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The Mythology of Minimum Wage

Any increase is likely to hurt the very people who need the most help.

12:00 AM, Aug 16, 2006 • By WHITNEY BLAKE
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THE RECENTLY DEFEATED minimum wage hike proposal in Congress has resulted in a regurgitation of economic misinformation. Here's a sampling of the propaganda:

Myth No. 1: Millions of "working poor" are trying to feed a family of four on a single income of $5.15 an hour. It's simply not fair or ethical for someone in modern America to work 40 hours a week and not earn enough money to afford the basic necessities (which, by the way, includes color TVs, appliances, cars, the latest designer sneakers, etc.).

We've all heard rhetoric similar to this ad nauseam. A recent Reuters article stated that the minimum wage "equat[ed] to $10,700 a year for full-time work, well below the roughly $20,000 needed to keep a family of four above the federal poverty level." The article then cited Labor Department statistics that there are now 1.9 million workers earning an hourly wage at or below $5.15, "with most of those people working in service-oriented jobs." Conflating these two statistics leads one to believe that almost 2 million people in the United States are trying to keep families financially afloat, when, in reality, the vast majority of minimum wage earners contribute second and third incomes to a household. On average, a family with a minimum-wage worker has a total income of $43,000, according to the U.S. Census Bureau.

According to the Bureau of Labor Statistics, in 2005, only about 2.5 percent of all hourly-paid workers earned $5.15 or less. More than a quarter of these workers are between the ages of 16 and 19. About 60 percent are part-time workers. Only 1.5 percent of hourly-paid workers over the age of 25 made minimum wage. A minimum wage hike, then, would not be pulling families above the poverty line, but putting a few extra dollars into the pockets of teenagers and college students working in retail or at fast food joints. Historically, most beneficiaries of minimum wage hikes have been white and middle or upper-middle class, which brings us to . . .

Myth No. 2: Increasing the minimum wage will help poor people and minorities. In fact, scores of economic studies have shown that minimum wage increases do not help the very class they are supposedly designed to assist--poor, underprivileged, uneducated minorities. In fact, such legislation may actually harm this group.

David R. Henderson of the National Center for Policy Analysis (NCPA) noted in a brief analysis released in May that an increase in the minimum wage "entices some teenage students to drop out," leads to cuts in benefits such as health insurance, and increases poverty. He cited a 1997 National Bureau of Economic Research study, which concluded that the higher minimum wage rates passed by Congress in 1996 and 1997 increased the number of poor families by 4.5 percent.

The Mackinac Center for Public Policy points to Labor Department statistics of 20,000 jobs lost after the legislation passed, and unemployment rates increasing from 37 to 41 percent for African-American male teenagers.

Similarly, the NCPA found that the poverty rate went from 12.8 percent to 14.5 percent following wage hikes in 1990 and 1992. Even Chicago mayor Richard Daley opposed the city council's decision to boost the city's minimum wage from $6.25 to $9.25, labeling the move as one that is "basically going to hurt the minority community," as large retailers consider relocating proposed stores to the suburbs.

For one, increasing the minimum wage forces businesses to pass the higher costs along to the consumer and/or hire fewer people over time. They might not fire anyone immediately, but they might be less inclined to add more workers or replace those who leave.

Raising the minimum wage also makes it harder for those with few skills to find a job. If someone has skills worth $5 per hour, an employer is unlikely to hire him for $7.

Myth No. 3: If Congress doesn't increase the minimum wage, the "working poor" will continue to work for slave wages and be oppressed by greedy corporations. To the contrary, business owners do not need a federal mandate to ensure that an employee is paid according to the worth of his work.

Service sector companies such as Marriott have found that the high turnover rates common in unskilled positions are inefficient and costly. To reduce the turnover rate, they provide competitive salaries, and benefits such as health insurance, day care, and education opportunities, with the hopes of encouraging their employees to stay longer.

Wal-Mart just announced this week an increase in wages at more than 1,200 stores by about 6 percent (along with higher wage caps for each position). The average full-time hourly wage for Wal-Mart associates--at $10.11--is almost twice the current minimum wage. Wal-Mart also provides benefits including health care, 401(k) plans, and profit-sharing.