March 1, 2000
Cliff Slater's Second Opinion
Cliff Slater is a regular columnist whose footnoted columns are at www.lava.net/cslater
(1) It is far from unusual for servers (formerly
known as waitresses and waiters) to make $100 in tips for a five hour
shift in addition to their minimum wage base pay. In Europe it is even
customary for hotel doormen to pay the hotel to work there; tips are
very high in such positions.
3) "Regarding the income distribution impacts of
raising the minimum wage, a variety of evidence indicates that it is an
inefficient method of assisting families of the working poor." Distribution
and Employment Impacts of Raising the Minimum Wage. Federal Reserve Board of San Francisco. Economic Letter, Number 99-06;
February 19, 1999. p. 3.
(4) Fuchs, Victor R., Alan B. Krueger, and James M.
Poterba. Economists’ Views About Parameters, Values, and Policies:
Survey Results in Labor and Public Economics. Journal of Economic
Literature, vol. 36, no. 3 (September 1998), pp. 1387-1425.
Minimum wage as welfare
The state administration proposes to hike the minimum wage so that poor working families will be able to adequately feed, clothe and house themselves—a laudable intention. However, most minimum wage earners are either teenagers, spouses of other wage earners, or restaurant servers and other tip workers (who may earn an additional $20 an hour or more).(1)
Cornell’s Professor Burkhauser testified before Congress recently that of the "additional wages generated by the last minimum wage hike, only 17% went to families of the working poor. The other 83 percent primarily went to second or third earners whose families had income that was often well above the poverty line.(2)
The poor working families problem is a welfare problem. It should be funded as such with expansion of the earned income tax credits together with rebates of the taxes poor families pay for food, rent and other essentials. The last thing we should do is hike the minimum wage.(3)
First, a minimum wage hike causes unemployment. All credible authorities, from University economists(4) to the Federal Reserve Bank,(5) are agreed on this issue. Despite this, on these pages last week,(6) our UH Center for Labor Education and Research, in fulfilling its taxpayer-funded role of providing "labor-related education to the public," wanted us to believe that past minimum wage hikes have "actually increased employment." What nonsense. If that were the case, why stop at the proposed $6.15 an hour? Why not have a minimum wage of $50 an hour and really increase employment?
Why minimum wages of any kind cause unemployment is simple. Some 95% of the nation’s workers are voluntarily paid more than the minimum wage by their employers. The market for qualified labor demands it. Those at the top of the compensation ladder earn more because of superior training, education, talent, communication skills, experience and energy. Moving down the ladder to the minimum wage levels, these attributes are less in evidence. On the lower rungs, there are even those who are worth less than today’s minimum wage; they are, by definition, unemployed. Minimum wage legislation has prevented these people from putting a foot on the bottom rung of the ladder to start on their way up and learn to communicate, get to work on time and achieve some work experience.
Second, it raises prices. Faced with an increased minimum wage, employers have only so many options since they can rarely absorb the increases. They may substitute machinery for people; an option that was possibly not economical at the lower minimum wage but now is at the higher one. Or employers may substitute a purchased service or product that has now become cost effective at the new higher wage rate. An example of this might be deciding to import prepared foods rather than preparing them at a restaurant. Lastly, some employers may have no choice but to simply try to pass along the full cost of the wage hike in higher prices to consumers.
You do not have to be an economist to know that higher prices for goods and services reduce consumers’ purchases of them. If we increase restaurant costs with a hike in the minimum wage the resulting higher restaurant prices lead to a decline in the meals that otherwise would have been purchased at the formerly lower prices. That is not rocket science. And the net result is a double whammy of both less employment and another hidden tax on the public.
However, legislators faced with passing a minimum wage hike (it’s compassionate) or treating it as welfare—which means cutting some budgets (cutting education!) or raising taxes (in an election year?)—will undoubtedly opt for the minimum wage hike. It is quite discouraging.