Minimum wage, maximum politics

For "progressive" economists in the United States, scoring policy points has gotten easy. "We have a tremendous amount of ammunition," says Jared Bernstein, an economist with the Economic Policy Institute, a liberal-leaning think tank in Washington. "Economic growth is not the biggest problem. It is distribution of that growth." He's referring to the fact that as the rich grow super-rich, most people in the US are running on an economic treadmill.

The EPI has been churning out study after study harping on America's growing income gap.

Late last month, for example, an EPI report noted: "In 2005, an average Chief Executive Officer was paid 821 times as much as a minimum wage earner, who earns just $5.15 an hour. An average CEO earns more before lunchtime on the very first day of work in the year than a minimum-wage worker earns all year."

Since polls show more than 80 percent of Americans support an increase in the minimum wage, the issue has become easy political pickings for Democrats.

"Last week," said Rep. Louise Slaughter (D) of New York in late June, "the Republican leadership moved heaven and earth to exempt the fortunes of billionaires and multimillionaires from taxation. Today, they are set to prevent a debate on a minimum wage increase amendment."

That amendment would raise the minimum wage to $7.25 from $5.15 an hour over the course of two years. Since some Republican members of Congress are worried about reelection this fall, the Republican leadership is under pressure to allow a vote on the issue.

But it hasn't – yet. That allows Ms. Slaughter to blame "a handful of hand-picked power brokers in the smoky backrooms of the majority leader's office." (Her words may evoke a colorful historic image, but in fact there's a smoking ban in congressional offices today.)

In any case, there is a suspicion that before the fall elections the GOP will allow a vote on a $1 boost in the minimum wage.

The growing wage gap worries more than bleeding-heart liberals. Try Goldman Sachs, a major Wall Street investment firm, whose CEO (Henry Paulson) was just confirmed as secretary of the Treasury. Economists there analyzed the growing "polarization" of US incomes in a weekly newsletter and speculated that it may be a "drag on consumer sentiment" and "create a broader constituency for redistributive or protectionist policies that would be seen as benefiting those at lower-income strata."

Some Republicans say an increase in the minimum wage is a "job killer." If fast-food restaurants, garden services, and other minimum-wage sectors have to raise their payrolls, they may also have to lay off workers. Economic theory says a boost in price (of wages or goods) reduces demand.

The evidence of job damage is slim.

"But how much do facts matter?" asks Mr. Bernstein.

In the early 1990s, research by two Princeton University economists, David Card and Alan Krueger, found that raising the minimum wage has no – or even a faintly positive – effect on employment. That is because the low-income labor market is not perfectly competitive, they argued.

Ever since, opponents of raising the minimum wage have been trying to shoot down the Card-Krueger findings. Mr. Card, now at the University of California at Berkeley, decided not to continue with research in that area because his "academic reputation" was being impugned all the time. "It is an area where academic research doesn't matter," he says. Politics overrules facts.

The Employment Policies Institute, supported by firms hiring "entry level" workers (many of them minimum-wage employees), last month published a study by economists Daniel Aaronson and Eric French, which used price data to show that a 10 percent increase in the minimum wage caused a 0.7 percent boost in restaurant prices, and a 1.6 percent hike at fast-food outlets. They then assumed that higher prices would shrink sales of hamburgers and other food, and that thereby there would be job losses of 2.5 percent.

Messrs. Aaronson and French work at the Federal Reserve Bank of Chicago, but did the study for the Employment Policies Institute as a freelance project.

Interviewed by telephone, Mr. French's endorsement of the findings of his own study is hardly ringing. "I can't say conclusively there is a big employment effect," he says. Maybe there is "a small disemployment effect. I don't think anyone really knows."

But French does reckon that a boost in the minimum wage "probably does transfer income to low-income workers."

And that is the main goal of those advocating a hike in the minimum wage. Bernstein's institute says it would help 14.9 million workers.

A minimum-wage hike may not be fully efficient in this regard. It will give many teens from well-off families a wage boost as well as boost the working poor, especially women. Another government program, the Earned Income Tax Credit, may be more efficient. In 2003 it transferred some $34 billion of Uncle Sam's money to 22 million low-income families with children.

But Bernstein says employers must share the burden of helping low-income workers – even if it comes out of profits. Corporate profits are enjoying the largest share of national income in 39 years. They are expected to rise another 12 percent at big companies this year.