The Minimum Wage: Impacts On Job Growth, Hiring Practices, And Wage Earners, By Ronald Schoedel

THE MINIMUM WAGE: IMPACTS ON JOB GROWTH, HIRING PRACTICES, AND WAGE EARNERS

An Issue Paper for Management Communications 320

By Ronald C. Schoedel, III 2 May 2005

Ronald C. Schoedel, iii [email protected]

2 May 2005 [This paper was originally submitted as an assignment for a Management Communications class. My professor recommended it might be suitable for publication with some minor modifications. I am placing this paper online as a contribution to the body of knowledge on the material covered. This paper is copyrighted by Ronald Schoedel III and may not be reproduced for any reason without express written consent.] I am delighted to present to you my issue paper for Management Communications 320. This report is the culmination of extensive research, which I found to be highly interesting and thought provoking. I have attempted to fairly portray the various positions held by persons and groups who have something to say about the role of the minimum wage in the American economy. I am fortunate that my selected topic seems to be the subject of a large body of research. Most of my investigation dealt with periodical literature, as you indicate you prefer for this assignment. However, several of my works cited are position statements of the parties involved in the minimum wage debate. As with all issues with so many variables, this issue does not present itself with an easy or obvious answer. I hope you will enjoy the viewpoints and information I have researched. Thank you for your time and consideration. I look forward to receiving your feedback on this paper. Respectfully,

Ronald C. Schoedel, III

ii

TABLE OF CONTENTS Page LETTER OF TRANSMITTAL .......................................................................................................2 EXECUTIVE SUMMARY .............................................................................................................5 INTRODUCTION ...........................................................................................................................6 Purpose and Procedures .......................................................................................................8 Authorization for Report......................................................................................................8 Historical Background .........................................................................................................8 REASONS FOR EXISTENCE OF MINIMUM WAGE ..............................................................10 Part of FDR’s “New Deal” ................................................................................................10 Support of Organized Labor ..............................................................................................11 Support of Social Welfare Advocates................................................................................12 CURRENT STATE OF THE MINIMUM WAGE .......................................................................14 Federal Standards...............................................................................................................14 State Standards...................................................................................................................15 Local “Living Wage” Ordinances......................................................................................16 EFFECTS OF RAISING THE MINIMUM WAGE......................................................................18 Possible Reduced Job Growth ...........................................................................................18 Possible Layoffs.................................................................................................................19 Possible Artificial Inflation of Wages for Other Positions ................................................20 EFFECTIVENESS OF MINIMUM WAGE IN MEETING ECONOMIC POLICY GOALS .....21 Effects on Lowest-Paid Workers .......................................................................................22 Effects on Other Workers ..................................................................................................24 Effects on Business Growth...............................................................................................24 CONCLUSIONS ...........................................................................................................................26

iii © Ronald C. Schoedel III

RECOMMENDATIONS...............................................................................................................28 WORKS CITED ............................................................................................................................30 APPENDIX....................................................................................................................................33

iv © Ronald C. Schoedel III

EXECUTIVE SUMMARY The U.S. economy is in the midst of a major transition from being production-oriented to being service-oriented. As high-paying manufacturing and technology jobs are being exported to Asia and Latin America in growing numbers, many Americans are finding it difficult to make ends meet with the low wages earned from service jobs. Many wage earners find it necessary to work two or three minimum-wage jobs to be able to afford the bare necessities of life. This paper examines the issue of the minimum wage in the economy and in the lives of Americans today. It offers an historical perspective on the minimum wage and attempts to determine whether minimum wage laws are effective in helping workers improve their lives. The following questions are answered in this paper: (1) Why does the minimum wage exist today? (2) What is the current state of minimum-wage and living-wage laws and movements in favor of them? (3) What are the effects of raising the minimum wage? and (4) Has the minimum wage been effective in meeting public policy goals of helping those it has been intended to help? As a result of this issue paper’s investigation, the following recommendations are issued: 1. The United States Congress should pass and the President should sign a modest increase to the federal minimum wage. The increase should include a third “tier” wage level that would allow for a slightly lower wage as a way of encouraging large corporations with overseas operations to bring jobs back to the United States. 2. Small business owners should consider the positive aspects of paying their employees more than the minimum wage and then decide to do so. Decreased absenteeism, turnover, and training costs are appealing reasons to pay lower-skilled workers more than the bare minimum. Business owners may find that the increased loyalty of their employees causes them to work harder, thus generating higher profits. 3. The American public should become more familiar with the economic system and engage in serious debate about how it can be refined. Americans should consider replacing the government’s free-trade policies with tariffs and trade restrictions, and they should also consider reforming their consumer spending habits, which are largely responsible for the increased demand of products made with cheap labor overseas. 4. Americans should attempt to experiment on a limited scale with economic systems aside from the currently prevailing model of “global capitalism.” Successful experimental micro-economies may serve as models for wider reform in the future. v © Ronald C. Schoedel III

THE MINIMUM WAGE: IMPACTS ON JOB GROWTH, HIRING PRACTICES, AND WAGE EARNERS Introduction Economists and observers generally agree that the United States economy is in the midst of a major transition from being production oriented to being service-delivery oriented. Factories are closing down and relocating while Wal-Mart is building stores at record pace. The reasons for the shift are many, but generally boil down to basic economics: the costs of producing abroad are lower than the costs of producing in the U.S. As a result of the free trade policies pursued by the administrations of the two Presidents Bush and President Clinton over the last fifteen years (including NAFTA and an increasing trade deficit with China), high-paying manufacturing and technology-development jobs continue to be shipped overseas (773,000 American software and tech jobs were lost from 2001-2003), leaving mostly lower-paying service-delivery jobs (sometimes humorously called “McJobs”) to be filled by Americans. Most Americans are aware of the massive shift of manufacturing jobs to Asia and Latin America, but may not know that the last several years have been particularly hard on tech workers. Computer corporations and other tech firms have relocated their support and engineering positions to India by the scores of thousands.1 As high-paying jobs become harder to find, various proposals have been considered and enacted to try to help displaced workers. Income redistribution through schemes such as the 1

