January 27, 1995
"Maybe $5 an Hour Would Create Jobs"
San Jose Mercury News
By Timothy Taylor
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AMONG ECONOMISTS, the negative effects of the minimum wage used to be a fairly settled issue. As wages increased, employers would conserve on labor, and some minimum wage workers would lose their jobs.

The traditional minimum wage story emphasized that in a market, the pay of workers will be closely linked to their productivity. The economist George Stigler, an ardent free marketeer who later won a Nobel Prize, explained in a classic 1946 article:

"If a minimum wage is effective, it must therefore have one of two effects: first, workers whose services are worth less than the minimum wage are discharged (and thus forced into unregulated fields of employment, or into unemployment and retirement from the labor force); or second, the productivity of low-efficiency workers is increased."

Since that essay, the empirical evidence has tended to support the prediction of moderate job losses. Based on dozens of studies over the years, economists often cited a rule of thumb that a 10 percent rise in the minimum wage would reduce teenage employment by about 2 percent.

Stigler didn't think it likely that a minimum wage would raise productivity. As he viewed it, such theories required that "entrepreneurs may be shocked out of lethargy to adopt techniques which were previously profitable or to discover new techniques. This 'shock' theory is at present lacking in empirical evidence but not in popularity."

But economists David Card and Alan Krueger -- both at Princeton University until Krueger recently accepted the job of chief economist with Clinton's Department of Labor -- have found some of the empirical evidence that Stigler was lacking. (In a spirit of full disclosure, I should mention that while at Princeton, Krueger was co-editor of the Journal of Economic Perspectives, where I work.)

Card and Krueger studied the experience of 410 fast-food restaurants in New Jersey and eastern Pennsylvania, after the decision by New Jersey to raise its minimum wage from $4.25 to $5.05 in April 1992. After adjusting for every factor they could think of, they found that the higher minimum wage did not cost jobs in New Jersey; in fact, in some statistical measures, a higher minimum wage increased the number of jobs!

How could this happen? One effect noted by Card and Krueger is that the price of fast food seemed to increase in New Jersey, presumably as one way of collecting the money to pay the higher wages. They also suggest the possibility that higher wages may encourage workers to be more productive, perhaps by working harder and quitting less often.

Card and Krueger have just published a book that offers additional evidence for their conclusion. But their findings remain controversial.

For example, if employers can expand their operations and hire more workers by paying higher wages -- perhaps because the higher wages attract more productive workers and discourage job turnover -- then why hadn't profit- seeking companies already raised wages on their own, without the government telling them to do so? Perhaps a higher minimum wage encourages employee productivity for only a short time, until the workers become used to the higher wage, and longer term followup would show a loss of jobs.

In addition, even if a high-wage state like New Jersey didn't experience job losses by raising the minimum wage to $5.05 in 1992, that level of minimum wage might still cause a disruptive loss of jobs in a low-wage state like Arkansas. But even if moderate increases in the minimum wage turn out to cost fewer jobs than previously believed, the minimum wage will still be of little consequence to most U.S. workers.

The U.S. economy has about 120 million jobs. In 1992, just 4 percent of U.S. workers were paid at the minimum wage of $4.25. Almost two-thirds of those minimum wage workers are part-time. A full 30 percent of them are between the ages of 16-19, and half are between the ages of 16-24. Most minimum-wage workers are not even in poverty; the 8 million families below the poverty line usually have no job (or few hours worked), not a full-time job at the minimum wage.

If we care about helping the poor and working poor, we will need better education, apprenticeships and job training. We will need welfare reform, which inevitably enters into questions of job search assistance and day care and health care for the children of low-wage workers. We should continue expanding the earned income tax credit, a tax break that is targeted precisely at poor working parents with children.

Raising the minimum wage is an old sentimental battle, and it will be fervently fought by President Clinton. But in the end, it has little to do with a serious attempt to help the working poor.

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