Debunking the Myths about the Minimum Wage

The Maryland General Assembly has passed a bill to raise the minimum wage in Maryland from the current $5.15 per hour up to $6.15 per hour. The governor has not indicated whether he will veto the bill or allow it to become law.

The votes in the General Assembly were largely along party lines, with the vast majority of Democrats voting for the increase, and the vast majority of Republicans voting against it. However, in some other states the minimum wage is not a partisan issue. Most notably, in the November 2004 election, voters in both Florida and Nevada overwhelmingly voted to raise the minimum wage in their states by more than 2-1 margins. These states also voted to re-elect President Bush.

There are a lot of myths about the minimum wage. Opponents argue that increasing the minimum wage will cause job loss, hurt the people it is supposed to help, pad the wallets of rich suburban teens, drive away business, and cause balding and tooth decay (okay, maybe not those last two). We’ll dispel some of those myths here.

1. Raising the minimum wage will hurt the very people it is intended to help by forcing layoffs and causing low-wage job losses.
We’ll get to the research, but first let me offer this observation: In years (almost two decades now) of doing poverty research or analyzing issues affecting lower-income people, I have never come across a low wage worker advocating against a minimum wage increase. It was interesting to hear the corporate executives articulate their opposition to the minimum wage increase out of their concern for how it would affect low wage workers, only to have their testimony followed by low-wage workers themselves making compelling cases for an increase in the minimum wage. Who is better suited to articulate the interests of low-wage workers than low-wage workers themselves?

On to the research.
There is a consensus among contemporary economists that moderate increases in the minimum wage do not lead to job loss.

• Four Nobel prize-winning economists were joined by 558 other economists in signing a letter supporting an increase in the federal minimum wage to $7.00 per hour in 2004. Their letter states, "We believe that a modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effects that critics have claimed."
• The Council of Economic Advisers stated in the 1999 Economic Report of the President that "the weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment."
• Following the most recent federal minimum wage increase in 1996 the low-wage labor market performed better than it had in decades. Noted labor economist Jared Bernstein argued before Congress that "the fact that employment and earnings opportunities of low-wage workers grew so quickly following that increase continues to pose a daunting challenge to those who still maintain that minimum wage increases hurt their intended beneficiaries.

2. Increasing the minimum wage will just put more money into the pockets of rich suburban teens.
We also heard this argument in Annapolis. We were ready to respond with some of the geeky facts below, but ultimately took a pass after one of the more senior Delegates made this point (we paraphrase): "I eat out a lot, usually stopping at a fast food drive-thru on my way home. I can’t remember the last time that the person who waited on me was younger than I am. These are seniors with small social security benefits who are working in these low-wage jobs to get by."
Alas, the rich suburban teen argument did not pass the sight test.
Undoubtedly, some minimum wage workers are teens from higher income families. However, increasing the minimum wage would target most of the wage gains to the primary wage-earners in lower income families:

• The earnings of low-wage workers contributed more than two-thirds of their total family income in 2002.
• Half of low-income, low-wage workers were married or had children.
  Eighty seven percent were 20 years of age or older.
• More than half (53 percent) of the wage gains from increasing the minimum wage by $1.00 per hour would go to families that currently receive 14 percent of total income.

Not all of the wage gains would go to poor or near-poor families. Nonetheless, increasing the minimum wage is a well-targeted way to boost the incomes of our poorest working families.

3. Raising the minimum wage will hurt small business
There is ample contemporary research that casts a long shadow of doubt over the contention that raising minimum wage will hurt small business. Jerold Waltman examined the relationship between business failures and minimum wage increases. He found that "there seems to be no discernible correlation between minimum wage increases and a rise in business failures, either in the year the increase occurred or in the following year. If anything, the evidence leans the other way." (page 221, Politics of the Minimum Wage, University of Illinois Press).
A 2004 study by the Fiscal Policy Institute examined the impact of minimum wage increases on small businesses. Their analysis focused on various outcomes for businesses with less than 50 employees, comparing outcomes in states with minimum wages higher than federal level to those with minimums at the federal level. They found that:

• Between 1998 and 2001, the number of small business establishments grew twice as quickly in states with higher minimum wages;
• Retail employment grew 1.5 times more quickly in high minimum wage states; and,
• Annual and average payroll growth was faster in higher minimum wage states.

Their analysis, like others, does not conclude that increasing the minimum wage will boost employment growth over what it otherwise would have been. Nonetheless, the report points out that "What does seem to be clear…is that it is hard to sustain the argument made by some observers that an increase in the minimum wage will result in adverse aggregate employment outcomes."

Certainly, there are some individual businesses that could be disadvantaged by increasing the minimum wage. But, in general, any negative impacts are likely to be so small that they would be undetectable at a macro level.

4. Establishing a minimum wage is a federal issue, and not a state issue.
Increasingly states are establishing minimum wages above the federal floor out of concern that the federal floor is too low.

As a nation, we are on track to tie the longest period over which the Congress has failed to increase the minimum wage. The most recent minimum wage increase occurred in 1997, almost eight years ago. In contrast, the minimum wage was increased six times during a seven year period in the 1970s.

If the minimum wage had kept pace with inflation since 1968, the current minimum wage would be over $9.00 per hour. More recently, the entire value of the 1996 and 1997 increases has been eroded by inflation.

In response, several states have established minimum wages above the federal floor. Nearly 40 percent of people live in states that have minimum wages that are higher than the federal minimum.

The Real Deal Over the Minimum Wage
Proponents and opponents for increasing the minimum wage will argue about the impacts and present data to support or refute arguments (just like we've done here). The data are important, but are not the primary drivers of this issue.

None of the research makes as compelling a case as one of the workers who testified before the Maryland Senate. This individual explained how he worked 130 to 140 hours a week at low-wage jobs to make ends meet. He explained to Senators how some days he would work around the clock: 8 a.m. to 4 p.m as a teacher’s assistant, 4 p.m. to midnight as a residential counselor at a group home, and midnight to 8 a.m. cleaning. "The cost of everything is going up," he said.

I often wonder just where it is that the parking attendant, the clerk at CVS, the counter person at the local deli live, and how they make rent on such a low wage. How do they afford a car or car insurance?

Median household income in Maryland is more than $55,0000 a year, tied for the highest in the U.S. Maryland is tied for first among states in the percentage of adults who have a bachelor’s degree. Maryland ranks second among states in the percentage of adults who have a graduate or professional degree and we have the second highest concentration of doctoral scientists and engineers. Maryland’s high-skilled workforce is closely connected to the development of the high-tech and bio-tech sectors in our state.

Collectively, we are rich. But not everyone is sharing in the prosperity. Raising the minimum wage is one way to provide a modest boost to working people who will continue to struggle to make ends meet. MBTPI

To get more information on the minimum wage, we recommend the web site of the Economic Policy Institute. Click on the subject heading "minimum wage" Also, see our testimony on the Senate minimum wage bill.