Presidential candidate John Kerry is his own worst enemy. On the one hand he has pledged to increase jobs by 10 million in four years and reduce the offshoring of jobs. On the other, he proposes a minimum wage increase that will lower employment and encourage shipping jobs overseas.
On June 18 Mr. Kerry proposed a 36 percent increase in the federal minimum wage, from the present $5.15 an hour to $7 an hour by 2007. This proposed $1.85 raise substantially exceeds past increases. The minimum wage was raised by 45 cents in 1990 and by the same amount in 1991, and by 50 cents in 1996 and 40 cents in 1997. According to Mr. Kerry, 7.4 million workers would benefit directly by having their wages boosted to the new minimum.
The higher minimum, says Mr. Kerry, would help teenagers, primary breadwinners, and working women, including 3 million mothers in low-wage jobs. What he hasn’t said is who would lose jobs or not get hired because of a higher minimum wage. That’s what happens when employers, mainly in small companies, can’t afford to pay the higher wage. Consequently, they are forced to fire or otherwise not hire some workers or to cut back on employee working hours. Higher labor costs also push employers to introduce labor-displacing technology and look for ways to squeeze more out of their remaining workers.
And, as has been happening with increasing frequency, when labor costs rise, businesses export jobs to take advantage of cheaper labor in other countries. Not least, higher labor costs put more inflationary pressure on the economy.
There have been numerous studies measuring the extent a minimum wage increase affects employment. The more credible show a higher minimum cuts jobs. A Congressional Joint Economic Committee report says estimates of job losses from raising the minimum wage 90 cents in 1996-97 have ranged from 100,000 to 625,000. By comparison, Mr. Kerry’s more ambitious 36 percent increase, based on estimates in the low end of the range, translates into a not insubstantial 300,000 to 800,000 loss in employment. Much of the burden would fall upon teenagers and first-time jobseekers, though adults, including working mothers, also would be affected adversely.
Closing the door on entry-level jobs has long-lasting effects, crippling workers’ lifetime earning potential. Preventing or delaying a young person from taking his or her first step on the job ladder means loss of work experience and the opportunity to learn on-the-job skills.
A higher minimum wage also reduces the pay differentials between wage groups. As workers strive to regain their positions in the wage distribution, wage rates above the minimum are pushed up, which causes jobs losses for yet more workers. According to a report accompanying the Kerry proposal, besides the minimum wage workers directly affected, another 8.2 million workers making between $7 and $8 an hour would be indirectly pushed up the wage scale.
Studies show there are other unwanted consequences of raising the minimum wage. A higher minimum makes it harder for people who want to leave welfare to get a job. They get crowded out of the job market by new labor force entrants attracted by the higher minimum. The higher minimum wage also attracts more students into dropping out of school before graduating, to their and the economy’s long-term detriment.
President Bush has supported a higher federal minimum wage, but recognizing it negatively affects employment, potentially more in some states than others, he would give states discretion to put it into effect or not.
Who is Mr. Kerry kidding? There are millions of American workers who are glad to have a job that hasn’t been exported, and don’t want to have their job wiped off the books because politicians have callously pushed up their employer’s labor costs. Back to the drawing board, Mr. Kerry.
Alfred Tella is former Georgetown University research professor of economics.