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TIME Domestic

February 6, 1995 Volume 145, No. 6

THE POLITICAL INTEREST

MINIMUM WAGE, MINIMUM SENSE

BY MICHAEL KRAMER

After 56 minutes of recycled campaign themes, Bill Clinton finally made some news
during last week's State of the Union address: the minimum wage should climb, he
said, because "you can't make a living on $4.25 an hour." That's for sure - but
as Clinton himself explained two years ago, hiking the minimum is "the wrong way
to raise the incomes of low-wage earners."

First, some facts about the minimum wage and those who get it:

About 2.5 million Americans earn the minimum; 1.7 million more take home even
less since the law doesn't cover them.

The minimum was first set at 25 cents an hour in 1938. Inflation has taken a
heavy toll: since it was last raised from $3.35 in 1991, its value has fallen 50
cents.

Contrary to popular belief, about 80% of those who get the minimum (or less)
belong to families with combined incomes above the poverty line (currently
$15,627 for a family of four) and thus are not defined as poor.

Many economists worry about two pernicious effects of raising the minimum. The
first concerns job loss. Standard theory holds that every hike in the wage
triggers employee firings, with the least skilled axed first. That view has been
challenged by several recent studies co-authored by Alan Krueger, the Labor
Department's chief economist. A modest increase, says Krueger, would have
"negligible negative employment effects" - or, in plain English, next to no job
losses. Negligible, though, is a term of art. Because wage-related costs like
unemployment compensation and payroll taxes rise along with the basic wage, most
experts say the contemplated hike to $5 an hour could cost between 40,000 and
100,000 jobs. "The consensus view has big problems with Krueger's results and
methodology," says Texas A&M labor economist Finis Welch. "Alan ought to consider
the old saw: If you drop an apple and it rises, question your experiment before
concluding that the laws of gravity have been repealed."

But "even if Krueger's right and no one's fired," says University of Texas
economist Daniel Hamermesh, "a raise will deter employers from hiring new
workers. That's bad especially for young minorities - over 30% of whom are
unemployed - because they're the people we want in the labor force, so they can
begin learning basic job skills."

The other troubling question is, Who pays? "Businesses don't simply absorb
increased wage costs," says Rob Shapiro, whom Labor Secretary Robert Reich tried
hard (and unsuccessfully) to enlist as a supporter of the raise because, as a top
Clinton campaign adviser, it was Shapiro who once convinced Clinton that hiking
the wage was counterproductive. "They pass them on in the form of higher prices,
which are regressive because they're borne equally by all. Thus the vast majority
of the 39 million poor Americans who won't benefit from a raise will be worse
off, while a very few get more pay."

When Clinton agreed with this analysis more than two years ago, he urged
enhancing the earned-income tax credit instead. "It's better targeted to
low-income people because it pays a supplement to everyone who earns up to 150%
of the poverty line," Clinton told me in 1992. "Those who work full time should
be able to support a family above that line, which is what an expanded EITC can
achieve."

Since many Republicans oppose hiking the minimum with near religious zeal ("I'll
fight it with every fiber of my being," says House majority leader Dick Armey),
the President's plan seems dead - which may explain why some Clinton aides say
the proposal won't be actively pushed.

What Clinton should fight for seems obvious: For openers, the President should
further promote the EITC. Many Americans still don't know they qualify for it,
and many of those who do get it don't realize they're also eligible for food
stamps. Above all, Clinton should invest his dwindling political capital in an
all-out drive for his job-retraining programs. Upgrading worker skills remains
the surest route to increased incomes. As Clinton says, "What you earn depends on
what you learn; the most effective way to help is to make workers more productive
because wages reflect the value of what people produce."

Alluding to Krueger's work without naming him, the President said last week that
the "weight of the evidence is that a modest increase ((in the minimum wage))
does not cost jobs." That may be so, but Clinton's calculation was primarily
political. "We need the energized support of minorities and unionists, our core
group of voters," says a Clinton adviser, "especially if there's another
three-way race in 1996."

That view seems shortsighted for two reasons. First, the Democratic base alone
won't re-elect Clinton, and the swing voters he most needs disdain old-fashioned
liberal solutions like raising the minimum wage. Second, the President's real
problem involves a perceived lack of resolution and stamina. If Clinton lets his
proposed hike die quietly and holds instead to his original diagnoses and
prescriptions (which were right then and are right now), he might come across
more like a President than a perpetual candidate - and possibly get the four more
years he covets.