John Buell

Reflections on the Poor, the Minimum Wage

Democrats in the House of Representatives did their job last month by passing the first increase in the Federal minimum wage in a decade. Last week, the Senate complicated matters by passing a version of the bill laden with new subsidies to small businesses. The House version is the better bill. Businesses that pay the current minimum wage already depend on government largesse for their survival.

Conservative columnists often complain that the minimum wage is a feel-good strategy lacking substance. Boston Globe columnist Jeff Jacoby argues that supporters of the minimum wage feel they are doing noble work but can offer no proof that the minimum wage improves the lot of the poor. George Will suggests that government mandates disrupt the beneficial workings of the free market.

Jacoby is evidently unaware of an extensive literature that has reached conclusions at odds with his. In theoretical work about two decades ago, economist Sam Bowles directly attacked the standard conservative notion that increasing the price of anything, whether labor or tomatoes, necessarily reduces demand for it. A higher minimum wage may destroy jobs of employees of very unproductive firms, but increases in the minimum also allow many other low wage workers to go out and spend more on goods and services, thus increasing the demand for labor. Which of these two effects is stronger depends on particular circumstances.

With today's federal minimum wage only slightly more than half of what it was in real terms a generation ago, it is virtually inconceivable that the House bill's modest increase in the minimum wage will result in any net job destruction. This conclusion is supported by a growing number of case studies showing that states raising their minimums clearly outperformed neighboring states that failed to increase the minimum wage. If the House bill has any inadequacy, it lies in the failure to include a regular inflation adjustment in the minimum wage standard. With the minimum wage fixed in nominal terms, conservatives can chip away at the real worth of the standard simply by blocking adjustments in future Congresses. Low-wage workers are just as worthy of inflation adjustments as Social Security recipients.

Opponents of the minimum wage are wedded to a myth of the market that will not stand close scrutiny. They live in a world where "market forces" determine the incomes of CEOs. surgeons, accountants, corporate attorneys, factory workers janitors, gardeners, and waiters. Some markets, however, are freer than others. As a result of what is mistakenly called free trade, most unskilled workers face unrestricted international competition. Production is outsourced to poorer countries where union and wage standards are even weaker than in the US. Economic dislocation in these nations in turn leads to the rise of an undocumented and easily exploitable labor force here.

Corporate elites do not face the same competition. Copyright and patent protection is stringently enforced worldwide, corporate mergers are applauded, while even the most modest attempts by workers to merge into unions are fiercely resisted.

If opponents of the minimum wage really cared about the fate of the poor, they would take a closer look at another icon of conservative economics, the Federal Reserve.

The Fed historically aims to keep the rate of inflation very low. Most middle and working class citizens, however, are better off with a higher level of inflation and low unemployment. In that scenario, increases in wages keep pace with increases in productivity.

When the Fed is forced to defend its bias, it usually argues that modest inflation can easily become the hyperinflation of Weimar Germany. There is no evidence, however, that modest inflation rates (say 4-6%) automatically lead to escalating rates of inflation.

Allowing wages to increase too rapidly could erode profits and create long-term inefficiencies. Yet strong labor markets also can allow business and labor to work out profit sharing schemes that advance the economic interests of both parties, an outcome achieved at least partially in Scandinavian nations.

The Fed's fear of a healthy labor market where workers can have some real choices takes a terrible toll. The Fed intentionally slows economic growth, thereby laying off a substantial portion of the workforce and driving wages down. This is itself a major source of long tern inefficiency. Workers forced into unemployment must be supported. In addition, inefficient businesses can get away with paying poverty level wages-thanks to tax payer subsidies. Few citizens, especially those with families, can live on today's minimum wage. Governments must support these low wage employers with food stamps, welfare, and Medicaid.

Inequitable labor markets also help sustain negative attitudes toward the poor. Many conservatives portray the poor as lazy or morally deficient. Even many liberals argue that the poor lack the training and job experience to get ahead. If federal policy, however, never allows all who want a job to hold one, the most disadvantaged workers can never gain the experience needed to hold a job, let alone advance. The uneducated and inexperienced are the first to be laid off when the Fed tightens the screws. Their move into unemployment then is used to confirm the view that they are shiftless or need more training.

A higher minimum wage, though not a panacea, is an excellent tool to address some of these concerns. It stimulates worker- and consumer-led economic growth and gives both workers and business leaders incentives to form longer-term relations. It should be enacted into law, without any more favors to those who have already benefited disproportionately from the current corporate agenda.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email

From The Progressive Populist, March 1, 2007

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