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Mr. Chairman and Distinguished Members of the Joint Economic Committee:
We do not all agree on the subject of our discussion today -- the fate of
the minimum wage. But let me begin with some ideas on which we do concur. Work
is better than welfare. Work enobles and gives meaning. Any American who works
hard and plays by the rules ought to have a fair chance to get ahead.
The current minimum wage betrays those ideals. It's not a liveable wage. A
person who works 40 hours per week, 50 weeks per year at this wage earns only
$8500 for an entire year's work. That's just not enough to support a family.
And to suggest it's good enough mocks the values we claim to hold dear.
Today, the real value of the minimum wage is 27 percent lower than it was in
1979. Since its last increase four years ago, the value of the minimum wage has
fallen 45 cents per hour. If it's not boosted this year, it will be worth less
than at any time in 40 years.
President Clinton's proposal to increase the minimum wage 90 cents an hour
over two years can help lift the lives of the
eleven million Americans who currently earn less than $5.15 an hour.
These are the invisible workers of America -- working harder than they've
ever worked before and barely making it. Hoping they or their kids stay
healthy, because they can't afford to see a doctor. Hoping the rent doesn't go
up again, because they can't afford another place to live. Hoping that interest
rates don't rise again, because they're already behind on their car payments and
their credit card payments, and they can't sink deeper into debt.
These Americans do work that's often hard on muscles and joints, the work
that few relish but that needs to be done -- janitors, maids, child-care
workers, cashiers, busboys, fast-food cooks, assemblers, gas-station attendants.
These are the people who vacuum the boardrooms, file the papers, sew the
clothing, and answer the phones. They don't need a capital gains tax cut,
because they have no capital. They simply work hard -- very, very hard -- and
play by the rules.
$4.25 an hour is not enough income to pay the bills. And it makes
responsible people feel like suckers -- and thus gnaws away at the precious
ethic of responsibility. The timing couldn't be worse. At the same time
inflation has stolen much of the value of the minimum wage, the condition of
America's working poor has declined. The Bureau of Labor Statistics estimates
that the real average hourly wage of male high school graduates fell by 19
percent since 1979, and by 3 percent for female high school graduates. High
school drop outs have fared even worse. This trend of declining real wages for
less-skilled Americans has continued for 15 years.
Most disturbing, less-skilled workers have done poorly in times of economic
growth as well as in times of economic downturns. The U.S. economy created more
jobs in 1994 than in any other year in the past decade, and the unemployment
rate fell to a four year low while the help wanted index climbed to a four year
high. Yet the prosperity of this recovery, and of the past 15 years, has not
been shared by all our citizens.
The reasons for the worsening fortunes of less skilled workers are many and
diverse. Part of the explanation lies in increased globalization; part lies in
technological change that has reduced the demand for less skilled workers; part
lies in
the decline in union membership as a proportion of the workforce. And
several economic studies tell us that 20 to 30 percent of the erosion in wages
of less-skilled workers is due to the fact that the minimum wage has not come
close to keeping up with inflation, (See Blackburn, Bloom and Freeman (1991) and
DiNardo, Fortin, and Lemieux (1994). The studies I cite here will be submitted
for the record.)
A moderate increase in the minimum wage is one of the few steps that
government can take to improve the living standards of low-income workers in the
short run. I use the word "moderate" advisedly. It would be reckless
and counterproductive to try to reverse the entire erosion of earnings through
minimum wage increases alone. An excessive increase in the minimum wage would
indeed invite unwelcome economic results. Is there a minimum wage level that is
too high? Yes. Is there a minimum wage level that is too low? Absolutely.
And we are there right now. To make work pay, the President has proposed to
raise the minimum wage from $4.25 to $4.70 on July 4, 1995, and to $5.15 after
July 3, 1996. In 1989, the Congress passed by large bipartisan majorities,
and President Bush signed, legislation to increase the minimum wage by an
identical amount, 90 cents, in two 45-cent steps.
An objective look at the evidence suggests that such a modest increase in
the minimum wage would not have the dire consequences that its opponents argue
it would have. Furthermore, with the changes in the wage structure the U.S.
economy has experienced, an increase in the minimum wage would help relatively
more low income families today than was the case 20 years ago. Economic theory
has much to teach us here and,
as I noted, warns against excessive increases. But in assessing an increase
of the scale the President proposes, we must go beyond the abstract theory of
Economics 101, and examine the evidence.
