Wage Wars

It's easy to attach the minimum wage issue to the working poor, says Matthew Brouillete, president of the Commonwealth Foundation, a nonprofit economic policy think tank in Harrisburg, Pa. After all, it's been holding steady at $5.15 since 1997. So, given inflation, it seems logical that raising it — or at the very least, discussing it — is a good idea. Who wouldn't support a proposal to help alleviate poverty and level the playing field between upper- and lower-rung earners?

The effort is misguided, though, says Brouillette. This being an election year, many politicians are using the minimum wage proposal to appeal to voters. "The minimum wage is one of those easy-to-sell, hard-to-oppose policy positions," he says. "Everybody would like to see people earn more; it's easy for politicians to pontificate about helping the poor."

Yet, a hike, says Brouillete, will end up hurting the very people — low-skilled, low-wage workers — proponents intend to help. Economists who favor raising the minimum wage say it stimulates the economy by increasing the purchasing power of low-income earners. But Brouillette, along with other dissenters, believes forcing companies, and small businesses in particular, to raise the minimum wage leads them to cut low-wage jobs, which reduces the opportunities for unskilled workers to enter the work force.

SmartMoney.com spoke to Brouillette about the proposal to boost the minimum wage and why it's not an effective means to reduce poverty.

SmartMoney.com: The minimum wage has stayed the same for nine years. Why shouldn't we raise it now?

Matthew Brouillette: We've been having this debate in Harrisburg because Pennsylvania is at the federal minimum wage level, and proponents want to boost it to $7.15 an hour. The problem is that raising the minimum wage actually hurts the very people that proponents purport to want to help — that is, low-wage workers and the working poor. The overwhelming majority of people earning the minimum wage aren't poor. Only 15% of those earning the minimum wage are actually trying to support a family. There are much better strategies to support the working poor than by artificially raising the wage level. Even proponents of raising the minimum wage recognize that artificial labor cost increases is "a blunt instrument" and is not an effective poverty-reduction tool.

SM: There's a lot of research on this subject, but contradictory results. Some show a minimum wage increase would help those really struggling and would not adversely affect businesses' hiring, while others say an increase wouldn't impact the workers it's meant to.

MB: Certainly we could have a war of studies. It is difficult to isolate the economic impact of the minimum wage because that is such a small segment of the total economy, that in a dynamic marketplace, it's difficult to isolate the direct impact. There will be other factors involved. However, the question that can't be answered adequately by proponents of raising the wage is where does this money come from, if not from higher prices for consumers, or lost work hours, or benefits, or jobs for employees?

SM: Why would an increase be detrimental to small businesses?

MB: Small businesses are operating on small profit margins as it is. If you raise the minimum wage, this forces them to try to do more with less. I'm talking about more service with less labor. As labor costs go up, we don't suspend the laws of economics, and employers purchase less labor as costs of labor goes up. Those employed currently may lose positions or realize less hours or benefits. It's likely going to be the least-educated or least-skilled worker who's negatively impacted, because as an employer you'll retain your best-skilled and most competent employees and hope they can perform at a higher level and assume more responsibility.

SM: Is this only an issue now because it's an election year?

MB: Economics haven't changed. Just the political environment has changed. It's fantastic political rhetoric but poor economics. This is a big election time, and we have a lot of dissatisfied voters, particularly with the Republicans. It's the same case in Pennsylvania. You have Republicans scrambling to hold onto to anything to get them re-elected. The minimum wage is one of those easy-to-sell, hard-to-oppose policy positions. Everybody would like to see people earn more. It's easy for politicians to pontificate about helping the poor.

Characteristics of Minimum Wage Workers

According to the Department of Labor's population survey estimates as of 2004: Around 73.9 million American workers were paid hourly rates (representing 59.8% of all wage and salary workers). Of those paid by the hour, 520,000 were reported as earning exactly $5.15, the federal minimum wage, and another 1.5 million earn below the minimum. About half of all hourly-paid workers earning $5.15 or less were under age 25; about one-quarter were between 16 and 19. About 4% of women paid hourly rates reported wages at or below the minimum wage, compared with 2% for men. The highest proportion of workers with hourly wages at or below $5.15 was in the leisure and hospitality industry (about 15%).

SM: One demographic that proponents of raising the minimum wage often throw out is single mothers. Wouldn't an increase benefit them?

MB: Only 15% of minimum-wage earners are trying to support a family. So 85% of earners do not fall into that category. There are better ways to assist these low-income families, such as the earned income-tax credit. It doesn't use that blunt instrument of artificially raising labor costs for everyone. It's a much more targeted and precise instrument to assist the working poor. The tax credit has been an idea pushed by President Clinton, Robert Reich, and is a way to help them by giving them, essentially, credits for any taxes they pay on their income.

SM: In what case might an increase be justified? Wouldn't an increase in the minimum wage also mean an increase in states' tax revenues?

MB: Most people are not stuck on that bottom rung of the economic ladder. In fact, they climb rather quickly. The minimum wage is merely a starting wage for the overwhelming majority of Americans. By any increase you end up knocking that rung out for some people — whether it's people trying to move from welfare to work who don't have skills or education, where an employer might be willing to pay them $5 an hour to get them skills to enter the work force but they won't be able to afford $7. Or a mentally handicapped person — the only thing they can do is clean tables in a restaurant, but it would be too expensive to hire that person at $7 an hour. There is no need for a minimum wage, as it's been demonstrated that the majority of people move on from that starting wage in the first year. Actually, two-thirds do. It only ends up hurting the least among us. I think we ought to get rid of it altogether.

SM: That sounds a bit radical.

MB: I don't know if you pay someone to mow your lawn over there, but I can't get a kid to mow my lawn for less than $10. Employers pay well above the minimum wage for people who demonstrate competency. And they'll want to keep them. Employees have the option to move to employers who pay them the best.

In Pennsylvania, even starting positions are $7 to $8 an hour. If we were to bump up the minimum wage, it would have a ripple effect, a negative effect on starting wage positions. The most recent example of a negative impact a lot of proponents did not expect is occurring in Santa Fe, N.M. There they bumped up the minimum wage to the living wage, over $8 an hour now, I think. They're seeing high school kids who are struggling, and saying, "Why should I stay in school when I could make $8 an hour?" They've seen an increase in dropouts. We just shouldn't make it illegal for people to contract for their labor whatever amount they're willing to work for. For an intern in my office, let's say, if I wanted to pay $5.15 an hour, I'll get $5.15 work. You get what you pay for. If an employer wanted to pay someone at $1 an hour, I don't know if that worker would get the job done.