Brier Dudley, “High Technology from India is Just Down the Street,” Seattle Times, 22 April 2005, para. 29-30; available from http://seattletimes.nwsource.com/html/ businesstechnology /2002001987_india11.html [accessed 24 April 2005]. 6 © Ronald C. Schoedel III

earned income tax credit and entitlement programs such as cash assistance and food stamps are being used to provide the basics of life for more Americans each year as the ranks of the unemployed and underemployed grow. The increasing number of two-income families is seen by some as an indicator that jobs paying enough to support a family are hard to come by for most workers. “More than 20 million of the 21.6 million new jobs projected to be created during the first decade of the 21st century will be in the service sector,” with the occupations experiencing the most growth being food preparation and serving workers, retail salespersons, cashiers, janitors, groundskeepers, and other unskilled service jobs, according to Craig Becker, associate general counsel to the AFL-CIO. Becker acknowledges that the growth of low-wage jobs is causing a lot of Americans to “wax nostalgic for the heyday of American heavy industry.”2 With well-paying jobs sparse, the most obvious “fix” demanded by some is a higher wage floor. Many today—including organized labor—petition for a higher minimum wage, which is proposed as a solution to helping wage earners support their families and to decreasing the reliance of the so-called “working poor” upon the welfare system. While in-depth discussion about the issues of free trade and the welfare system are beyond the scope of this paper, they (along with common concepts of social justice and concern for the poor) are directly related to the economics of the minimum wage, and should therefore be considered in conjunction with the research and findings presented herein on the minimum wage issue.

2

Craig Becker, “A Good Job for Everyone: Fair Labor Standards Act Must Protect Employees in Nation’s Growing Service Economy,” Legal Times, 6 September 2004, 1. 7 © Ronald C. Schoedel III

Purpose and Procedures Specifically, the purpose of this report is to examine the effects of a legally mandated minimum wage on hiring practices, on the labor market, and for wage earners as a group. Specifically, the following questions will be answered: 1. How did the minimum wage come about and why does it continue to exist? 2. What is the current status of minimum wage laws in the United States? 3. How does the minimum wage—particularly, raising it periodically—affect job growth, job stability, and wages for other employees? 4. Has the minimum wage been effective in meeting the economic policy goals of those who advocate it? To answer these questions, investigation of secondary source has been conducted. Recent periodicals containing articles dealing with minimum wage issues constitute the bulk of cited sources. Authorization for Report This research report was prepared under the direction and authorization of Dr. T. D. Stoddard as detailed in the research proposal, which is included as Appendix 1 following the report. Historical Background Some may be surprised to learn that a minimum wage law has not always existed in the United States. Since the minimum wage is so often the starting wage for new entrants into the job market, many take it for granted that simply by virtue of showing up for a job, a wage earner is entitled to a minimum amount of pay. This has not always been so. For most of America’s

8 © Ronald C. Schoedel III

history—those centuries during which the family farm and the family business dominated American commerce—the labor market was decidedly much different than it is today. Among the massive changes to the American economy brought on by the Industrial Revolution of the late nineteenth century, concern with fair pay for workers quickly arose. Most who have even briefly studied American history are aware that the factories, railroads, and mines of the late 1800’s and early 1900’s were dangerous places that offered almost no job security or benefits to workers. Many workers toiled 14 or more hours a day or more and received company scrip as pay—scrip that held no value outside the company’s own overpriced general store, mess hall, and grossly expensive, substandard company housing. Labor leaders fought hard for the rights of workers to unionize and demand better pay and working conditions. Among the rights demanded by the unions was a minimum standard of pay, sought as a means of protecting the workers from the impersonal, aggressive tactics used by company bosses in their quest for higher profit margins. Socialist Party presidential candidate Eugene V. Debs was the first to campaign on the issue of a minimum wage, declaring the liberation of 25 million Americans from “wage slavery” the major theme of his 1904 campaign.3 He went on to win nearly one million votes in each of his 1912 and 1920 runs for president, indicating a popular appeal of a minimum wage. In 1912, Theodore Roosevelt, the Progressive presidential candidate, spoke critically of the “scrap heap system of industrialism” that created so much “human wreckage.”4 However, more than two

3

Eugene V. Debs, “Opening Speech Delivered as Candidate of the Socialist Party for the President at Indianapolis, Ind., September 1, 1904,” available from http://www.marxists.org/ archive/debs/works/1904/sp_wkingclss.htm [accessed 24 April 2005]. 4

Becker, 1. 9 © Ronald C. Schoedel III

decades passed before President Franklin D. Roosevelt signed a federal minimum wage into law as part of his “New Deal.” Reasons for Existence of Minimum Wage Part of FDR’S “New Deal” Several of the labor-rights advocates’ desires were granted when the Fair Labor Standards Act (FLSA) was passed in June 1938 as one of 121 social welfare bills pushed through Congress. The FLSA was passed as a reaction to mounting labor-union pressures and “atrocious Depression-era workplace standards.” According to the U.S. Department of Labor, the federal act required overtime pay for hours worked over 44 in a week, child labor standards, and a minimum wage of $0.25 per hour. 5 The first minimum wage applied to about 50 percent of the workforce; today, the minimum wage law covers about 90 percent of jobs.6 Congress passing amendments to the FLSA has accomplished each subsequent increase of the minimum wage.7 Since the passage of the FLSA, Congress has supported “a policy that prevents market forces from driving the wages of [the] lowest paid workers below a level deemed to be minimal

5

Victor D. Infante, “The Future of the Minimum Wage? Speculation Over Statement by Secretary of Labor Elaine Chao,” Workforce, March 2001, para. 4; available from http://www.findarticles.com/p/articles/mi_m0FXS/is_3_80/ai_71836858 [accessed 28 February 2005]. 6

Economic Policy Institute, EPI Issue Guide: Minimum Wage (Washington, D.C.: Economic Policy Institute, 2004), 12; available from http://www.epinet.org/content. cfm/issueguides_minwage_minwage [accessed 11 February 2005]. 7

Ibid. 10 © Ronald C. Schoedel III

by Congress, and by [society’s] general sense of fairness and decency,”8 according to the Economic Policy Institute, an organization that lobbies for a higher minimum wage. As today’s economy is dominated by multinational corporations rather than the “mom and pop” corner stores of the past, the minimum wage law is seen by some as a basic right of laborers—an impediment to corporate abuse of workers similar to that experienced in the mines and sweatshops of old. Support of Organized Labor Labor unions remain at the forefront on the matter, calling for an increased minimum wage. The AFL-CIO currently advocates an increase to $7.25 an hour, noting that if the minimum wage in 2005 were worth what it was worth in 1968, the minimum wage would be $8.88 an hour. The labor group supports Democratic Senator Edward Kennedy’s minimum wage proposal, which would raise the wage floor in three steps of 70 cents each. An Economic Policy Institute study cited by the AFL-CIO reports that 7.3 million workers would benefit from Kennedy’s wage-increase bill. But since most union workers make more than minimum wage, why do the unions want a minimum wage hike? The AFL-CIO refers to a “spillover effect” through which an additional 8 million workers’ wages would rise as a result of the upward pressure on the entire wage structure that is caused by raising the minimum wage.9

