Sorting out the economics of a higher minimum wage

In an election year, the politics of economics tends to become all-important. That's certainly the case with Congress's battle over the minimum wage. ``The whole thing gets blown out of proportion,'' says Harvard economist Richard Freeman of the minimum wage. ``It has become a symbol for the different sides. It is sort of ridiculous.''

The legislative effort of congressional Democrats to boost the minimum wage for the first time in seven years ended last week in a successful Republican filibuster in the Senate.

Democrats will use this news in the campaign to charge that Republicans do not care about the poor. Republicans will counter that a boost in the minimum wage would cut many jobs.

In the presidential race, Vice-President George Bush has defused the issue somewhat by supporting an increase in the minimum wage, but only if the bill provides a ``training wage'' that would allow newly hired workers to be paid at 80 percent of the wage floor for their first 90 days of employment.

The minimum-wage issue is not dead. It will come up again next year in Congress.

Looking at the economic evidence, Mr. Freeman concludes that despite the ``huffle and puffle'' of the politicians, a boost in the minimum wage as proposed by the Democrats - from $3.35 an hour ($6,700 a year) to $4.55 an hour via 40-cent-an-hour increases over the next three years - would not do much to reduce poverty. Nor would it reduce employment by much.

About 85 percent of those workers receiving the minimum wage do not come from poor families, he says. They are youths living in middle-class homes or spouses supplementing the wages of the key breadwinner. For that 85 percent, a higher minimum wage may be nice but not necessarily economically crucial for a family.

Examining the 15 percent of low-wage working poor, a minimum-wage increase would lift 144,000 to 200,000 families above the poverty level, according to a study by Ronald Mincy, a research associate at the Urban Institute in Washington.

Some others among the 2.2 million of working poor families would benefit, too. Mr. Mincy figures that the gap between actual income of these families and the top official poverty-level income amounts to $8 billion. A rise in the minimum wage would reduce that gap by between $750 million and $1 billion.

When the minimum wage goes up, some bosses decide it is no longer profitable or affordable to hire some workers. Estimates of job losses vary greatly, depending on assumptions and in some cases the wishes of the political or economic sponsor of the study.

Some of the latest work was done by Alison Wellington, a student of University of Michigan economist Charles Brown. Mr. Brown was director of research on the Minimum Wage Study Commission, which was set up by Congress during the Carter presidency and which made its report at the start of the Reagan tenure. Its recommendation that the minimum wage be indexed to the inflation rate was ignored by the new government. As a result, the $3.35 minimum wage remained unchanged, while average wages rose. The minimum is now only about 30 percent of the average hourly wage in nonagricultural industries.

Ms. Wellington calculates that teen-age employment might be reduced by 0.56 percent from what it otherwise might be for every 10 percent jump in the minimum wage. Of course, if the economic expansion were to continue, the effect could be merely a slowdown in the increase in teen-age employment.

She found no significant effect for young adults (aged 20 to 24), except for blacks and Hispanics in that age bracket.

A Congressional Budget Office researcher, looking at her work and that of others, concluded that the number of jobs lost by the increase in the minimum wage proposed by the Democrats would amount to 175,000 to 350,000. That compares with a labor force of some 123 million.

``The effects on employment are more modest than some critics are saying,'' says Brown.

A minimum-wage increase would also raise costs and thus inflation. One calculation cited by Joseph Flader, legislative director in the office of Rep. Thomas Petri (R) of Wisconsin, shows inflation rising 0.2 to 0.3 percent extra a year through 1991. This in turn would boost interest rates.

The cost to business in higher wages of the higher minimums would be about $25 billion, Mr. Flader estimates. Indirect effects on higher wages as workers try to maintain a differential with minimum-wage workers could amount to some $22 billion.

Government would also have to pay another $2 billion to $5 billion in direct and indirect costs, he says.

Employees benefit financially from these wage gains, though inflation could trim those gains in real terms.

Considering all these factors, opinion in Washington appears to be trending toward an alternative way to raise the incomes of the working poor - the earned-income tax credit that has been part of the tax code since 1975. Some 4 million poor families with children receive cash payments from the federal government of up to 14 percent of wages, or a maximum of $874. Representative Petri leads a bipartisan effort to raise the maximum amount of this credit to $2,500.

``We have won the intellectual argument,'' claims Nielson Wright, another Petri aide. His hope is that powerful Democrats will back the Petri proposal once the election is past.

As a political compromise, the Petri plan would boost the minimum wage to $4. But its core is the increase in the tax credit. This has the advantage of focusing money directly on the working poor with children.

Other advantages of the tax credit are that it would not trim employment or boost inflation and interest rates. Flader says he is confident that the tax credit would do more to help working poor families with children than the hike in minimum wage alone. It would provide credits not only to those families whose incomes are at or below the equivalent of the proposed $4.55-an-hour minimum; it would also help some 3 million poor families whose incomes are somewhat above that. And the credits should make working more attractive financially than living on welfare alone for many families.