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OSEC Congressional Testimony

Statement of Robert B. Reich Secretary of Labor Before the Joint Economic Committee[2/22/95]

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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