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Executive Summary #1162es on Federal Budget

March 5, 1998

March 5, 1998 | Executive Summary on Federal Budget

Executive Summary: Increasing the Mandated Minimum Wage: Who Pays the Price?

Less than six months after its last increase to $5.15 per hour, President Bill Clinton is proposing a hike of 19.4 percent that would raise the federally mandated minimum wage over the next two years to $6.15 per hour. During the past eight years, Congress has increased the mandated minimum wage four separate times. Before raising the minimum wage again, Congress must ask itself a fundamental question: Should it be illegal for Americans, young or old, to work at even a part-time job for $5.50 or $6.00 an hour?

An increase in the mandated minimum wage to $6.15 per hour would be unprecedented in size: in effect, it would represent an increase of $1.90 per hour (44.7 percent) from 1996 to 1999. Never before has Congress raised the minimum wage by more than $1.05 per hour over a period of four years. And that $1.05-per-hour hike took place from 1978 to 1981, a period in which inflation was increasing an average of 10.7 percent per year.

Supporters of a federally mandated minimum wage continue to claim that additional increases are needed because the "rich are getting richer, while the poor are getting poorer." Although wage differences have widened over the past 20 years, such bad economic policy as a mandated minimum wage for workers serves only to exacerbate this problem. President Clinton's proposal to raise the minimum wage, moreover, works against the efforts of Congress to address the problem of moving unskilled Americans from welfare to work. It is an uncompassionate mandate that gives some low-wage workers an increase in their earnings while depriving others of the opportunity to earn anything at all.

Proponents often point to the increase in employment after the most recent hikes in the minimum wage as proof that raising the minimum wage does not destroy jobs. This argument, however, is misleading and deceptive. The overwhelming majority of economists agree that focusing only on the minimum wage's effect on total employment hides significant negative effects within groups like teenagers (see Chart 3). Although the last increase in the minimum wage did not reduce employment, it did reduce employment growth. The number of jobs, particularly for teenagers, would have grown even faster than it did over the past two years without the 1996 and 1997 increases in the minimum wage.

 

 

 

 

 

 

 

 

 

To be sure, increasing the minimum wage would help some low-income workers, but it would harm many more Americans. Consider the following:

  • Had Congress not raised the minimum wage in 1996, there would have been 128,000 more entry-level job opportunities for teenagers than were created otherwise. After the October 1996 increase, the employment rate of teenagers declined by 0.14 percent. For black teenage males, the decline was even worse--1.0 percent.

  • Recent economic research suggests that a higher minimum wage would decrease school enrollment and increase the proportion of idle teenagers--those neither in school nor employed.

  • Raising the minimum wage to $6.15 would cost consumers and workers about $6.5 billion over the next two fiscal years as the higher cost of entry-level jobs is passed on through higher prices and lower real wages. Although the overall inflation rate has been very modest in recent years, inflation in the service sector--in which most minimum wage workers are employed--is rising much faster.

  • Increasing the minimum wage would represent a substantial unfunded mandate on state and local government. It would cost taxpayers about $383.1 million over the next two fiscal years as the higher cost of state and local government jobs is passed on through higher taxes or fewer services.

A policy decision like increasing the minimum wage is not cost-free; someone has to pay for it. Economic research indicates that those who pay the most are unskilled youth through fewer job opportunities, consumers through higher prices, and taxpayers through higher taxes or fewer services. Voters recognize these costs. Over the past two years, they have rejected eight out of ten state and local ballot initiatives that would have raised the minimum wage. Instead of hiking the minimum wage, Congress and the Clinton Administration should take positive steps to benefit American workers. They should cut marginal tax rates on work, savings, and investment; increase the skills of the future workforce; modernize the Fair Labor Standards Act to grant working parents the opportunity for flexible work schedules; and reduce the burden of federal regulations.

D. Mark Wilson is a former Labor Economist at The Heritage Foundation.

Related Issues: Federal Budget