John Buell

Market Magic vs. Minimum Wage

A jointly-authored study by the Economic Policy Institute and the Center on Budget and Policy Priorities recently confirmed what most Americans have thought for some time: Income inequality has grown dramatically over the last two decades. In this period, the incomes of the poorest fifth of families grew by $2660 while the incomes of the richest fifth grew by $45,100.

Such stories confirm the fear of many Americans that corporate globalization is forcing more workers into poorly compensated service sector jobs. Yet both state and Federal governments can mitigate some of the most deleterious trends. One crucial step would be to increase the minimum wage.

While Congress continues to dicker on this, some state and local governments are striving to increase the minimum wage. In today's political climate, making the case for even modest and long-overdue increases in the minimum wage requires challenging both market fundamentalists and cultural conservatives.

Market fundamentalists have a familiar refrain. Raise the cost of any good and demand falls. If the cost of lumber goes up, contractors will use more fiber glass to build their boats, houses, etc. If government mandates a higher minimum wage, employers will hire fewer workers. Persuasive as this argument may seem, empirical studies fail to bear it out. Work by Princeton economists David Card and Alan Krueger shows that even when individual states push their minimum wage above national or regional standards, jobs are not lost.

On the national level, President Clinton's 1996 boost in the Federal minimum wage from $4.25 to the current $5.15 was accompanied by a decrease in unemployment from 5.6% to 4% by the year 2000. Other factors played a role, including especially a Federal Reserve less obsessed by fears of inflation and more willing to stimulate investment. Nonetheless, at the very least the higher minimum wage did not stand in the way of greater prosperity for all.

Whenever this topic comes up, newspaper reporters invariably present stories of business owners worried that with a higher minimum for their bottom-tier employees, they can no longer compete. Here in Maine, an AP story (Portland Press Herald, Feb. 14) cites a local pizza parlor owner who fears that he will have to pay not only his entry level but also his experienced workers, whose hourly rates are pegged to the minimum wage, higher salaries. These small business owners forget that their competitors will have to absorb similar cost increases. In addition, higher minimum wages can also decrease worker turnover and enable more pizza purchases by the low-income employees of his and other businesses.

The same arguments now advanced against the minimum wage were once staples in business leaders' objections to child labor laws. Hiring child labor may once have benefited some individual business, but when large numbers of children lack the opportunity to develop their minds and bodies, economic and social progress suffers.

Today's businesses that pay their workers poverty-level wages are parasitic on a whole host of social services, including food stamps, Medicaid and the Earned Income Tax Credit. Wal-Mart has received much negative publicity for encouraging its low-wage workers to draw on Medicaid and food stamps. Problematic as much of Wal-Mart's behavior is, in this case it is merely making explicit the reliance of all low-wage businesses on a host of government subsidies. The same business leaders who denounce minimum wage laws as "interventions in a free market" would have fewer healthy and productive workers to hire without these subsidies.

Today's Federal minimum wage has fallen from its 1968 peak of nearly $8 an hour in inflation-adjusted terms. The Maine Center for Economic Policy estimates that statewide an average adult worker with one child would need nearly $15 an hour to meet basic needs. Increases in the minimum wage alone cannot close that gap. Enhancements of the Earned Income Tax Credit, worker training and better workplace practices are all essential, and any policy mix will need periodic adjustments. Nonetheless, modest increases in the minimum wage are an important first step as well as a catalyst for other changes.

Market fundamentalists and cultural conservatives also tell us that if our poor, our teens and our minorities worked harder, they would prosper. Low wages must therefore reflect low productivity. Yet in the years since the real value of the minimum wage has fallen by about 40%, average worker productivity has increased by nearly 75%. Minimum-wage workers are more productive than ever, but their compensation fails to reflect their productivity.

Some pundits also routinely suggest that teens, minorities and single women trapped in poverty need to learn a lesson from history. Earlier generations of Irish, Polish and Italian Americans worked themselves out of poverty. This argument is true. They worked hard, they formed unions, they became the backbone of a New Deal coalition that enacted minimum-wage standards and demanded full employment policies of their leaders. All American workers benefited, just as they will today if our state and Federal leaders do the right thing.

John Buell is a columnist for the Bangor Daily News. His most recent book, coauthored with Tom DeLuca, is Liars, Cheaters, Evil Doers: Demonization and the End of Civil Debate in American Politics.

From The Progressive Populist, April 1, 2006

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