Higher pay hurts prospects of people it claims to help

  • Author: Craig Garthwaite

  • Publication Date: November 2004

  • Newspaper: Asbury Park Press

  • Topics: Minimum Wage

New Jersey appears set to raise its statewide minimum wage nearly 36 percent over the federal rate now that Senate President Richard J. Codey has become acting governor. Unfortunately, Trenton’s pending wage law threatens the long-term economic prospects of the people it is intended to benefit.

Lawmakers who make wage floors the centerpiece of their fight against poverty have ignored the changing demographics of the minimum-wage labor force. In 1950, few women worked outside the home, and most teenagers had limited job opportunities. Consequently, 77 percent of the families living in poverty received most of their income from a single low-wage employee. That number dropped to 45 percent by 1970. Today, fewer than 30 percent of families in poverty depend exclusively on the earnings of a low-wage employee.

While wage hike proponents often frame their efforts as a way to rescue society’s most economically vulnerable — a purportedly vast underclass of single parents raising their children on just a minimum wage paycheck — only 15 percent of employees affected by the wage proposal fall into that category. Poverty is becoming a phenomenon relegated largely to nonworkers, none of whom will benefit from a minimum-wage increase.

A single-minded focus on gross earnings drives much of the debate on the minimum wage. Higher wages, however, mean little to those who no longer have a job. Duke University researchers have found that after an increase in the minimum wage, low-skilled adults are often crowded out of their jobs as better-educated teenagers (frequently from wealthier families) are drawn into the work force simply to earn money for video games and iPods. These teenagers require less training and are an attractive hire for employers seeking to get the most out of their dramatically higher payroll costs. Meanwhile, the adults who need their jobs to support themselves and their families are forced out of the job market and onto the welfare lines.

In congressional testimony this summer, Federal Reserve Chairman Alan Greenspan repeated his long-standing conclusion that raising the minimum wage increases unemployment. Much of that unemployment is focused on those who have the most difficulty finding jobs. High school dropouts, who already suffer an unemployment rate more than 50 percent higher than the national level, are often replaced by teenagers following a wage hike. The impact on minorities is even more dramatic. Black young adults bear four times the employment loss of their non-black counterparts after a minimum wage increase.

And once low-wage earners lose their jobs, they become ineligible for one of the federal government’s most effective anti-poverty tools, the earned income tax credit. The program provides up to $4,000 in tax-free income, but only for those who have a job. This represents an effective wage rate of up to $7.20 for a full-time minimum-wage employee.

New Jersey’s proposed wage hike is imperiling other federal assistance that has been available to low-wage earners for decades. Why? Each of these programs has strict income limits set by the federal government.

Among other programs, Congress offers Section 8 housing subsidies, food stamps and health insurance through Medicaid to qualifying people. Each of these programs can represent up to several thousand dollars for their recipients. State-level minimum-wage increases typically push low-wage earners just beyond the cutoffs for federal assistance while failing to provide sufficient supplemental income to replace the lost benefits.

The low-wage employment debate requires new approaches to a changing work force, not blind adherence to generations-old notions of poverty. When asked about an apparent shift in his position, economist John Maynard Keynes quipped, “When the facts change, I change my mind. What do you do, sir?” For New Jersey’s lawmakers, the answer to Keynes’ question seems to be “Nothing.”

Craig Garthwaite is director of research at the Employment Policies Institute, Washington, a nonprofit research organization that studies public policy issues surrounding entry-level employment. Its Web site is www.old.epionline.org.