Sunday, June 25, 2006

Raise the Minimum Wage

Unemployment in America is at 4.6%, so as expected, the US labor market should be painfully tight. Labour force participation is relatively low, by the standard of recent years, and real hourly earnings have barely budged since 2001. It is little surprise then that many Americans tell pollsters that they are not happy with the state of the economy.

Naturally, Democrats hope to profit from this in November’s congressional elections. To help them, Edward Kennedy attempted to put through a hefty hike in the Federal minimum wage to $7.25, up from $5.15 where it was fixed in 1997. It did not work. The measure was defeated in the Senate on procedural grounds, and the House has it locked up in committee.

This has not deterred Democrats as they are busy painting a stark picture of life on the minimum wage. At $5.15 an hour, a full-time worker earns less than $10,300 a year, barely above the poverty line for a single person and well under it if the wage-earner supports a child. The real value of the wage is down to its lowest level since 1955. In the late 1960s, the wage was more than half of average hourly earnings for a (low level) production worker. Now it is less than a third.

However, and this is an interesting fact not many Democrat’s will mention, the number of people earning the minimum wage has also declined. In 1980, over 15% of workers received it (or even a lower wage—there are broad exemptions for various classes of workers). That figure is now just 2.5%. The Centre for Economic and Policy Research, a left-leaning think-tank, estimates that lifting the wage to $7.25 would affect only 4.4% of workers, giving them an average increase of $0.79 an hour. This would yield an extra $1,580 a year for full-time workers, enough to get a mother and child within shouting distance of the poverty line. But most such workers aren’t in a full-time job. Of the roughly 1.6m low-wage workers who do regular hours, nearly 1m are part-timers, most of them doing fewer than 25 hours a week. This is ammunition for opponents of an increase, who also point out that few such workers support families, or even themselves. They are mostly young (more than half of them are under 25), and according to testimony before Congress from the conservative Heritage Foundation in 2004, only 15% of workers making less than $6.65 an hour live in poverty. Many of them have family incomes well above the poverty line.

Given all this, The Economist has termed a minimum wage increase a blunt instrument for attacking poverty. Moreover, The Earned Income Tax Credit, which already gives a annual bonus to the working poor, targets poverty more directly and effectively. As for
Businesses that say that higher wages could force them to reduce staff, is unlikely.

In all, raising the minimum wage should be done, though not the politicized reasons mentioned. A higher wage gives respect. Respect breeds confidence; confidence to find those full-time jobs, and later in life, pay other workers a decent wage.

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