That evidence allows us to dismiss, for example, the myth that the typical
minimum wage worker is a middle-class high school student. Only one in 14
workers earning between $4.25 and $5.15 per hour is a teenaged student from a
family with above-average earnings. Fully 46 percent of workers who would be
affected by the President's proposal are in the bottom earnings quintile of
working families. The average worker who would be affected by the President's
proposal brings home half of his or her family's earnings; 38 percent of those
affected are the sole worker in their family. An increase in the minimum wage
of 90 cents would mean a $1,800 raise for a full-time, year-round minimum-wage
worker. This is not an insignificant sum for low-income families struggling to
make ends meet on the minimum wage. Indeed, it is as much as the average family
spends on groceries in seven months.
The standard criticism of the minimum wage is that it raises employer costs
and reduces employment opportunities for teenagers and disadvantaged workers.
Of course, if we were talking about a $10 per hour minimum wage, I believe this
argument would have merit. At the same time, it is not credible that a one-cent
increase in the minimum wage, for example, would cause meaningful job loss.
Again: To assess the impact of an increase, we must be guided by evidence as
well as theory. The weight of the evidence suggests that moderate increases in
the minimum wage of the magnitude President Clinton has proposed would not have
significant impact on overall employment. Many of the vested interests that
stand to gain from keeping the minimum wage low have funded studies, published
their viewpoints and primed the press on the myth that a moderate increase in
the minimum wage of the sort the President has proposed would costs hundreds of
thousands of jobs. To clarify an important but muddied debate, I ask your
indulgence as I review briefly the state of empirical work on this subject.
The most common research method used by economists to study the impact of
the minimum wage on employment is based on time series evidence. Time-series
models attempt to relate changes
in the minimum wage over time with contemporary, or subsequent, changes in
employment. A strong enough connection between the timing of minimum wage
increases and job losses would support a causal link. Such time-series models
that were developed in the 1970s and early 1980s tended to find that a 10
percent increase in the minimum wage leads to a 1 to 3 percent decline in teen
employment, with most estimates near the bottom of the range. This is a range
that is reported by the Minimum Wage Study `Commission, which was appointed
under President Carter. However, when these same studies are updated to include
data covering the 1980s, the results show a much smaller and statistically
insignificant effect of the minimum wage on employment. In other words, in the
time-series literature one can no longer rule out that the apparent relationship
between the minimum wage and employment occurs by chance. A 1988 study by
Allison Wellington of Davidson College that was subsequently published in the
Journal of Human Resources was among the first to find this result. This study
was contested the last time the Congress considered raising the minimum wage,
but the results have held up. For example, a study by Jacob Klerman of the Rand
Institute published in 1992 (Health Benefits in the Workforce, GPO, 1992)
reached a similar conclusion. These findings are significant because they
appear to contradict most of the previous empirical literature on the minimum
wage. One cannot simply count the number of studies; one must weigh the
quality, content, and completeness of the evidence. One must also distinguish
between impartial, peer-reviewed academic research and the many studies funded
by vested interests to reach a predetermined conclusion. Of the articles
published in peer-reviewed American economics journals over the past five years,
a majority has found that moderate changes in the minimum wage have an
insignificant effect on employment.
The current time-series evidence, then, is inconclusive on the proposition
that the minimum wage adversely affects employment at all. Since this challenges
what many theorists predict, many economists have sought other methods for
researching this issue further.
One promising approach is to compare impacts across areas, instead of over
time. In one of the most compelling such studies Professor David Card of
Princeton University examined the effect of the 1990 and 1991 increases in the
minimum wage on employment growth for teenagers in different states. The rise
in the federal minimum wage had a varying effect on wages from one state to
another. In some states, the rise in the federal minimum wage affected many
teenagers; in other , relatively few. For example, in many Southern states over
50% of teenagers were paid between $3.35 and $3.80 prior to the increase in the
minimum wage to $3.80, while fewer than 10% of teens were in this range in
New England and California. If a 45-cent increase had a significant impact
on employment, that impact should be more noticeable in the states with many
people affected by the increase, and state-by-state comparisons should reveal
such differences. Card finds no evidence of the 1990 minimum wage increase
affecting teenage employment or school enrollment across states. Professor Card
has followed this work up through 1992, and the data continue to show no
relationship between the percent of workers affected by the minimum wage
increase in a state and growth in teenage employment. It is important to note
that his conclusions are essentially unchanged if he controls for changes in
adult employment and other variables. (See Industrial Labor Relations Review,
October 1992.)
Professor Card has also done a case study of the minimum wage in California.
In July 1988 California raised its minimum wage to $4.25 per hour, three years
before the federal minimum reached that level. Card compares teenage employment
and retail employment growth in California to a group of comparison states
(Arizona, Florida, Georgia, New Mexico and Texas). His results show "no
decline in teenage employment, or any relative loss of jobs in retail trade".
