The wages of politics

The Wall Street Journal

John Kerry says he wants to raise the minimum wage to $7 an hour from $5.15, and his proposal has us thinking: Why stop there? Why not $10 an hour, or $20, or for that matter whatever a U.S. Senator makes? If Mr. Kerry thinks government is obliged to guarantee Americans a certain level of income, why not simply elevate everyone at least into the middle class? The reason, as Mr. Kerry well knows, is that wage floors aren't manna from heaven. Here on Earth, they tend to price certain kinds of labor out of the job market. Businesses hire and pay workers what they think their skills are worth relative to other ways they can spend their capital. Force the price of labor too high, and suddenly businesses hire fewer workers, especially those at the lower rungs of the skill ladder.

This is one of the most settled propositions in economics, second only perhaps to free trade. Sure, Mr. Kerry has found a few economists willing to lend their credibility to his proposal, but even they don't deny that some people may lose their jobs -- which is why they don't want to raise the minimum too high. The debate is over how many poor people Mr. Kerry would throw out of work.

To answer this question, you first have to look at who earns the minimum wage. The Labor Department believes that 1.5 percent of the work force, or 2.1 million people, earn $5.15 an hour or less. More than half of them are under the age of 25, meaning they are likely working a temporary or entry-level job. Three-fifths are in the leisure and hospitality industry, which means in jobs that often come with tips in addition to wages. Studies have also shown that most people earning the minimum wage are not poor -- more than one-third live with a parent or relative. Only 15 percent are the sole breadwinner in a family with children.

These low-paying jobs are important because they are a gateway into the world of work for people who lack experience and skills. One study showed that, of a sample of workers earning minimum wage, fully 63 percent were already making more a year later.

The truly unfortunate are those who cannot find work at all. These tend to be the least skilled Americans, which means the young, or the poorly educated. It's no accident that under current minimum wage levels the unemployment rate for teenagers is 17.2 percent, three times the national average. For black teenagers it is a scandalously high 32.5 percent.

How much worse does Senator Kerry want to make it? Bill Clinton's Small Business Administration followed a group of workers after the last increase in the minimum wage, in 1997, and found it slowed wage growth at small businesses and more than doubled the likelihood that low-wage workers at large firms would be unemployed. And that was at a time when the national jobless rate was falling rapidly and hamburger flippers in some places were earning $8 an hour.

One reason employment and productivity are so much higher in the U.S. compared to Europe is that we have switched from trying to alleviate poverty with a high minimum wage to the Earned Income Tax Credit. This scheme, along with the Child Tax Credit and other assistance programs, pay cash and benefits to supplement the incomes of the working poor.

These programs have incentive problems of their own, and the EITC in particular has been subject to abuse. But at least it preserves the incentive to take up low-paying jobs, and in combination with welfare reform discourages the growth in dependency seen in the 1970s and '80s when the minimum wage was higher in inflation-adjusted terms. The success of this gradual shift will be undermined if these lower-wage jobs disappear.

The minimum wage gambit sends a bad signal about the direction of Mr. Kerry's economic policy. It is one of the mustier items in the liberal playbook and suggests a candidate who dances to the tune of unions rather than thinks creatively about how to reduce poverty. If Mr. Kerry really wants to raise take-home pay, he could help raise American skills by challenging the catastrophe of inner-city public education. But that's politically hard; it's so much easier to pose as the champion of the poor and worry about the consequences later.