- The Washington Times - Tuesday, August 8, 2006

On August 3, the Senate “trifecta” bill to raise the federal minimum wage, cut estate taxes and extend special tax breaks was blocked by Democrats in a procedural vote. The majority leader reserved the right to bring the House-passed bill back for reconsideration in September. The bill would have increased the current $5.15 hourly federal minimum wage in three steps to $7.25 in June 2009, a 40 percent hike. It’s perhaps fortunate that the Senate bill failed to come to a final vote considering the mischief a higher minimum wage could have made. Currently, fewer than half the states have a state minimum wage higher than the federal minimum. Adjusting for inflation, the federal minimum has lost about one-fourth of its purchasing power since the 1997 increase to $5.15. A three-year raise in today’s minimum to $7.25 would about restore its relationship to the 1997 median wage. The minimum wage issue has a direct bearing on immigration reform. Last December the House passed a tough immigration bill that included provisions to strengthen border security and sanction employers who hire illegal workers. In contrast, the Senate-passed bill, favored by President Bush and a coalition of business and liberals, is weaker on enforcement and supports a guest worker program and a path to citizenship for illegal immigrants. For legal residents, a higher minimum wage, even though a relative catch-up, would mean employers could be expected to offer fewer entry-level jobs, locking out less educated young people from the opportunity to gain the work experience they need to get better paying jobs. To offset the higher labor costs, employers would be pressured to reduce hours worked, cut benefits, and push workers to work harder. As in the past, a higher minimum would have ripple effects, pushing up wage rates that are above the minimum. That would raise labor costs higher into the wage distribution, put additional upward pressure on prices, push more workers into the underground economy, increase government transfer costs, encourage labor-saving substitution, discourage employer-paid training, and cause small businesses to outsource, relocate or fail. The effect of a higher minimum wage on illegal immigration and its fallout is less clear cut. If existing laws prohibiting the hiring of illegal workers were strictly enforced, there would be less need for new legislation to control immigration. With fewer illegal workers, job opportunities and wages would rise and more legal workers would be employed. Unfortunately there is no demonstrated will to enforce our immigration laws, as history eloquently testifies, despite the recent token increase in employer prosecutions by the Bush administration. Even if an immigration bill with sharp teeth became law, there’s little reason to believe the administration would suddenly reverse its position on enforcement. If a higher minimum wage becomes law, how might it impact legal and illegal workers? By boosting wages both at and somewhat above the new minimum, it would attract more native Americans into employment. In the absence of effective immigration controls, it would also be a magnet attracting more Mexicans and other Latin Americans to illegally cross our border. Employers who evade the increased labor costs by paying illegal workers less than the new higher wage by going underground or paying off the books would eliminate potential new job opportunities for legal workers. Because illegal workers are exploitable, their dollar equivalent worth to some employers could be more than the new higher minimum wage, in which case the illegals would be retained at the expense of legal workers. Going off the books would also save employers the significant costs of employment taxes and non-wage benefits, which could lead them to fire legal workers and hire illegals. Honest business people who follow the rules would try to compete with employers who disregard the law. But the gap between off-the-books pay and legal compensation would force many small businesses to fail or succumb and break the law. It’s not yet clear the extent to which a higher minimum wage would affect legal versus illegal workers, a question in need of research. Meanwhile we need to strive toward creating an environment where markets set wages, but among legal employees and employers. Increasing the minimum wage is not a good idea on economic grounds. But if it happens, caution dictates that effective immigration reform with stringent enforcement come first. Come November, if voters speak out loudly enough on illegal immigration, perhaps the Senate and the administration will get the message. Alfred Tella is former Georgetown University research professor of economics.

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