8

Jared Bernstein, “Minimum Wage and Its Effect on Small Business,” testimony given before U.S. House Subcommittee on Workforce Empowerment and Government Programs on 29 April 2004, para. 2; available from http://www.epinet.org/content.cfm/webfeatures_ viewpoints_raising_minimum_wage_2004 [accessed 9 February 2005]. 9

AFL-CIO, Talking Points: Raising the Minimum Wage (Washington, D.C.: AFL-CIO, 2005) para. 5; available from http://www.aflcio.org/yourjobeconomy/minimum wage/talkingpoints.cfm [accessed 28 April 2005]. 11 © Ronald C. Schoedel III

While the union organization supports what appears to be the most realistic legislative opportunity for an increase in the wage rate, their historic position calls for even stronger wage controls: Fairness to the working poor demands that the federal minimum wage should be not less than 50 percent of average hourly earnings of non-supervisory workers and production workers in non-farm private industry. If this adjustment were automatic, then the minimum wage worker would get an increase when everyone else got one, creating a steady relationship between wages of workers in general. For this reason, the federal minimum wage should automatically be adjusted to the private industry hourly earnings.10 The AFL-CIO counts a good number of Americans as supportive of its positions. A January 2005 Pew Research Center report cited by the labor group found that 82 percent of Americans believe a higher wage is “an important priority” and only 6 percent oppose an increase. Three-fourths of respondents to a 2001 poll jointly conducted by Investor’s Business Daily and Christian Science Monitor supported raising the wage as a way to stimulate the economy. Another nationwide poll in 2002 found that 77 percent of likely voters support a raise to $8 an hour.11 Support of Social Welfare Advocates Social welfare activists—such as some religious groups—also push for increased wage. The religiously inspired supporters of a higher minimum wage are spurred on by their understanding of teaching of Christ, who advocated helping the helpless by equipping them to help 10

AFL-CIO, AFL-CIO, “Restore the Floor: It's Time to Raise the Minimum Wage,” AFL-CIO Reviews the Issues, October 1995, 2; available from http://www.ilr.cornell. edu/library/downloads/keyWorkplaceDocuments/AFL-CIOIssueBriefs/AFLIssuesRestorethe Floor.pdf [accessed 20 April 2005]. 11

AFL-CIO, Americans Support an Increase in the Minimum Wage (Washington, D.C.: AFL-CIO, 2005) para. 1-4; available from http://www.aflcio.org/yourjobeconomy/minimum wage/americanssupport.cfm [accessed 28 April 2005]. 12 © Ronald C. Schoedel III

themselves. A higher minimum wage—an amount workers can live off—encourages the poor to make an effort to better themselves by working, they reason. Two of the largest churches in America, the Roman Catholics and the leading Lutheran conference—both support “living wages.” According to the Catholic Voting Project’s 2004 issues guide, the Catholic conference of bishops teaches that “because financial and economic factors have such an impact on the wellbeing and stability of families, it is important that just wages be paid to those who work to support their families and that generous efforts be made to aid poor families.’12 Pope John Paul II wrote in his 1981 treatise On Human Work: “The justice of social and economic systems is finally measured by the way in which a person’s work is rewarded…. A just wage is a concrete measure, and in a sense the key one, of the justice of a system.”13 Peter J. Sammon, writing for a national Catholic journal, comments that the movement for higher wages is a “fitting response to Catholic social teaching that insists on the right of workers to a just living wage.” He further notes that “as far back as 1906, Monsignor John A. Ryan, the well-known proponent of Catholic principles of social justice, wrote a book titled A Living Wage: Its Ethical and Economic Aspects.”14 Sammon states several reasons he supports living-wage movements, especially those working to get at least government agencies and contractors on board with a higher minimum: 12

Catholic Voting Project, 2004 Catholic Voter Guide, http://www.voting catholic.org [accessed 20 April 2005]. 13

Peter J. Sammon, “The Living Wage Campaign,” America: The National Catholic Weekly, 26 August 2000, para. 19; available from http://www.americamagazine.org/gettext.cfm?articleTypeID=1&textID=2120&issueID=378 [accessed 20 April 2005]. 14

Ibid. 13 © Ronald C. Schoedel III

In the cities that have passed a living-wage ordinance, studies thus far show that these ordinances have added slightly more than 1 percent to the total production cost for most contractors. Jobs have not been lost. Fear of job relocation is lessened by the fact that basic city service jobs cannot readily be moved to another city. Also, better-paid workers are more productive. Higher wages improve morale and this lessens absenteeism and turnover—all of which are costly business factors.15 The Evangelical Lutheran Church in America, which counts over 5 million Americans as members, is extensively involved in social welfare and advocacy projects. The ELCA urges Christian support for higher wage standards in an issue paper released by the Churchwide Assembly in 2003. Quoting a 1999 position statement adopted by the Assembly, the Lutherans advocate for a minimum wage level that is balanced with the delicate economic reality of raising labor costs. They call for “a minimum wage level that balances employees’ need for sufficient income with what would be significant negative effects on overall employment.”16 Current State of the Minimum Wage Federal Standards All this support for a higher federal minimum wage has not convinced Washington, D.C., however. Even though Congress has traditionally supported periodic raises in the wage floor, the wage has not been raised since the 1997 increase from $4.75 to $5.15. Washington is presently “on track to tie the longest period over which Congress has failed to enact an increase in the minimum wage,” which was the nine years before President George H. W. Bush signed an in-

15

Ibid., para. 15.

