MINIMUM WAGE Essay Summary Example For Students

MINIMUM WAGE Essay Summary History of the Minimum Wage 1938 The minimum wage was first enacted into law as part of the Fair Labor Standards Act (FLSA) of 1938. The original minimum wage applied to workers engaged in interstate commerce and the production of goods for interstate commerce. In 1938, this applied to roughly 11.0 million workers out of a total of 54.9 million workers. The minimum wage was set at $0.25 per hour. 1961 Amendments to the minimum wage law extend coverage primarily to employees in large retail and service trades as well as local transit, construction, and gasoline service station employees. 1966 Amendments to the minimum wage law extend coverage to state and local government employees of hospitals, nursing homes, and schools and to employees of laundries, dry cleaners, large hotels and motels, restaurants, and farms. Subsequent amendments extended coverage to the remaining federal, state and local government employee not protected in 1966, to certain workers in retail and service trad es previously exempted, and to certain domestic workers in private household employment. The 20-percent increase in the federal minimum wage scheduled to occur over the next year may not be the best way to boost the incomes of low-skilled workers and their families. This article explores the purpose and impact of the minimum wage in an effort to discover whether it is a good idea. Proponents of the minimum wage argue that it ensures a living wage for workers who might otherwise be underpaid, while opponents claim it costs hundreds of thousands of workers their jobs and reduces new hires of unskilled workers. About 10 percent of workers will be directly affected by the two increases in the minimum wage Congress authorized in 1996. The first increase, which took effect on October 1, boosted the minimum wage from $4.25 to $4.75. The second increase, scheduled for September 1, 1997, will raise the wage floor to $5.15. A Brief History?A public outcry over wages and working conditions in turn-of-the-century sweatshops led to the first minimum wages in the United States. Several states, beginning with Massachusetts in 1912, regulated minimum wages, maximum hours and working conditions for women and minors. A national minimum wage was created in 1938 when President Franklin D. Roosevelt signed the Fair Labor Standards Act (FLSA). Initially set at 25 cents per hour, the wage floor applied to industries engaged in interstate commerce and covered about one-fifth of the labor force. The FLSA also required overtime pay and set restrictions on child labor. The basic goal of the minimum wage is to guarantee workers a fair wage. Congress determines increases in the federal minimum wage and has usually set it at about one-half the average manufacturing wage. (Table 1 summarizes the history of the federal minimum wage.) Since the minimum wage is set in nominal terms, its real value declines as prices rise until Congress raises the wage floor again, creating the sawtooth pattern evident in Chart 1. ?As shown in the chart, the minimum wage fell dramatically relative to the average manufacturing wage during the 1980s, prompting one-third of the states to impose state minimum wages above the federal level. Over time, Congress has greatly expanded the coverage of the FLSA, and almost 90 percent of workers now must be paid at least the minimum wage. Most businesses with annual sales of less than $500,000 are exempt from the minimum wage standard. Concerns that the wage floor would reduce employment for certain groups of workers led to the creation of subminimum wages. The federal wage floor has usually been lower for students, and in 1989, the subminimum wage was expanded to cover all teenagers. Under the 1996 law, employers will still be able to pay teenagers $4.25 for up to 90 days. Tipped employees may also be paid less than the wage floor since the law currently includes a tip credit that allows employers to pay workers $2.13 an hour and credit tips for the rest of the wage floor. l topWho Earns the Minimum Wage?Before we assess the effects of minimum wage hikes, it is useful to examine the demographics of those earning the minimum wage to determine whether the policy helps low-skilled workers who support families or merely boosts the incomes of middle-class teenagers. Relatively few workers earn exactly the minimum wageonly 5.3 percent in 1995. Fewer than 10 percent of workers earned between $4.25 and $5.15. ?There are two main types of minimum wage workers: youths who are earning a starting wage, often while still in school, and adult women for whom the minimum wage is a primary source of household income. In 1995, more than one-third of all workers earning the federal minimum wage were teenagers, and another one-fifth were aged 20-24. The vast majority were part-time workers, and over 60 percent of workers paid the federal minimum wage were female. Table 2 summarizes the characteristics of minimum wage workers. Minimum wage workers are highly concentrated in the retail trade and service sectors and in small businesses. Over four-fifths of workers paid the federal minimum wage in 1993 were employed by retail trade or service establishments. More than one-half of all workers earning the minimum wage were employed at establishments with fewer than 25 employees, and about 85 percent were employed by establishments with fewer than 100 employees. In addition, a higher fraction of workers employed by small businesses are paid the minimum wage; almost 4 percent of employees at establishments with fewer than 25 employees earned the minimum wage, compared with less than 1 percent at establishments with more than 250 employees. Many economists believe that the minimum wage raises the wages of middle-class teens while doing little to help the working poor get out of poverty. Edward Gramlich (1976) found that any income gains among teenagers resulting