Economists rethinking impact of wage increase

January 25, 1995|By Knight-Ridder News Service

WASHINGTON -- Working at $4.25 an hour for a company that cleans public schools in Baltimore, Keith Mahone is puzzled that there should be argument over President Clinton's proposal to raise the minimum wage.

"Four-twenty-five is not enough money for anybody to do anything with," said Mr. Mahone, 35. "It takes you a couple of weeks of work just to pay one bill. The only thing $4.25 is enough for is for you to eat."

Over the years, economists have had a pretty blunt response to complaints such as Mr. Mahone's: Would you rather be unemployed?

According to standard economic theory, minimum-wage increases cost jobs. Raise the price of low-wage labor, and employers won't hire as many workers.

That could mean fewer jobs for welfare recipients trying to make it off the dole.

That's exactly what business groups and conservatives predict will happen if Congress approves Mr. Clinton's plan to raise the minimum wage. An increase of 75 cents, to $5, has been suggested. Senior Republicans have vowed to stop it.

But lately, some economists are having second thoughts about the job impact.

Several newer studies report that recent increases in the minimum wage have not led to significant job losses among the estimated 4.2 million minimum-wage workers, who represent about 7 percent of hourly employees.

"The theory clearly predicts a decline in employment, and most of us come to the subject expecting the potential harm to be pretty substantial," said Charles Brown, a minimum-wage expert at the University of Michigan.

"My reading of the studies is that, by and large, we find less harm than we expected to."

One frequently cited study compared employment at fast-food restaurants in New Jersey and neighboring Pennsylvania after New Jersey raised its minimum wage to $5.05 an hour, while Pennsylvania's remained at $4.25.

It found that low-wage employment in New Jersey actually increased slightly despite the raise. However, fast-food prices went up somewhat in New Jersey.

"When you raise the minimum wage, a good guess is that employment will stay virtually constant," said Princeton economist David Card, a co-author of the study. Mr. Card said the reasons are not well understood, but it could be that a slightly higher minimum wage makes for less employee turnover.

Mr. Brown said that while some workers probably would lose their jobs, many others would keep theirs at a substantially higher wage. Mr. Clinton's plan would mean an 18 percent raise for minimum-wage workers.

Despite a 90-cent increase from 1990-1991, a report by the liberal Center on Budget and Policy Priorities found that the purchasing power of the minimum wage is at its second-lowest level in 40 years.

The impact on jobs is not the only thing about the minimum wage that's subject to misunderstanding. For instance:

* Most people picture minimum-wage workers as teen-age burger-flippers, but only 31 percent are under 20. Nearly half are 25 or older. More than three out of every five minimum-wage workers are women.

* Although inflation has substantially weakened the minimum wage, about four of every five minimum-wage workers have household incomes above the federal poverty line. They avoid poverty by living in households with more than one worker.

Given the relatively small number of minimum-wage workers and the fact that most hourly workers make well above the minimum, some analysts question whether the issue is all that important anymore.

But that doesn't stop the political debate from getting pretty heated. Princeton economist Mr. Card says the minimum wage is an ideologically charged symbol in the struggle between business and labor, liberals and conservatives.

"For some people, it's like a religious thing," said Mr. Card.

Liberals see raising the minimum wage as backing the little guy against greedy bosses. Conservatives see it as interference in a private contract between employer and employee.

The real-world impact of any increase would be on the wallets of workers, employers and consumers.

Giovanni Coratolo, owner of the Port of Italy restaurant in Northern Virginia, isn't sure whether he'd have to fire any of his 50 employees. But he says an increase would reduce his wiggle room in a fickle business, cause him to think twice about new hires, and he would have to raise his prices.

"It's like a spring compressing from the bottom," he said. "It puts pressure at the top to expand."

As for school custodian Mr. Mahone, he's not waiting. He joined a labor-church coalition that persuaded the City of Baltimore to require all its contractors to pay a "living wage." In July, he expects his wages to go up to $6.10 an hour.

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