16

ELCA Churchwide Assembly, ELCA Background Paper: Increase the Minimum Wage, 2003, para. 4; available from http://www.elca.org/advocacy/issues/economiclife/minimum wage.html [accessed 27 April 2005]. 14 © Ronald C. Schoedel III

crease in 1990.17 The current President Bush has gone on the record as supporting a wage hike to $6.15—but only if states have the right to “opt out” of an increase.18 So, even if Congress were to pass a wage increase, in order to get Bush’s signature, the amended federal minimum wage law would have to be crafted such that it might become practically meaningless. State Standards So far, fourteen states plus the District of Columbia have their own minimum wage laws, which mandate wages higher than the federal minimum.19 These laws vary from statutes that fix the minimum wage at a predetermined dollar amount, a percentage above the federal rate, or an amount determined yearly by factors such as the increase in the consumer price index. The lowest state rate more than the federal wage is $6.00, in New York; the highest minimum wage is $7.35, mandated by law in the state of Washington. Oregon follows at $7.25, with Alaska at $7.15.20 Kansas and Ohio have state minimum wages lower than the federal rate and six states have no minimum wage.21 Even though the federal rate applies to most jobs, about 10 percent of jobs do not fall under the federal law.22 Workers in some states are thus at the mercy of their employers, who have no law at all to regulate how little they can pay their employees.

17

Bernstein, 1.

18

Infante, para. 1.

19

Angela Cara Pancrazio, “Minimum Wage a Hard Way to Live,” The Arizona Republic, 17 February 2005, para. 9; available from http://www.azcentral.com/specials/special12/articles/ 0217MinimumWage.html [accessed 22 February 2005]. 20

Wikipedia, “List of U.S. State Minimum Wages;” available from http://en.wikipedia.org /wiki/List_of_U.S._state_minimum_wages [accessed 15 April 2005]. 21

Pancrazio, para. 9.

22

Economic Policy Institute, 12. 15 © Ronald C. Schoedel III

Local “Living Wage” Ordinances According to the Economic Policy Institute, “a full-time worker (working 2,080 hours a year) earning $5.15 an hour would earn $10,712 a year, well below the 2003 federal poverty line of $14,824 for a family of three.”23 With the lofty goal of bringing certain workers up to a bare minimum standard of living, at least 62 communities and counties have adopted a new form of minimum wage requirement called a living-wage ordinance.24 Living-wage ordinances go beyond the mere minimum by requiring employers to pay employees an amount that has been determined sufficient to support a family. The living wage amount is determined by factors such as the federal poverty level and the cost of living for the area. In 2000, Santa Cruz, California, adopted the highest hourly living wage so far: $11 for employees with health care coverage and $12 for employees without health insurance.25 The first living-wage ordinances—such as that passed in 1994 by Baltimore—generally applied only to companies that held municipal contracts,26 but over the past several years the trend has been for living-wage laws to apply to most major business enterprises in a given city.27

23

Economic Policy Institute, 10.

24

Chris Pentilla, “Who’s Paying? Staff Smarts: Should You Choose to Pay Your Employees a ‘Living Wage’ Today? Tomorrow, the Decision May Not Be Yours to Make,” Entrepreneur, December 2001, para. 3; available from http://www.findarticles.com/p/articles/mi_m0DTI/ is_12_29/ai_83678111 [accessed 28 February 2005]. 25

Ibid.

26

Los Angeles Business Journal, “Living Wage Laws Hurt Poor the Most,” 26 March 2001, para. 3; available from http://www.findarticles.com/p/articles/mi_m5072/ is_13_23/ ai_72809104 [accessed 28 February 2005]. 27

Pentilla, para. 5. 16 © Ronald C. Schoedel III

Some “living wage” requirements appear high at first glance, but a recent study in Wyoming indicates that the true cost of living is significantly higher than the federal minimum wage and the federal poverty rate. Wyoming has no living wage requirement at present, but the study was commissioned as a tool to guide public and private sector policies on wage issues. It measures how much a family needs to earn to pay for the basic necessities of life without any public assistance or help from friends and family. The findings: a single parent with an infant and a preschool-aged child needs to make a minimum of $12-14 an hour to just scrape by in most counties in Wyoming. In Teton County, the aforementioned family of three needs its wage earner to make $21.62 an hour. Diane Pearce, researcher and author of the “Wyoming SelfSufficiency Report,” is quick to note that families making the recommended living wages must adhere to a strict “bare bones budget that allows no take-out foods or restaurant meals—not a pizza, Happy Meal, or latte.”28 Living-wage supporters claim that living wages make happier, more loyal, and more productive employees. But laws alone are not driving the living-wage trend. In the Northeast, a number of business owners have decided that a law is not necessary to encourage them to pay their workers what they consider fair wages. In Boston, a group called Responsible Wealth has given business owners and investors the opportunity to sign “covenants” stating they will pay “fair” wages. The coordinator of Responsible Wealth, Karen Kraut, acknowledges that paying living wages may indeed reduce profits and require additional costs to be passed on to customers, but she also notes that costs related to absenteeism, turnover, and training can be significantly reduced for a company. The owner of

28

Joan Barron, “Making a Living,” The Casper Star-Tribune, 17 February 2005, para. 12; available from www.casperstartribune.net/articles/2005/02/19/news/wyoming/ 3d6d6bec93db2d6187256faa007212c6.txt [accessed 22 February 2005]. 17 © Ronald C. Schoedel III

a Maine bakery is one such businessman. Jim Amaral took it upon himself to raise the wages of each of his minimum-wage workers to $8 an hour, almost $3 an hour more than the minimum wage requirement. He reports that his early-morning drivers and bakers—positions that historically have very high turnover—are remaining with his company longer and that it is now easier to recruit for those positions. When asked if the higher wages have hurt his business, Amaral states that paying a living wage is a great marketing tool: customers actually appreciate the opportunity to purchase from a socially-responsible company.29 Effects of Raising the Minimum Wage Possible Reduced Job Growth Not all business owners or economists are quite so keen on living-wage or minimumwage laws, however. Quite the contrary, in fact. A survey published in the Winter 2005 Journal of Economic Perspectives and cited by Heritage Foundation economist and researcher Tim Kane, Ph.D., reports “71 percent of economists at America’s top universities agree with the statement ‘a minimum wage increases unemployment among the young and unskilled.’ About one-third of the economists agree outright, and another third agree with reservations.”30 The reasons for this sort of overwhelming agreement are straight out of any Economics 101 textbook: somebody has to bear the cost of the increased wages, and that “somebody” usually ends up being the workers on the “bottom rung” of the employment ladder, who are the first to be laid off when labor costs

29

Pentilla, para. 7.

