January 2, 2007
As Congress eyes an increase in the minimum wage, experts discuss the implications of such a policy, focusing on how it would affect workers and business as well as other facets that lawmakers must address.
It's All About How You Raise Minimum Wage (January 2007 commentary by Len Burman)
Tax Credits, the Minimum Wage, and Inflation (January 2007 research brief)
Jobs in an Uncertain Economy (Issue in Focus)
Low-Income Working Families (Issue in Focus)
Welfare Reform: Ten Years Later (Issue in Focus)
Overview of the Discussion
WASHINGTON, D.C., Jan. 3, 2007--Political momentum for raising the minimum wage is expected to soar during the first 100 hours of the 110th Congress. But a panel of experts speaking at the Urban Institute on January 2 warns that the devil is in the details.
A House proposal would increase the minimum wage to $7.25 an hour by 2009, ending the longest period without a hike since the minimum wage was created in 1938. Congress last raised the minimum wage in 1997, to $5.15 an hour. With inflation, that wage’s purchasing value has fallen almost 20 percent.
Still, a note of caution was expressed on reversing the downward wage trend for the lowest earners. Economists have traditionally worried that raising the minimum wage could cause businesses to hire fewer unskilled workers.
William Wascher of the Federal Reserve System asked, "If it benefits some and hurts others, should we still do it?" An extensive literature review suggests that a minimum wage hike would have limited positive effects and may even increase poverty, he said.
"Not all minimum wages are created equal," countered Jared Bernstein of the Economic Policy Institute. Hiking the minimum wage to $7.25 would only sweep a small share of workers into the higher wage, he said, and the increase should not be traded for tax cuts.
President Bush has suggested he would sign a minimum wage boost if the legislation also includes some compensation for small businesses--which would face increased labor costs.
"Keep the bill clean," urged Bernstein. "I don’t buy that we need to protect small business."
Both Bernstein and Harry Holzer of the Urban Institute and Georgetown University emphasized that the wage hike would be redistributive at a time when the labor market is particularly inequitable--with the top earners scoring huge bonuses while lower earners often go without such benefits as health insurance.
Elaine Maag, also of the Urban Institute, said that a minimum wage hike should be considered with other proposals that would ease the squeeze on the nation’s poorest families. The earned income tax credit and the child tax credit, which target families with children, could be changed to better meet low earners’ needs. A slight modification to the child credit, for instance, could help families earning near the minimum wage offset a declining child credit each year.
Eugene Steuerle, an Urban Institute senior fellow and the panel’s moderator, asked how high the minimum wage should be set.
Holzer said a good place to establish the wage floor is at about 40 percent of the average national wage, or close to the proposed rate of $7.25 by 2009. The current $5.15 minimum is only 30 percent of the average wage, which he argues is too low. Yet, a minimum wage set at 50 percent of the average wage (or in the $8.50 to $9.00 range) would create problems and could generate more significant risks of employment loss, said Holzer.
Some concerns were voiced about whether raising the minimum wage could curb the already limited resources spent on training workers. Likewise, would the higher salaries squeeze important worker benefits? Unfortunately, most agreed, very little is currently spent on training the minimum-wage employee and few at the bottom receive health care insurance or paid leave.
Another issue aired was the role of states as laboratories testing new minimum wage levels: about half the states have raised their minimum wage beyond the current federal level. But, as some pointed out, this experimentation also pits the higher-earning states against less wealthy neighbors and allows businesses to choose where to locate based on wage levels.