An unproductive wage hike

The recent congressional debate over the minimum wage had all the elements of a classic conservative-vs.-liberal fight, all head vs. all heart. How, argued Democrats (and some Republicans), could we deny a 20 percent hike to the least fortunate when so many others are benefiting from our booming economy?

Of course, there are easy explanations for why some people make more money than others - often much more than they need. "Skill" is usually the pat answer. But there are other less-obvious reasons.

There has been much recent discussion of the striking gains in productivity. The Bureau of Labor Statistics (BLS) released figures in March showing the second straight quarter of near-record non-farm business productivity growth (an annual rate of 5 percent for the last six months of 1999).

Late last year, Sen. Ted Kennedy argued, "Productivity is up, and we should see an increase in terms of the wages for those [minimum wage] workers."

Higher productivity is a slam-dunk argument for higher wages. But it is a crude oversimplification to suggest that because some businesses earn higher profits everyone should earn a higher wage.

Common sense indicates limits to rising productivity in some service industries. A maid can make a limited number of beds per hour. A waiter can effectively serve a fixed number of guests. Minimum-wage advocates argue in bad faith when trying to capitalize on broad productivity gains: They lump all workers and all industries together in a one-size-fits-all argument.

When we examined the individual industries where most people earning the minimum-wage work, the productivity argument for a higher wage crumbles.

The most straightforward measure of productivity tracked by the Labor Department (real output per hour) has actually declined steadily over the years in most of those industries. In fact, nearly all of the productivity gains making headlines in recent months are found outside the industries where entry-level employment is concentrated.

In food stores and eating and drinking places, real output per hour has declined since the mid-1970s. For example: In restaurants, inflation-adjusted sales per hour relative to labor costs have fallen to their lowest level since 1962. Conversely, non-farm business productivity is up 44.3 percent since 1974. The manufacturing component has nearly doubled over the same period.

Last month, Congress voted to raise the minimum wage 19 percent, adding a dollar on top of the current $5.15 per hour.

Firms employing mostly entry-level employees are sandwiched between these rapidly rising labor costs and stalled or declining labor productivity. With inflation at historic lows - in part due to productivity gains in high-wage sectors - price hikes are difficult to implement. Today, consumers have become resistant to price increases. They opt to pump their own gas, shop in discount stores with fewer available clerks, or fly on "no frills" airlines, if it means saving a buck. When marketers can get people to dump their phone companies for pennies a minute, you know price hikes don't easily stick.

One of the few avenues left when price increases don't wash is to hire employees who need less training and/or have a better education. Research from Boston University has shown when the mandated wage floor rises, employers gravitate to high school students who are often better qualified than adults with low skills.

Studies also show more students, attracted by the new higher minimum wage, drop out of high school following mandated wage hikes. This employer skills bias is one reason minimum-wage hikes have evolved into a middle-class entitlement.

The average family combined income of those earning between $5.15 and $6.15 an hour, is now $38,000 per year. In 10 states, the average family income of those affected by a minimum-wage hike is $45,000. Obviously, many of those working at or near the minimum wage aren't coming from the pool of unskilled adults, but are secondary earners in middle-class families.

A failure to legislate higher rates does not mean minimum-wage employees are left in desperation. New research from Florida State University and Miami University (Ohio) shows that two-thirds of minimum-wage employees move up within one to 12 months of being employed at the entry-level. As they gain skills and work experience, it is clear they become more productive. And then someone is willing to pay them a higher wage - without any law setting the amount - because higher productivity is a slam-dunk argument for higher wages, just as lower productivity argues against them.

*Richard Berman is executive director of the Employment Policies Institute, a nonprofit research organization dedicated to studying policies that affect entry-level employment.

(c) Copyright 2000. The Christian Science Publishing Society