30

Tim Kane, “Minimizing Economic Opportunity by Raising the Minimum Wage,” Heritage Foundation, 4 March 2005, para. 4; available from http://www.heritage.org/Research/ Economy/wm676.cfm [accessed 28 April 2005]. 18 © Ronald C. Schoedel III

are raised by external forces such as legislation, and those for whom jobs will not be created by businesses that are scaling back on labor expenses. Ron Bird, chief economist for the Employment Policy Foundation states that his “concern is that if…the minimum wage [is raised] too high, you'll be excluding some people from the labor market, the folks that don't have experience or skills.” He adds that the minimum wage “creates a barrier to entrepreneurship because it adds to what you have to do to justify expanding your business. So it has a negative effect on job creation and the creation of new businesses.”31 A 1987 report—prepared at a time when Congress was considering raising the federal minimum wage from $3.35 to $4.65, with an additional provision for automatic raises to 50 percent of a national average hourly wage—declared that such a law would “have the same effect as a government regulation banning the hiring of low-skilled workers.”32 Possible Layoffs Craig Garthwaite, an economist with the Employment Policies Institute—a pro-business organization that lobbies against the minimum wage—writes in a guest newspaper editorial: …[L]ow-skilled employees are [the] most likely to lose their jobs following a wage hike. Duke University researchers have found that after an increase in the minimum wage, the lowest skilled adults are crowded out of their jobs as bettereducated teenagers (frequently from wealthier families) are drawn into the workforce. Their ‘need’? Simply to earn money for video games and iPods. But be-

31

C. J. Prince, “Dollar Signs: When the Minimum Wage Rises, Will Small Businesses Get the Downside?” Entrepreneur, October 2001, para. 2; available from http://www.findarticles.com/p/articles/mi_m0DTI/is_10_29/ai_79756154 [accessed 28 February 2005]. 32

Amie Snider, “Minimum Wage Increase Hurts Unskilled Workers,” Discount Store News, 24 August 1987, para. 1; available from http://www.findarticles.com/p/articles/ mi_m3092/ is_v26/ai_5123730 [accessed 28 February 2005]. 19 © Ronald C. Schoedel III

because they require less training, employers eagerly hire these teenagers to get the most from their higher payroll costs.33 Countering the idea that higher labor costs are easy for businesses to absorb, Garthwaite points out that one need only observe the adoption of automation technologies such as ATMs and grocery self-checkout lanes. But with increasing pressure to raise wages, even McDonald’s, “one of the most reliable sources of entry-level job opportunities” is experimenting with automated self-service kiosks instead of cashiers. “These new technologies, designed to reduce labor costs, eliminate jobs in the process.”34 Possible Artificial Inflation of Wages for Other Positions When the wage floor is raised, some employees, who today earn more than the minimum, will find that their hourly wage is either at or only slightly higher than the new minimum wage. Economist Ron Bird of the Employment Policy Foundation believes that (not surprisingly) those who are presently earning what would become the minimum wage would want an increase in their wage as well. He urges prudence in the minimum wage debate and careful consideration of this particular reality.35 Restaurant workers provide an excellent example of what happens when the minimum wage is raised. The federal law allows tipped employees to be paid at a lower minimum wage— just $2.13 an hour—as long as they receive sufficient tips to make their gross pay equal the minimum rate. Like the general standard, some states mandate a higher tipped-employee mini-

33

Craig Garthwaite, “Increasing Minimum Wage Won’t Help Jobless,” Duluth NewsTribune, 19 February 2005, para. 4; available from http://www.epionline.org/oped_detail. cfm?oid= 40# [accessed 21 February 2005]. 34

Ibid., para. 5.

35

Prince, para. 5. 20 © Ronald C. Schoedel III

mum rate: $3.13 in Maine, $3.65 in Vermont, and $3.85 in New York, for example. When tips are added to this rock-bottom remuneration, many tipped employees gross $15-17 an hour or more, according to restaurant owners. Raising the minimum wage across the board for tipped and non-tipped employees results in the “tragedy” of restaurateurs being required to raise hourly pay for tipped employees—who are their highest-paid workers—while “struggling to pay a fair wage to non-tipped employees.” As a result of trying to ensure more fair wages for all, the lower-paid, back-of-the-house employees are actually treated less fairly. Owners struggling to meet the need for higher wages for all are left with few choices. Paul Douglas, a small-restaurant owner in New York state, employs 35 people and opposes raising the minimum wage. He says he “doesn’t see the justice of his dishwashers earning only the new minimum wage, while most of his servers will get most of that amount and make a total of $31 an hour.” Illinois pizza franchisee Mike Monseur says that if labor costs continue to rise he will have his salaried “managers pick up more hours.” Thus, while paying some employees a higher hourly rate, his managers will gross the same weekly salary while working more hours, resulting in a lower hourly wage for their labors.36 Effectiveness of Minimum Wage in Meeting Economic Policy Goals The effectiveness of minimum wage laws is easier to theorize about than to actually quantify. Studies have been conducted “proving” opposite positions. Economic assumptions are not foolproof; textbook models are always presented ceteris paribus—all else being equal— because too many variables exist to consider every possible market reaction or result, not to men36

Carolyn Walkup, “Operators: States’ Minimum-wage Hikes Pose Job Cuts, Price Spikes,” The Nation’s Restaurant News, 24 January 2005, para. 7; available from http://www.findarticles.com/p/articles/mi_m3190/is_4_39/ai_n9487332 [accessed 28 February 2005]. 21 © Ronald C. Schoedel III

tion the great difficulty in trying to determine if a given result is merely a short-term anomaly or a long-term outcome. Supporters of the minimum wage generally agree that a wage floor ought to help reduce poverty, ensure a decent standard of living, and stimulate economic growth as wage earners have more money to spend. Detractors believe minimum wages lead to business closures and reduced employment levels, and thus higher poverty levels. Effects on Lowest-Paid Workers Federal Reserve chairman Alan Greenspan consistently speaks against a minimum wage. He states that a wage set by legislation “increases unemployment and, indeed, prevents people who are at the early stages of their careers…from getting a foothold in the ladder of promotions.”37 In Alaska, where the minimum wage rose from $5.65 to $7.15 an hour in 2003, the owner of a popular Anchorage restaurant closed its doors after 30 years in business because she could not afford to continue paying the $200,000 increase in labor costs over the previous year. Trina Johnson says she “feels bad” but that the only hope for keeping her two other locations open was to cut her “highest cost items,” which meant laying off 26 of her 35 employees.38 Johnson added that her workers’ compensation insurance premiums, which are tied to a company’s payroll amount, multiplied nearly four-fold from $22,000 to $80,000 per year.