(See Industrial and Labor Relations Review, October 1992.)
Several studies have found that moderate changes in the minimum wage have an
insignificant effect on employment in the restaurant industry. Professor Walter
Wessels at North Carolina State University has found that a modest rise in the
minimum wage has a small positive effect on employment in the restaurant
industry. Professor Kevin Lang of Boston University, in a 1994 study done for
the Employment Policy Institute -- which opposes any minimum wage increase --
concluded that, "In the light of the literature discussed in the
introduction and the results presented above, this author can find little effect
on employment levels from changes in the minimum."
In a widely cited study, David Card and Alan Krueger examine the impact of
the 1992 increase in New Jersey's minimum wage (to $5.05 per hour) on employment
in the fast food industry. (Both researchers are Professors at Princeton
University; Alan Krueger is currently on leave from Princeton to serve as the
Chief Economist at the Labor Department.) They perform two types of
comparisons. First, they compare the change in employment in New Jersey fast
food restaurants to that in eastern Pennsylvania (along the New Jersey border).
Second, they look within New Jersey, comparing restaurants that initially paid
$4.25 per hour to those that paid $5.00 per hour or more. Both comparisons show
that employment did not decline at stores that were compelled to raise their
wages in response to the minimum wage increase compared to those that were
unaffected by the increase. This paper was published in the American Economic
Review, the premier journal of the economics profession, in September 1994.
In short, over a dozen studies have found that a modest rise in the minimum
wage has little, if any, effect on employment. These studies have examined the
effect of the minimum wage on states and regions of the United States, on
selected industries, on several groups of workers, and in foreign countries.
The prediction of no significant job loss resulting from a modest boost in the
minimum wage from its low level is based on studies that are not narrow or
selective or partisan, as some of the vested interests would have you think.
And this research also affirms that a minimum wage increase would increase the
overall earnings of low-wage workers as a group.
Why is the empirical reality more complex than Economics 101 theory would
predict? It is sometimes said that economists are unimpressed to see that
something works in practice; they wait to see if it works in theory. Faced with
the evidence, many economists are trying to explain why minimum wages turn out
not to have the effects an introductory textbook model predicts. Leading
economic theorists have proposed models to explain why a modest increase in the
minimum would not harm employment, and why it might even help employment in some
cases.
For example, Professor Dale Mortensen of Northwestern has been a pioneer in
so called "search models," which predict that employment costs will
be partially offset by better recruiting, more loyal workers, and lower
turnover. As the President said in his State of the Union Address, a rise in
the minimum wage might help to encourage people who are out of the labor force
-- many of them collecting welfare -- to take jobs. In your panel this morning
you heard from Lowell Taylor, who recently coauthored a paper arguing that a
rise in the minimum wage could lead to more -- not less -- employment because
firms would not have to supervise their workers as much if they were better
paid. Earlier economists, such as Richard Lester, former Chairman of the
Economics Department at Princeton, argued in the 1940s that most employers could
manage a moderate increase in the minimum wage without a loss in employment
because they could negotiate lower prices from suppliers, recruit and retain
workers better, increase worker productivity, and improve management methods.
The idea that a slightly higher minimum wage may not adversely affect
employment, and may in some cases lead to more employment, is not radical. It
is not even new.
The mounting empirical evidence, and the emerging theoretical literature,
have led many economists to reconsider their views on the employment effects of
moderate increases in the minimum wage. For example, after surveying and
analyzing the recent empirical literature, Harvard University labor economist
Richard Freeman concluded, "At the level of the minimum wage in the late
1980s, moderate legislated increases did not reduce employment and were, if
anything, associated with higher employment in some locales."
(International Journal of Manpower, 1994.) Similarly, Professor Robert Solow of
MIT, Nobel Prize Winner in Economics, recently stated "The main thing about
(minimum wage) research is that the evidence of job loss is weak. And the fact
that the evidence is weak suggests that the impact on jobs is small."
In sum, the evidence suggests that the minimum wage increase that the
President has proposed is safely below the range that would seriously deter
employment. We have six decades of experience showing that the dire predictions
propagated by vested interests do not come true when moderate minimum-wage
increases are implemented.
The current situation -- with the real minimum wage heading for its lowest
real level in 40 years and with more and more workers finding that full-time
work doesn't pay -- is unacceptable. And a reasonable -- if partial and
imperfect -- remedy is at hand. I ask you to lend your support to the
President's proposal for a responsible increase in the minimum wage.
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