, since companies generally don’t hire employees who can’t earn their salaries. Scores of studies over the years have demonstrated the harmful employment effects of the minimum wage, though the magnitude of the job loss remains in dispute. Even former Labor Secretary Robert Reich acknowledged in a 1993 memo to President Clinton that “the potential effects of a minimum wage increase on employment should of course be weighed.”
Four years ago Alan Krueger of Princeton and David Card of the University of California at Berkeley wrote a study arguing that a hike in New Jersey’s minimum had actually increased employment. (Krueger and Card later reaffirmed their earlier conclusion, based on just three months of data after the 1996 federal wage hike took effect.) The counterintuitive study suffered from severe data problems, pointed out by EPI. Economist Finis Welch called the numbers “incredible.” However, Senator Kennedy suddenly discovered the value of economic research and brandished the study at every opportunity. In 1996, an election-minded Congress raised the minimum.
In fact, it appears that the Pollyannas were wrong and the two-stage increase to $5.15 did cut employment. Overall employment has obviously increased in what remains a strong economy. But that jump came in spite of the rising minimum. The place where job losses typically occur is among the unskilled and ill educated, particularly blacks, teens, and female family heads. Alan Reynolds of the Hudson Institute found that six months after the 1996 installment took effect, unemployment rates rose in all three categories.
Moreover, EPI figures that the 1996 installment alone probably reduced the total number of jobs by about 380,000. The impact was particularly hard on teens, who found an estimated 128,000 fewer job openings. While overall employment rose, the rate for teens, especially black teens, fell. Today teen unemployment stands at about 17 percent, nearly four times the overall rate. Black teens have an unemployment rate of nearly 40 percent.
Minimum-wage supporters reply with their own numbers, usually based on data choices that obscure employment changes. But even the most avid advocates of an increase flee from the logic of their position: if the minimum wage does not cut jobs, why not increase it by $100 an hour instead of just $2, as proposed by Kennedy, and make everyone rich? The reason, of course, is that he knows, and knows everyone else knows, that doing so would reduce jobs. Hiking the wage by less would eliminate jobs too, just not so many. A Heritage Foundation study figures that a $1 hourly increase would destroy 345,000 jobs in 2000. Overall employment would still rise, but not as much.
In fact, even Krueger now suggests caution. He explains that “David and I have said all along that there was a tipping point where a great enough increase in the minimum wage would start to reduce employment.” He didn’t think the economy was at that point in 1996. However, today he says, “I suspect now that another increase, coming quickly after the last one, would bring us closer to the tipping point and may even cross it.” This defection has chastened Senator Kennedy—at least a little bit. “I am not ready to grant the job loss argument. But it is an argument that needs serious evaluation.”
Such serious evaluation won’t come from the Economic Policy Institute (EPoI), the labor-backed think tank that has long pushed for a higher minimum. EPoI’s Jared Bernstein argues that raising the minimum would help “insure that low-wage workers get a fairer share of the economic growth.”
How that would happen if they lose their jobs is unclear. So EPoI simply argues that wages have no impact on the employer’s decision to hire. It is as if business were a charitable enterprise, hiring irrespective of productivity.
EPoI’s research suffers from even more serious legerdemain than the Card-Krueger studies. In a 1997 report co-written by Bernstein, EPoI claimed that employment didn’t fall after the 1996 hike. But it based that conclusion on just six months of data; researchers for the Employment Policies Institute found that adding just three more months of data reversed that conclusion. EPoI also contended that most of the gains from the 1996 minimum wage increase went to “the poorest 40 percent” of low-income working families. That sounds good, except for the fact that EPoI defined a “family” as just about anything, including a single person. And one could fall into the category of “poorest” American by earning up to $37,000. In fact, even using EPoI’s curious methodology, two-thirds of the gain went to families with incomes above $25,000.
Baltimore’s Preamble Center for Public Policy study, which cites the Card/Krueger and EPoI research (and which is also cited by Kennedy), is even more dubious. It allegedly analyzed a city ordinance (one of the nation’s first “living wage” measures) that set a minimum wage of $6.10 (later increased to $6.60) for municipal contractors. Preamble declared that, magically, city costs fell by $500,000. Preamble relied on contracts that had been re-bid and others that were exempt from the ordinance. Had these effects been included, average costs would have risen.
There is an odd connection between these examples of bad research. Robert Reich was a member of EPoI’s board before becoming secretary of labor in the first Clinton cabinet. He later hired Alan Krueger as his chief economist. EPoI’s study was partially funded by the Department of Labor. EPoI and Preamble share the same research director, Mark Weisbrot, who happened to write Preamble’s living-wage study. Organized labor helps fund EpoI, political supporters of the minimum wage, and living wage electoral campaigns. Indeed, it looks an awful lot like, well, a vast left-wing conspiracy.
Advocates of the minimum wage have not been able to repeal the law of supply and demand. If you make something more expensive, people demand less of it. And that includes employment.
Helping low-wage workers should be a priority. But the best way to help them would be to cut their taxes, reduce regulatory burdens on companies that would otherwise hire them, and allow them to pull their children out of failing public schools. Today Congress threatens to kill them with kindness.