37

Craig Garthwaite, “Raising Minimum Wage Stands to Hurt Low-Income Workers,” The Detroit Free Press, 18 February 2005, para. 4; available from http://www.freep.com/voices/ columnists/egarth18e_20050218.htm [accessed 18 February 2005]. 38

Sarana Schell, “Labor Costs Kill Downtown La Mex,” Anchorage Daily News, 9 February 2005, 1; available from http://www.adn.com/front/story/6137674p-6019567c.html [accessed 9 February 2005]. 22 © Ronald C. Schoedel III

Researchers at Michigan State University found that: …[I]ncreases in the minimum wage encourage more teenagers to leave school and enter the workplace, displacing lower-skilled workers from their jobs…. Those most affected will be single parents, developmentally disabled persons, school dropouts, and recent immigrants with poor language and reading skills. If you price entry-level labor higher than its real value, jobs will not be available for people whose skills are limited.39 The Los Angeles Business Journal states that higher wages hurt the poor the most. In 1998, when California’s minimum wage increased from $5.15 to $5.75, “annual labor costs increased $790 million, and “$230 million in workers’ annual income and more than 25,000 jobs were lost.” The result is that “low-skilled workers are squeezed out of work by mandated wage hikes, they collect welfare, leaving them locked out of jobs and worse off than before.” The Journal notes that raising wages has the “perverse effect” of forcing companies to eliminate jobs, “especially those of low-wage and low-skilled workers.”40 Chris Koetzle, a vice president of the New York-based Support Service Alliances, Inc., writes about the likely wage inflation that would follow a minimum-wage increase in a recent business-weekly editorial: Worse yet, the wage inflation will lead to price inflation eating away at the temporary gains in higher wages. In relative terms, those making the lowest wages won't be better off because prices will rise to meet the higher wages. In the end, this artificially mandated increase to businesses across New York will place our

39

Mark Alesse and Matthew Guilbault, “A Minimum Wage Increase Will Hurt Small Business and the Working Poor,” Gotham Gazette, 16 February 2004, para. 6-7; available from http://www.gothamgazette.com/print/871 [accessed 9 February 2005]. 40

“Living Wage Laws Hurt Poor the Most,” Los Angeles Business Journal, 26 March 2001, para. 3; available from http://www.findarticles.com/p/articles/ mi_m5072/is_13_23/ ai_72809104 [accessed 28 February 2005]. 23 © Ronald C. Schoedel III

fragile job growth in jeopardy, placing our most vulnerable workers in greatest harm.41 Effects on Other Workers While it seems conclusive that the “lowest of the low-paid” are negatively impacted by minimum wage increases, workers higher on the pay scale who keep their jobs seem to benefit. The non-partisan Center on Budget and Policy Priorities reports that a 1997 increase in Oregon’s minimum wage “corresponded with a drop in participants in the state’s welfare program.”42 Also, as cited in numerous examples earlier, ample evidence exists to indicate that higher-paid employees benefit from the upward pressure on their wages that results from an increased minimum wage. Union members, tipped employees, and workers making the current minimum are among those who seem to benefit more from the increase than do those actually making the minimum wage. Effects on Business Growth The effects of a minimum wage on business growth are difficult to conclusively determine. As stated in the example of the Anchorage restaurant, raising the minimum wage carries associated costs to business owners such as higher workers’ compensation premiums and increased Social Security and Medicare taxes. According to an opinion column in the business journal Business First of Buffalo, small business owners in New York are concerned that an impending raise of the state minimum wage to $7 an hour will “leave small businesses struggling to 41

Chris Koetzle, “Minimum Wage Override Hurts Small Businesses,” Buffalo Business First, 10 January 2005, para. 4; available from http://buffalo.bizjournals.com/buffalo/stories/ 2005/ 01/10/editorial2.html [accessed 9 February 2005]. 42

Mark Poloncarz, “Higher Minimum Wage Won’t Hurt Economy,” Buffalo Business First, 24 January 2005, para. 5; available from http://buffalo.bizjournals.com/buffalo/stories/ 2005/ 01/24/editorial2.html [accessed 9 February 2005]. 24 © Ronald C. Schoedel III

simply survive. Jobs would be cut [and] costs would rise.” Editorialist Chris Koetzle argues further, “all workers would begin looking for their…increase just to keep up with the market,” which would “artificially increase the market wage, leaving small businesses at risk and more workers unemployed.” He also states that businesses in border areas near states with lower minimum wages will be adversely affected.43 However, a 2004 study released by the Fiscal Policy Institute indicates that an increase in the minimum wage would improve New York’s economy. The Institute reports, “in the 12 states that had a higher minimum wage than the federal base, from 1998 to 2004 job growth was greater than the level seen in states with the federal minimum (6.1 percent to 4.8 percent).” The report also notes that the “twelve higher wage states were not in the burgeoning economies of the south or southwest, but in the allegedly faltering economies of the northeast and west.”44 Labor economist Jared Bernstein, of the Economic Policy Institute and former deputy chief economist with the U.S. Department of Labor, supports the study’s findings. He states: “Of course, minimum wage increases do raise labor costs for employers… [and] there’s always the potential to throw a monkey wrench into the economy, but that’s only if the minimum wage is raised too high.” Bernstein also believes that many firms that have dealt with minimum wage increases have found that higher labor costs “are ameliorated with less turnover, fewer vacancies, and more expensive yet more efficient workers.” He adds that it “seem[s] that one of the reasons we

43

Koetzle, para. 3, 4.

