Budget Watch #43

A newsletter covering news and views on government spending, published by The National Center for Public Policy Research, 20 F Street NW, Suite 700 , Washington, D.C. 20001, (202) 507-6398, Fax (301) 498-1301, E-mail [email protected], Web http://www.nationalcenter.org.

Issue #43 * October 6, 2001 * David A. Ridenour, Editor


Is it Better to Have a Raise or a Job? Kennedy’s Proposed Minimum Wage Increase Would Increase Unemployment, Harm Undertrained Workers

The federal government reported October 5 that 199,000 jobs were lost between mid-August and mid-September, reflecting a national unemployment rate of 4.9 percent. Private sector economists are predicting that, thanks in part to the September 11 terrorist attacks, the unemployment rate will climb to six percent by early 2002.

Against this backdrop, some in Congress want to increase the minimum wage.

Led by Senator Ted Kennedy, chairman of the Senate Health, Education, Labor and Pensions Committee, Democrats have proposed raising the $5.15 minimum wage by $1.50, a 29 percent increase. Earlier this year some Republicans signaled they would acquiesce to a $1 increase. The White House has signaled that it does not support a minimum wage increase at this time.

The minimum wage was last increased by legislation passed in 1996, which raised it from $4.25 to $4.75 on October 1, 1996, and again to $5.15 per hour, on September 1, 1997.

Since the passage of the Fair Labor Standards Act in 1938, labor advocates have contended that a constantly increasing minimum wage will prevent the exploitation of unskilled and part-time workers. Some politicians continually trot out the issue, confident that even if its economic effects aren’t as advertised, the political benefits of appearing to care about the working poor are.

But yet another of our many dozens of upward wage adjustments will fail to succeed in creating economic stability for those at the bottom end of the pay scale, and, particularly unfortunate at this time of economic uncertainty, are likely to exacerbate unemployment.

As Sharon Brooks Hodge of the African-American leadership group Project 21 has written: “Wages are a reflection of relative work skills. You can trust that no one is out there lobbying for a minimum skills floor to coincide with the demand for more money. Until that happens, this segment of the work force will remain unable to compete for higher wages on their own. What [those] clamoring for a higher minimum wage fail to acknowledge is that boosting pay for that reason alone does little more than continue the endless spiral of inflation.”

And put more money in the coffers of labor unions. Unions benefit from minimum wage increases because many union contracts use the federal minimum wage as a base. Unions receive a percentage of their members’ pay in dues.

Other leading African-Americans endorse Hodge’s view: “Forty years ago, when Jim Crow was alive and well but before substantial increases in the minimum wage, the unemployment rate for black youths was virtually identical to that of white youths. But with the rise in the minimum wage, there has been a rise in the unemployment rates of black youth,” says Peter Kirsanow, Chairman of the Center for New Black Leadership and a labor attorney.

Black youths, through no fault of their own, disproportionately attend failing inner-city schools. The government thus hits them with a double-whammy: It gives them substandard training in public schools, and then it raises the minimum wage, which reduces the number of jobs for untrained people.

Minimum wage increases, while not designed to be racist, simply are.

According to a study by David Neumark for the Employment Policies Institute, an increase in the minimum wage would have the perverse effect of increasing both the school dropout rate and teenage unemployment. This is so because higher mandatory minimum wages will entice some students into sacrificing school for work while at the same time compel many employers to forgo hiring low-skill teenagers in favor of older employees whose experience makes them worth hiring at higher wage rates.

These facts are no secret: A University of New Hampshire poll of the nation’s economists has shown that nearly 80 percent acknowledge that minimum wage hikes cause job losses.

The Dallas-based National Center for Policy Analysis notes that in 1981 the federally-mandated Minimum Wage Study Commission concluded that each 10 percent rise in the minimum wage reduces teenage employment by one to three percent. The NCPA also points out that a study of the 27 percent increase in 1990-91 by economists Donald Deere, Kevin Murphy and Finis Welch, published in the American Economic Review in May 1995, found that the increase reduced employment for all teenagers by 7.3 percent and for black teenagers by ten percent. A study of two-stage 21 percent increase over 1996-97 by economists Richard Burkhauser, Kenneth Couch and David Wittenburg found a decline in employment of two percent to six percent for each ten percent increase in the minimum wage.

Nevertheless, the crusade for a minimum wage increase continues, always in the guise of “help” to workers. Advocates of increases always gloss over the job loss issue. Rarely do they answer the question: If it is good to raise wages a dollar an hour, why not raise them $50 an hour? Wouldn’t that be fifty times better?

The answer, of course, is that it is much harder to pretend that raising wages by $50 per hour will not kill jobs. The pretense that raising wages by legislative fiat is a benevolent act must be maintained.

The War: Its Cost in Dollars (So Far)

How much in dollars is the war on terrorism costing us? Since the September 11 attacks, so far, the following spending items have either been approved by Congress or proposed by President Bush:

1) $40 billion for recovery efforts in New York and Washington, air travel security, military and intelligence needs and other items. About half of this proposed spending is for defense.

2) $15 billion in aid to airlines: $5 billion of direct cash assistance and $10 billion in loan guarantees. Status: Signed into law.

3) $3 billion for grants to states for health care, job training or other needs. Status: Proposed by Bush, no congressional action as yet.

4) Extension of unemployment benefits for 13 additional weeks in hard-hit states. Cost uncertain. Status: Proposed by Bush.

5) In addition, Congress and the White House have agreed on a total spending increase of $25 billion over the president’s initial February proposal for the 13 annual government spending bills. That includes $18.4 billion extra Bush requested in June for the military, including the full $8.3 billion Bush request for national missile defense.

6) Another request is pending from the Department of Defense for additional funds for anti-terrorist efforts. According to the Associated Press, one internal Pentagon document lists items totaling $38 billion. This list has not been approved by the White House Office of Management and Budget, nor has it been sent to Congress.

by Amy Ridenour

Nothing written here should be construed as an attempt to help or hinder legislation before the U.S. Congress. Reprints of material in Budget Watch is permitted provided that original source is credited.

The National Center for Public Policy Research is a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems. We believe that the principles of a free market, individual liberty and personal responsibility provide the greatest hope for meeting the challenges facing America in the 21st century.