March 30, 1989
"Minimum Wage is Irrelevant"
San Jose Mercury News
By Timothy Taylor
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IN A battle of competing inertial forces, President Bush and House Democrats
are fighting over the minimum wage as if it actually mattered. Because of changes
in the economy since the Fair Labor Standards Act of 1938 enacted the minimum
wage, it has become largely irrelevant and inappropriate as a policy tool.
A justification for the minimum wage from the perspective of 1938 might sound
something like this:
"We were afraid that the Great Depression, Part II, was about to start.
Only five years earlier, back in 1933, unemployment had soared to 24.9 percent
and wages were falling. From 1933-37, it looked like an economic recovery had
started. Unemployment fell to 14.3 percent and the economy was growing again.
But then the recession of 1937-38 started, and unemployment went back up to 19
"Even though women had made a lot of progress toward equality in the 1920s
and 1930s, it was still true that about 90 percent of adult men and only about
20 percent of adult women were in the labor force. The minimum wage was to assure
that a man working full-time would earn enough to support a wife and family."
That justification for the minimum wage sounds strange in 1989. Women have
entered the labor market in force and many families now have two wage earners.
If every full-time worker is to be paid enough to support a family, then every
two-earner household will earn enough to support two families, and any family
with a couple of teen-age kids working part-time will earn enough to support three
Moreover, although the possibility of a recession is always worrisome, nothing
like the Great Depression is looming. Today, the economy is in the seventh year
of an economic upswing and unemployment is down to 5.1 percent. Wages are keeping
pace with inflation. As a result, while one out of every seven workers who are
paid by the hour earned the minimum wage in 1981, only one of every 16 hourly
workers earned the minimum wage last year.
But the new justification for an increase in the minimum wage is to help fight
The difficulty with that argument is that only about 300,000 of the 3.9 million
workers who have minimum-wage jobs are actually poor, according to the U.S. Labor
That hypothetical example one often hears of a single wage- earner, working
full-time for the minimum wage and trying to support a family, is nothing more
than a rhetorical echo of the 1930s; it rarely happens that way any more. The
problem for the 21 million people below the poverty line in this country is primarily
that they don't have full-time jobs, not that they are paid low wages.
Whether the minimum wage increases to $4.55 an hour (the House Democrats plan)
or $4.25 (the Bush administration plan), it will only affect some ill-defined
group of part-timers and first-timers in the labor market, most of whom are above
the poverty line. There will be a trade-off within that nebulous group between
those who lose jobs (or don't get hired) because of the higher minimum wage, and
those who keep jobs and receive the higher wages.
But unless your social conscience is captivated by the burning issue of teen-agers
getting only $3.35 an hour for flipping burgers, the minimum wage is no longer
especially relevant as social policy.
Those of us who care about the plight of poor working families should stop
thinking about the minimum wage and start focusing on the earned income tax credit,
which can only be claimed by low-income families with dependents. Under current
law, the tax credit provides a tax credit of 14 percent of total earnings up to
$6,500. The credit is refundable, which means that if a poor household has tax
liability of $500 and an earned income tax credit of $900, the government will
send them a check for the $400 balance.
The tax credit provides an incentive to work and it is targeted to families
with low incomes. Since businesses don't pay higher wages, the tax credit doesn't
lead to fewer jobs.
But when the Senate starts considering the minimum wage next month, the earned
income tax credit will probably stay anonymous. From the government point of view,
after all, the tax credit costs money, while the costs of imposing a higher minimum
wage on business don't show up in the government budget.
The dispute between Bush and the Democrats over the minimum wage is a rerun
of an old political morality play, with emotion substituting for analysis. Winning
or losing the battle over the minimum wage is fairly unimportant. But expanding
the earned income tax credit would make a real difference to working families
who really need the help.
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