Minimum Wage Rage

On June 22nd 2006, The Economist wrote an article entitled 'Wage Rage' discussing the current minimum wage debate in Washington D.C. "Both politics and economics lie behind Democrats' calls for a higher minimum wage". Here is the article:

With unemployment as low as 4.6%, America’s labour market might be expected to be painfully tight. In fact there seems to be some slack in it. Labour force participation is relatively low, by the standard of recent years. Real hourly earnings have barely budged since 2001. Perhaps that is why many Americans tell pollsters that they are not happy with the state of the economy.

Naturally, Democrats hope to profit from this in November’s congressional elections. This week Republicans in Congress fought Democratic efforts—led by Edward Kennedy—to put through a hefty hike in the Federal minimum wage to $7.25, up from $5.15 where it was fixed in 1997. The measure was defeated in the Senate on procedural grounds, even though 52 senators voted for it (including eight Republicans). The House has it locked up in committee. An alternative bill that paired a more moderate increase to $6.25 with some changes in work regulations also died after drawing Democratic opposition.

Mr Kennedy and other Democrats are not ready to give up. Although they have little chance of getting a bill passed this year, and despite the fact that some 20 states have increased their own minimum wages in the past few years, Democrats are hoping to make the issue prominent before the November poll. The goal is to attract disgruntled voters who feel they have missed out in the current economic boom.

To this end, Democrats are busy painting a stark picture of life on the minimum wage. At $5.15 an hour, a full-time worker earns less than $10,300 a year, barely above the poverty line for a single person and well under it if the wage-earner supports a child. The real value of the wage is down to its lowest level since 1955. In the late 1960s, the wage was more than half of average hourly earnings for a (low level) production worker. Now it is less than a third.

However, the number of people earning the minimum wage has also declined. In 1980, over 15% of workers received it (or even a lower wage—there are broad exemptions for various classes of workers). That figure is now just 2.5%. The Centre for Economic and Policy Research, a left-leaning think-tank, estimates that lifting the wage to $7.25 would affect only 4.4% of workers, giving them an average increase of $0.79 an hour.

This would yield an extra $1,580 a year for full-time workers, enough to get a mother and child within shouting distance of the poverty line. But most such workers aren’t in a full-time job. Of the roughly 1.6m low-wage workers who do regular hours, nearly 1m are part-timers, most of them doing fewer than 25 hours a week. This is ammunition for opponents of an increase, who also point out that few such workers support families, or even themselves. They are mostly young (more than half of them are under 25), and according to testimony before Congress from the conservative Heritage Foundation in 2004, only 15% of workers making less than $6.65 an hour live in poverty. Many of them have family incomes well above the poverty line.

Given all this, a minimum wage increase seems like a blunt instrument for attacking poverty. The Earned Income Tax Credit, which already gives a annual bonus to the working poor, targets poverty more directly and effectively. Nor will fiddling with the minimum wage do much to placate the anxious middle class. Raising the wage, say critics, may even hurt the people who are supposed to be helped. Businesses say that higher wages could force them to reduce staff (though economic studies appear to show that is unlikely). More worrying is that unskilled workers may be kept out of the labour market if they are unable to claim jobs with higher minimum wages.

But for Mr Kennedy and his fellow, all this may be beside the point. Minimum wage workers are sympathetic figures, working boring jobs for paltry pay. Most Americans say they support an increase. While that may not get the wage up, it could help put Republicans on the defensive.