## Making Work Pay

### The Case for Raising the Minimum Wage 

| ***Office of the Chief Economist*** | ***March 1996*** |
|-------------------------------------|------------------|

This document was prepared in early 1996 to outline the case for raising theminimum wage.  It outlines who earns the minimum wage and answers questionsabout the likely impact of raising the minimum. 

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### Fact Sheet

Americans know a raise in the minimum wage is one way to help make work pay. For many working Americans an increase in the minimum wage will make thedifference between living in poverty and not.  Furthermore, a higher minimumwage -- a floor to ensure workers that they're getting a fair deal for theirefforts -- provides a foothold into the middle class for many other families.

#### The Problem: The Minimum Wage is Worth Less Than It Used to Be

The Federal minimum wage is currently $4.25 per hour.  Adjusted forinflation, the value of the minimum wage has fallen by nearly 50 cents since itwas last increased in 1991, and is now 29% lower than it was in 1979.  If leftunchanged, its real value will be at a forty-year low by January 1997.

Raising the minimum wage is one way to make work pay.  A recent studyconcluded that the decline in the real value of the minimum wage since 1979accounts for 20% of the rise in wage inequality for men, and 30% for women (seeDiNardo, Lemieux & Fortin).  According to the Bureau of Labor Statistics,3.66 million workers paid by the hour earn at or below the minimum wage.  Anincrease in this living wage is a strong response to the stagnant incomes thatmany of these workers face.

#### Many Adults Rely on the Minimum Wage as a Living Wage

Contrary to popular opinion, the average worker affected by an increase inthe minimum wage is not just a teenager flipping hamburgers.  Only one infourteen is a teenage student from a family with above average earnings.  

The fact is, almost two-thirds of minimum wage workers are adults, and fourin ten are the sole bread winner of their family.

#### Increasing the Minimum Wage Lifts Families out of Poverty

Twenty percent of those living on the minimum wage the last time it wasraised in 1991 were in poverty, and an additional 13% were near poverty.  In1993, the President expanded the Earned Income Tax Credit (EITC), which raisedincome for 15 million families, helping many working families move above thepoverty line.  Yet to complete the goal of insuring that full-time workingfamilies are out of poverty, we need to raise the minimum wage.  Recent analysisby the Economic Policy Institute and preliminary work by the Department ofHealth and Human Services suggests that 300,000 people would be lifted out ofpoverty if the minimum wage was raised to $5.15 per hour.  This figure includes100,000 children who are currently living in poverty. 

The current poverty line for a family of 4 is $15,600.  A family of 4 withone worker earning $4.25 an hour and working full-time year round ($8,500) wouldreceive a tax credit of $3,400 under the 1996 provisions of the EITC, willcollect food stamps worth $3,5l6, and will pay $650 in payroll taxes.  Thisfamily would end up $834 below the poverty line.  On the other hand, for afamily of 4 with one worker earning $l0,300 (a full-time year round worker at$5.l5 per hour), the EITC would provide the maximum tax credit ($3,560), foodstamps would provide $2,876, and they would pay $788 in payroll taxes.  Theincrease in the minimum wage -- along with EITC and food stamps -- would liftthis family out of poverty.

**What a Moderate Increase in the Minimum Wage Would Mean for Workers**

The President's proposal to raise the minimum wage by $.90 would generate$1800 in potential income for minimum wage workers.

Based on expenditure patterns of an average family, $1800 would buy:

-  Seven months of groceries
-  One year of health care costs, including insurance premiums, prescriptiondrugs, and out- of-pocket costs
-  Nine months' worth of utility bills
-  More than a full-year's tuition at a 2-year college
-  Basic housing costs for almost 4 months

#### Many Working Women Depend upon the Minimum Wage

Fifty nine percent of workers earning from $4.25 to $5.14 per hour arewomen; of those, 72 percent are adults 20 years old or over.  The President'sproposal to increase the minimum wage would raise wages of more than 5.7 millionworking women.  This includes more than 950,000 African-American women and760,000 women of Hispanic origin.  Single heads of households, who are oftenwomen, represent over one-fifth of all families who currently rely on theearnings of a worker making $4.25 to $5.14 per hour.

