May 12, 1996
"A World View of Minimum Wage"
San Jose Mercury News
By Timothy Taylor
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FOR straight talk on the issue of raising the minimum wage, detached from
election year shenanigans, take a small step backward in time, and a large step
sideways to an international perspective.
In 1994 and 1995, the Paris-based Organization for Economic Cooperation and
Development, an international body whose member-nations represent the world's
developed economies, published a study in several volumes examining why unemployment
in much of Europe has been been stuck in at double-digit rates over the last two
decades. Unemployment rates for European youth have been even higher, commonly
exceeding 20 percent.
There are many reasons, of course, including generous levels of government
benefits in Europe that give workers less incentive to take a low-paying job,
government requirements of employers that raise the cost of hiring, and so on.
Another factor, at least in some countries, is a high minimum wage.
If the minimum wage is at or above half of the average wage, as it was in France,
the Netherlands, and New Zealand in the late 1980s - and in the United States
in the 1950s and 1960s - then it has a fairly strong ''bite,'' as the OECD puts
it, in reducing employment.
But if the minimum wage is only one-third of the average wage, as is presently
the case in Canada, Spain, and the United States, then its bite is smaller. Even
if the U.S. minimum wage rises from $4.25 to $5.15, it would only be about 40
percent of the average wage.
"Increasing the minimum wage from a high level relative to average wages
may prompt large cuts in employment," as the OECD puts it, "whereas
the unemployment consequences may be small when the minimum wage is already low."
Some studies of minimum wages predict that they cost no jobs at all. Other
studies in France, Canada, and the United States imply that raising the U.S. minimum
to $5.15 would cost perhaps 200,000 jobs.
There are moderate arguments to support a slightly higher minimum wage. Even
if it does cost a month's worth of job growth, perhaps this price is worth paying
if it means a higher incentive for jobless people to go to work.
But other benefits of a higher minimum wage are oversold. For someone who supports
a family by working at the minimum wage, a higher wage (assuming they don't lose
their job) will mean lower eligibility for welfare, food stamps, Medicaid, and
the earned income tax credit, which is available only to low-wage workers with
children. After these adjustments, their standard of living will barely budge.
It's pleasant to pretend that we live in the Land of Milk and Honey, where
government can solve social problems by passing laws with no adverse consequences
and zero public cost.
But back here in Reality-ville, if we want to raise the take-home pay of low-wage
workers immediately without endangering their jobs, the obvious policy tools are
to reduce their income or Social Security and Medicare taxes, or to raise the
earned income tax credit. If we must raise the minimum wage, then it would be
wise to have several tiers, as the OECD suggests, with lower levels for teen-agers
and low-wage geographic areas.
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