44

Poloncarz, para. 3. 25 © Ronald C. Schoedel III

haven’t seen job loss yet is that these costs are absorbed through the higher productivity of the workers.”45 Yet another study, conducted in 1998 by the Jerome Levy Economic Institute at Bard College, found that the 1997 minimum wage hike from $4.75 to $5.15 “affected hiring decisions at only 6.2 percent of the small businesses surveyed.” A follow-up study conducted the following year asked whether small businesses would be impacted by a further increase to $6 an hour. Over 84 percent of the businesses surveyed said such an increase would not affect them. About 15 percent said it would affect their hiring of new employees but would not be enough to cause them to lay off workers. Oren M. Levin-Waldman, who headed up the studies, believes this is significant since “most people who claim that the minimum wage is going to have a detrimental effect usually say it’s going to lead to layoffs.”46 Conclusions 1. The United States federal government and most states have minimum wage laws, which primarily came about in response to the demands of laborers in the early twentieth century. Public support for a minimum wage has endured decades of changes in our society and markets. A wage floor is regarded by the public as the primary means of keeping employers from exploiting workers, especially workers that are young, less educated, and inexperienced. The general consensus of Americans is that these folks “deserve a break.” Therefore, minimum-wage laws and the drive for even higher “living wages” persist, backed by powerful labor forces. On the surface, giving workers higher wages seems perfectly 45

“Will a Minimum Wage Hike Hurt Productivity?” Workforce, April 2000, para. 5; available from http://www.findarticles.com/p/articles/mi_m0FXS/is_4_79/ ai_62324221 [accessed 28 February 2005]. 46

Prince, para. 3. 26 © Ronald C. Schoedel III

reasonable to most people. Americans—many of whom are descended from immigrants that “had it rough” upon their arrival in the new world—have an innate desire to see justice done for the poor and downtrodden of society. Americans also tend to feel that helping poor people work for a living is preferable to increasing government welfare benefits. 2. Unfortunately, research indicates that those who ought to benefit most from higher minimum wages end up with “the short end of the stick.” Economic theory states that as the price of a good increases, demand for the good decreases. Enough studies have been done that indicate that the demand for labor is decreased when labor becomes more expensive. At the very least, the added labor costs are passed on to the end customer. This in turn decreases the buying power of the money earned by a wider circle of participants in the economy, who then desire higher wages that they may be able to keep up with the rising price of goods and services. As more wages go up, more prices go up, and more workers demand higher wages. The effect of a minimum wage increase is similar to the effect a small pebble has when dropped into a pond: it causes a ripple effect that extends far beyond the initial reach of the pebble’s gravitational force—outward, ever outward. For the economy, what is described here is a classic inflationary cycle. That higher wages contribute to inflation practically goes without saying. 3. Some workers are indeed helped by higher minimum wages; some are hurt, as well. Evidence that public policy goals are actually being met by increasing minimum wages is sparse. But so is evidence that slight increases in the minimum wage are having the dreadful impact envisioned by some economists. The evidence suggests that a “tipping point” exists, at which business owners begin to be more concerned about the adverse effect of a higher minimum wage. Levin-Waldman, who also authored The Case of the Minimum Wage, says that the tipping point

27 © Ronald C. Schoedel III

seems to be some level under $7.25, but that the current national standard of $5.15 is “clearly not” the limit to how high the wage can be raised.47 Recommendations When considering the minimum wage, one must consider the overall context in which the U.S. economy exists. Certain truths are mostly invariable. For example, that a free-market economy will continue is likely a safe assumption. America is unlikely to become a true welfare state after the manner of some European nations. Americans cherish a certain amount of freedom and risk that are associated with a free market economy. With these considerations in mind, the following recommendations are issued: 1. The United States Congress should pass and the President should sign a modest increase to the federal minimum wage. This increase should include a third “tier” in addition to the tipped and non-tipped tiers of the present law. The third tier should allow for a slightly lower wage as a way of encouraging large corporations with overseas operations to bring jobs back to the United States. As additional jobs are added to the economy and corporations are given the opportunity to pay reasonable but slightly lower minimum wages, economies of scale will be realized throughout the marketplace, which will have the effect of tightening the reins on inflation. 2. Small business owners should consider the positive aspects of paying their employees more than the minimum wage and then decide to do so. Decreased absenteeism, turnover, and training costs are appealing reasons to pay lower-skilled workers more than the bare minimum. Business owners may find that the increased loyalty of their employees causes them to work harder, thus generating higher profits.

47

Prince, para. 4. 28 © Ronald C. Schoedel III

The old notion of the “career ladder” has largely disappeared, as very few people today work for the same company for the entire duration of their working lives. But if business owners are willing to pay a little more and make the effort to respect and “cultivate” their workers, owners should see them develop more skills that may benefit the employer by encouraging capable employees to move into positions of greater responsibility, further reinforcing employee loyalty. Business owners should move away from the trend of viewing labor as just another “input” and should instead consider the value of “human capital” and invest in creating mutually beneficial relationships with their employees. 3. The American public in general should become more familiar with the economic system and engage in serious debate about how it can be refined. Misconceptions abound and the public does not have a good grasp of economic principles. It should be understood that America has never had a 100 percent “free” market and that the recent take-off of free trade policies is not just another development of “the American way.” Restraints such as tariffs and foreign trade restrictions have always existed, but have varied widely according to the needs of the nation at a given time. Americans should reconsider their government’s free-trade policies and their own consumer spending habits, both of which promote sending jobs overseas. 4. In the so-called perfect world, a minimum wage would not be needed since anyone who wants to work would have a job and each job would pay according to the needs of the employee. Though discussion of other economic models is beyond the scope of this paper, Americans should attempt to experiment on a limited scale with economic systems aside from the currently prevailing model of “global capitalism.” Microeconomies such as the theosocialistic systems advocated by nineteenth-century Mormon leaders might hold promise for those committed to their success and may serve as models for wider reform in the future.