#### A Moderate Increase in the Minimum Wage Does Not Cost Jobs

The standard criticism of the minimum wage is that it raises employers'costs and reduces employment opportunities for teenagers and disadvantagedworkers.  However, several studies have found that the last two increases in theminimum wage had an insignificant effect on employment.  Furthermore, anextension of the time-series studies that had previously been used to claim thatraising the minimum wage decreases employment, no longer finds a significantimpact.

In a recent review of the literature, Professor Richard Freeman of Harvard,a widely respected labor economist, wrote: "At the level of the minimumwage in the late 1980s, moderate legislated increases did not reduce employmentand were, if anything, associated with higher employment in some locales."

In discussing the minimum wage, Robert M. Solow, a Nobel laureate ineconomics at the Massachusetts Institute of Technology, recently told the NewYork Times, "The main thing about (minimum wage) research is that theevidence of job loss is weak.  And the fact that the evidence is weak suggeststhat the impact on jobs is small."

#### Americans Want an Increase in the Minimum Wage

The American public supports increasing the minimum wage by a solid margin. Nearly every survey finds overwhelming support for raising the minimum wage. For example, a national poll conducted in January 1995 for the Los Angeles Timesfound that 72% of Americans backed an increase in the wage, confirming aDecember 1994 Wall Street Journal/NBC News survey that found raising the minimumwage is favored by 75%. 

Despite expected criticism in some corners, the minimum wage hastraditionally had bipartisan support.  In 1989, the minimum wage increase passedthe House by a vote of 382 to 37 (with 135 Republicans voting for the bill), and89 to 8 in the Senate (with the support of 36 Republicans).

Currently, ten states and the District of Columbia have minimum wages thatexceed the Federal minimum wage (Alaska, Connecticut, Hawaii, Iowa,Massachusetts, New Jersey, Oregon, Rhode Island, Vermont and Washington). Delaware is expected to pass legislation that will raise its minimum wage onApril 15, 1996.  Hawaii's minimum wage is $5.25 an hour and Massachusetts willmatch this in January 1997; New Jersey's is $5.05.

## The Minimum Wage

### Myth and Reality

*The federal minimum wage now stands at $4.25 per hour.  A person whoworks full-time all year long at that wage earns only $8500 in a year.  Thebuying power of the minimum wage is already 29 percent lower than in 1979 -- andif left unchanged, will be at its lowest point in 40 years by January 1997.  Torestore that buying power and to make work pay, the President has challengedCongress to raise the minimum wage.*

*But the debate has been muddied by several myths that anti-minimum wageforces repeat at every opportunity.*

**Myth:** The only Americans working for the minimum wage are teenagers.

**Reality:** 63 percent of minimum-wage workers are adults age 20 orover.  (Source: Bureau of Labor Statistics)

**Myth:** Minimum wage workers don't support families.

**Reality:** The last time the federal minimum wage was increased, theaverage minimum wage worker brought home 51 percent of his or her family'sweekly earnings.  (Source: Analysis of Census Bureau's Current Population Surveyby Professors David Card and Alan Krueger)

**Myth:** Raising the minimum wage hurts the poor by causing job loss.

**Reality:** Nearly 10 million working Americans would get a pay raiseif the minimum wage is increased to $5.l5 per hour.  As Nobel Prize-winningeconomist Robert Solow said, "[T]he evidence of job loss is weak.  And thefact that the evidence is weak suggests that the impact on jobs is small."(Source: *New York Times,* January 12, 1995)  

**Myth:** The only study showing that raising the minimum wage does notcost jobs was a study funded by the U.S. Labor Department.

**Reality:** One major study -- conducted in 1992 and financed byPrinceton University and the University of Wisconsin -- was published by twoPrinceton University economists.  One of those economists later joined the LaborDepartment.  (Source:*Washington Post*, January 11, 1995) Furthermore, asimilar conclusion has been reached by at least ten other independent studies.

