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Minimum Wage Hike's Real Payoff

May 12, 1987|David M. Gordon | David M. Gordon is professor of economics at the New School for Social Research in New York

The minimum wage has been nearly forgotten. Lodged at $3.35 an hour since 1981, the real purchasing power of the minimum wage has declined by roughly one-fifth.

But it is about to return to the headlines. Three bills to revitalize it have already been introduced into the House, while Sen. Edward M. Kennedy (D-Mass.) has urged similar legislation in the Senate.

The basic arguments for reviving the minimum wage are straightforward. More and more workers in the United States face the hardship of surviving on low wages. In 1984, according to a recent study by economists Barry Bluestone and Bennett Harrison for the congressional Joint Economic Committee, roughly one-third of employees had annual earnings below $7,000. More striking still, nearly 60% of net additional employees in the labor force between 1979 and 1984 had earnings below that level.

Increasing the minimum wage by itself is hardly a panacea. Roughly 15% of private sector employees are not even covered by minimum wage legislation, and its standards are not always easy to enforce legally. But revitalizing the minimum wage would at least place some pressure on employers to provide something closer to a livable wage.

What should be the legislative target? In the short run, at least, it would probably make sense to try to return to the standards of the 1970s, when the minimum wage was pegged at roughly half of the average hourly earnings of non-farm production workers: If the minimum wage were still at that level in 1986, it would be $4.45 instead of $3.35.

Conservatives and many in the media are waiting with sharpened knives. Opponents insist that a higher floor on wages will make it even more difficult for U.S. products to compete in the global market--at a time when the trade deficit is already catastrophic. They also argue that a higher minimum wage will price low-productivity workers out of the market, reducing employment opportunities for the least skilled in the labor force. When in doubt, finally, they characterize minimum wage concerns as a sop to "special interests" such as the trade unions or minority workers.

These arguments do not merely manifest a self-proclaimed "tough-minded" preference for economic efficiency over economic decency. Worse than that, they sustain misguided economic policy.

Consider our trade position. Underlying competitiveness depends on movements in relative unit labor costs, the amount it costs to pay the labor necessary to produce a unit of output. But unit labor costs depend on both wages and productivity--on how much is paid a worker per hour of work and on how much output that worker can produce in an hour of work.

Viewed through that lens, the United States has fared badly in global markets over the past 25 years, not because U.S. workers' wages have increased too rapidly but because U.S. firms' productivity growth has been far too tepid. Between 1960 and 1984, for example, an index of U.S. manufacturing workers' compensation, relative to wages in major competing economies such as Japan and West Germany, declined by more than half, creating much more favorable conditions for competition. But in the same period, a comparable index of productivity relative to major competing economies fell by roughly 50%, eliminating most of the competitive gain.

Productivity growth has been so slow in the United States, at least partly because we rely on a "low-wage growth strategy." Our social policies enable firms to hire workers at low wages and to feel confident, in conditions of high unemployment, that they can easily find replacements. In such an environment, firms have few incentives to modernize or to make efficient use of their (inexpensive and dispensable) employees.

A "higher-wage growth strategy" makes much more sense. Rising wage floors can force firms to modernize or get out of the kitchen. As wages rise, firms no longer have an excuse to indulge in indolent management practices. And as our firms' productivity increases, so would our competitive position . . . and then our net exports . . . and through that, aggregate demand . . . and with that, finally, total U.S. employment.

For all that indirect chain of possible effects, won't rising wages increase the unemployment rate more directly by pricing low-skilled workers out of the market? Rising wages can help stimulate employment by making money available for consumption; this can help boost aggregate demand. More important, a combination of rising productivity growth and rising wages makes it much more likely that currently employed workers would be willing to engage in work-sharing, reducing their average weekly hours and helping spread employment.

It is notable, in this regard, that volumes of studies by economists on the ostensible employment-reducing effects of the minimum wage have produced a whimper, not a bang.

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