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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 percent.

"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 families.

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 poverty.

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 Department.

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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