**Myth:** Raising the minimum wage will have a negligible impact onpeople's lives.

**Reality:** A 90-cent per hour increase in the minimum wage means anadditional $l,800 for a minimum wage earner who works full-time, year round --as much as the average family spends on groceries in more than 7 months. (Source: Bureau of Labor Statistics)

**Myth:** Increasing the minimum wage has always been a bitter, partisanissue that only Democrats have supported.

**Reality:** In 1989, the last time the minimum wage was increased, theHouse of Representatives vote in favor of the proposal was 382 to 37, and theSenate vote was 89 to 8.  Indeed, Senator Dole said at the time, "[T]his isnot an issue where we ought to be standing and holding up anybody's getting a 30to 40 cents an hour pay increase, at the same time that we're talking aboutcapital gains.  I never thought the Republican Party should stand for squeezingevery last nickel from the minimum wage."  (Source: *CongressionalQuarterly Almanac 1989)*

### Making Work Pay

#### Questions and Answers on Raising the Minimum Wage

## 

**With unemployment at its lowest level in years, should we be tinkeringwith the minimum wage?  Won't an increase in the minimum wage hinder thecreation of new jobs?**

The minimum wage is currently valued at 29% lower in real terms than it wasin 1979.

A number of recent studies have found that a moderate rise in the minimumwage has little, if any, affect on job creation starting at such a low level. In fact, "The impact of a minimum wage rise on jobs is small," the NewYork Times quoted Nobel Laureate Robert Solow as saying.  The Times alsoreported that economists agree that a minimum wage rise will lift the incomes oflow wage workers.

**Isn't the minimum wage poorly targeted to people in poverty?  TheDemocratic Leadership Council reports that a number of minimum wage workers arein households with earnings higher than the median worker.  Wouldn't a rise inthe minimum wage just help middle class teenagers?**

Although some people who earn the minimum wage are teenagers, almosttwo-thirds are adults age 20 and older.  The average minimum wage worker bringshome about half of his or her family's earnings.  Increasing the minimum wagewill help these workers to make up for lost ground due to inflation -- it willhelp make work pay.

The minimum wage provides a foothold into the middle class.  A family withtwo full-time year round workers would earn $20,600 a year with a $5.l5 minimumwage.

**Wouldn't a rise in the minimum wage hurt minorities and thedisadvantaged due to job loss?**

As the New York Times reported, most economists agree that raising theminimum wage increases the incomes of low wage workers, which more than offsetsany effect on jobs.  Further, studies of minimum wage increases fail to showdisproportionate impacts for minority youth.

Additionally, public support for a minimum wage increase is strong.  AJanuary 1995 Los Angeles Times poll found that 72% of Americans back anincrease, confirming a December 1994 Wall Street Journal/NBC News poll thatfound that 75% of adults favored a rise in the minimum wage.   

**How many workers are affected by a rise in the minimum wage?**

An estimated 10 million hourly paid workers earn between $4.25 and $5.14,and would   directly benefit from the President's proposal to increase theminimum wage.

**How can you contemplate a rise in the minimum wage with a new Congressintent on getting government off the backs of business?**

The minimum wage has historically enjoyed bipartisan support.  Sens. Doleand Kassenbaum, Speaker Gingrich and Rep. Goodling voted for the last minimumwage increase to $4.25 an hour in 1989.

**Governors across the country are fighting against unfunded mandates. Isn't the minimum wage an unfunded mandate on businesses and states?**

The minimum wage is not a new unfunded mandate.  In fact, given the erosionof the value of the minimum wage over the last 15 years it is now much less of amandate on businesses and the public sector than it used to be.

**What do you say to all the businesses that say they will lose profit andpossibly go bankrupt if the minimum wage is raised?  Aren't you justantagonizing the business community by proposing a minimum wage increase?**

Inflation has eroded the minimum wage so much that it is currently at itssecond lowest level since the 1950s.  The economy has been very strong, butwages have not grown as much as they need to for the middle class to keep up.

The Clinton Administration has pursued economic policies to put our fiscalhouse in order, laying the foundation for the current economic expansion.  Butthe problem is that low- wage and middle class workers have not shared fully inthis recovery.

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