29 © Ronald C. Schoedel III

WORKS CITED AFL-CIO, “Restore the Floor: It's Time to Raise the Minimum Wage,” AFL-CIO Reviews the Issues (October 1995), 2; available from www.ilr.cornell.edu/library/downloads/key WorkplaceDocuments/AFL-CIOIssueBriefs/AFLIssuesRestoretheFloor.pdf [accessed 20 April 2005]. AFL-CIO, Americans Support an Increase in the Minimum Wage, Washington, D.C.: AFL-CIO, 2005, para. 1-4; available from http://www.aflcio.org/yourjobeconomy/minimumwage/ americanssupport.cfm [accessed 28 April 2005]. AFL-CIO, Talking Points: Raising the Minimum Wage, Washington, D.C.: AFL-CIO, 2005; para. 5; available from http://www.aflcio.org/yourjobeconomy/minimumwage/talking points.cfm [accessed 28 April 2005]. Alesse, Mark, and Matthew Guilbault. “A Minimum Wage Increase Will Hurt Small Business and the Working Poor,” Gotham Gazette, 16 February 2004, para. 6-7; available from http://www.gothamgazette.com/print/871 [accessed 9 February 2005]. Barron, Joan. “Making a Living,” The Casper Star-Tribune, 17 February 2005, para. 12; available from http://www.casperstartribune.net/articles/2005/02/19/news/wyoming/ 3d6d6bec93db2d6187256faa007212c6.txt [accessed 22 February 2005]. Becker, Craig. “A Good Job for Everyone: Fair Labor Standards Act Must Protect Employees in Nation’s Growing Service Economy,” Legal Times, 6 September 2004, 1. Bernstein, Jared. “Minimum Wage and Its Effect on Small Business,” testimony given before U.S. House Subcommittee on Workforce Empowerment and Government Programs on 29 April 2004, para. 2; available from http://www.epinet.org/content.cfm/webfeatures_ viewpoints_raising_minimum_wage_2004 [accessed 9 February 2005]. Catholic Voting Project, 2004 Catholic Voter Guide, http://www.votingcatholic.org [accessed 20 April 2005]. Debs, Eugene V., “Opening Speech Delivered as Candidate of the Socialist Party for the President at Indianapolis, Ind., September 1, 1904”, Socialist Party Minutes, available from http://www.marxists.org/archive/debs/works/1904/sp_wkingclss.htm [accessed 24 April 2005].

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Dudley, Brier, “High technology from India is Just Down the Street,” Seattle Times, 22 April 2005, para. 29-30; available from http://seattletimes.nwsource.com/html/business technology/2002001987_india11.html [accessed 24 April 2005]. Economic Policy Institute, EPI Issue Guide: Minimum Wage, Washington, D.C.: Economic Policy Institute, 2004, 10, 12; available from http://www.epinet.org/content.cfm/ issueguides_minwage_minwage [accessed 11 February 2005]. ELCA Churchwide Assembly, ELCA Background Paper: Increase the Minimum Wage; 2003, para. 4; available from http://www.elca.org/advocacy/issues/economiclife/minimum wage.html [accessed 27 April 2005]. Garthwaite, Craig. “Increasing Minimum Wage Won’t Help Jobless,” Duluth News-Tribune, 19 February 2005, para. 4; available from http://www.epionline.org/oped_detail.cfm?oid= 40# [accessed 21 February 2005]. Garthwaite, Craig. “Raising Minimum Wage Stands to Hurt Low-Income Workers,” The Detroit Free Press, 18 February 2005, para. 4; available from http://www.freep.com/voices/ columnists/egarth18e_20050218.htm [accessed 18 February 2005]. Infante, Victor D. “The Future of the Minimum Wage? Speculation Over Statement by Secretary of Labor Elaine Chao.” Workforce (March 2001), para. 1, 4; available from http://www.findarticles.com/p/articles/mi_m0FXS/is_3_80/ai_71836858 [accessed 28 February 2005]. Kane, Tim. “Minimizing Economic Opportunity by Raising the Minimum Wage,” Heritage Foundation, 4 March 2005, para. 4; available from http://www.heritage.org/Research/ Economy/wm676.cfm [accessed 28 April 2005]. Koetzle, Chris. “Minimum Wage Override Hurts Small Businesses,” Buffalo Business First, 10 January 2005, para. 3, 4; available from http://buffalo.bizjournals.com/buffalo/stories/ 2005/01/10/editorial2.html [accessed 9 February 2005]. “List of U.S. State Minimum Wages,” Wikipedia: The Online Open Source Encyclopedia; available from http://en.wikipedia.org/wiki/List_of_U.S._state_minimum_wages [accessed 15 April 2005]. “Living Wage Laws Hurt Poor the Most,” Los Angeles Business Journal, 26 March 2001, para. 3; available from http://www.findarticles.com/p/articles/mi_m5072/is_13_23/ ai_72809104 [accessed 28 February 2005]. Pancrazio, Angela Cara. “Minimum Wage a Hard Way to Live,” The Arizona Republic, 17 February 2005, para. 9; available from http://www.azcentral.com/specials/special12/ articles/0217MinimumWage.html [accessed 22 February 2005].

© Ronald C. Schoedel III

Pentilla, Chris. “Who’s Paying? Staff Smarts: Should You Choose to Pay Your Employees a ‘Living Wage’ Today? Tomorrow, the Decision May Not Be Yours to Make.” Entrepreneur (December 2001), para. 3, 5, 7; available from http://www.findarticles.com/p/articles/mi_m0DTI/is_12_29/ai_83678111 [accessed 28 February 2005]. Poloncarz, Mark. “Higher Minimum Wage Won’t Hurt Economy,” Buffalo Business First, 24 January 2005, para. 3, 5; available from http://buffalo.bizjournals.com/buffalo/ stories/2005/01/24/editorial2.html [accessed 9 February 2005]. Prince, C. J. “Dollar Signs: When the Minimum Wage Rises, Will Small Businesses Get the Downside?” Entrepreneur (October 2001) para. 2-4; available from http://www.findarticles.com/p/articles/mi_m0DTI/is_10_29/ai_79756154 [accessed 28 February 2005]. Sammon, Peter J. “The Living Wage Campaign.” America: The National Catholic Weekly, 26 August 2000, para. 15, 19; available from http://www.americamagazine.org/gettext.cfm ?articleTypeID=1&textID=2120&issueID=378 [accessed 20 April 2005]. Schell, Sarana. “Labor Costs Kill Downtown La Mex,” Anchorage Daily News, 9 February 2005, 1; available from http://www.adn.com/front/story/6137674p-6019567c.html [accessed 9 February 2005]. Snider, Amie. “Minimum Wage Increase Hurts Unskilled Workers,” Discount Store News, 24 August 1987, para. 1; available from http://www.findarticles.com/p/articles/mi_m3092/ is_v26/ai_5123730 [accessed 28 February 2005]. Walkup, Carolyn. “Operators: States’ Minimum-wage Hikes Pose Job Cuts, Price Spikes,” The Nation’s Restaurant News, 24 January 2005, para. 7; available from http://www.findarticles.com/p/articles/mi_m3190/is_4_39/ai_n9487332 [accessed 28 February 2005]. “Will a Minimum Wage Hike Hurt Productivity?” Workforce (April 2000) para. 5; available from http://www.findarticles.com/p/articles/mi_m0FXS/is_4_79/ai_62324221 [accessed 28 February 2005].

© Ronald C. Schoedel III

APPENDIX (not included in online version of paper)

33 © Ronald C. Schoedel III