from the minimum wage are about evenly split between high-income and low-income families. The vast majority of minimum wage workers are not the primary wage earner in a poor family; Richard Burkhauser and T. Aldrich Finegan (1989) estimated that in the mid-1980s only 7 percent of low-wage workers were heads of families living in poverty. Burkhauser, Kenneth Couch and David Wittenberg (1996) found that almost 40 percent of all workers directly affected by the minimum wage increases in 1990 and 1991 were from families in the top half of the income distribution, with 4 percent of affected workers in the top decile. The minimum wage does have the potential to raise the incomes of some poor households, particularly those headed by women. About 40 percent of poor adults worked in 1994, and low-wage workers contribute about one-half of household earnings. Over one-fourth of all workers in the lowest family income decile were affected by the 1990 and 1991 federal minimum wage increases, according to Burkhauser, Couch and Wittenberg. Because women tend to have lower earnings than men, working women are more likely to be in poverty. In 1987, the earnings of nearly 18 percent of working female household heads were less than the poverty level. However, the minimum wage is not high enough to lift most single-earner families out of poverty. After the federal minimum reaches $5.15 in 1997, a full-time, year-round worker will earn about $10,700 annually before taxes, less than the poverty level for a family with two children. More than one-half of all families headed by single women with children were below the poverty level in 1993. In addition, low-skilled adults may be the most likely to be laid off when the minimum wage is raised. Minimum wage increases may draw more-skilled workers into the labor market and cause employers to switch from low-skilled workers to high-skilled ones. Indeed, Kevin Lang (1994) found that minimum wage increases appear to have caused restaurants to substitute teenagers for lower skilled adult workers. Similarly, research by David Neumark and William Wascher (1995) suggests that employers substitute higher skilled teens for lower skilled teens when the minimum wage is raised. Youths who earn the minimum wage are soon likely to earn higher wages, while adults with low levels of education are more likely to get stuck at the wage floor. Ralph Smith and Bruce Vavrichek (1992) followed a group of workers earning the minimum wage in the mid-1980s and found that over 60 percent of them were earning higher wages after one year, with a median wage gain of 20 percent. However, over one-third of those workers who were still employed a year later did not experience any wage increase, even before adjusting for inflation. These workers tended to be older and have less education than workers who experienced a wage increase. These demographics suggest that a substantial minority of low-wage workers might receive even lower wages in the absence of a minimum wage. Teens and low-skilled women are the primary earners of the minimum wage. If the minimum wage is designed to ensure a living wage for families, it fails to accomplish this because it does not raise a single-earner household with children out of poverty. Although the minimum wage raises some workers wages, it also may hurt the very workers it is designed to help since businesses may respond to minimum wage increases by reducing the number of employees, cutting the number of hours worked by employees and/or raising prices. l topEffects of Minimum Wage IncreasesNeoclassical economic theory predicts that a minimum wage increase will reduce the number of low-wage workers demanded by employers. Under this model, employment of workers who initially earned less than the new wage floor should fall when the minimum wage is increased. If employers need to raise the wages of other workers to maintain a wage hierarchy within the firm, the ripple effect can cause even greater employment losses. Economists have tested this theory by examining the effect of minimum wage increases on employment among teenagers. Most studies have found that an increase in the minimum wage slightly lowers teenage employment. l 1 1 In their 1982 survey of minimum wage research, Charles Brown, Curtis Gilroy and Andrew Kohen conclude that a 10-percent increase in the minimum wage reduces teen employment by 1 to 3 percent. In a recent study, Donald Deere, Kevin M. Murphy and Finis Welch (1995) conclude that the 1990 and 1991 increases in the federal minimum wage caused teen employment to be at least 10 percent lower than it would otherwise have been. Several recent studies, however, have found that minimum wage increases appear not to reduce employment among low-wage workers. David Card and Alan Krueger (1995) find that increases in federal and state minimum wages during the 1980s and early 1990s did not reduce employment among teenagers or workers at fast-food restaurants. Indeed, their research suggests that the increases may even have slightly raised employment. In a particularly controversial study, Card and Krueger find that a 90-cent increase in New Jerseys minimum wage in 1992 appears to have increased employment at fast-food restaurants relative to neighboring Pennsylvania, which did not experience a minimum wage increase. This research, and its implications for public policy, has been strongly criticized on methodological and theoretical grounds. There are several potential reasons employment might not fall when the minimum wage rises. First, an increase in the minimum wage simply might not be large enough to raise wages. Even if the minimum wage hike raises workers pay, there are several possible scenarios in which employment might not fall or might even increase. One such possibility is monopsony, in which a firm can attract more workers if it increases the wage. If workers with similar skills have different reservation wagesthe lowest wage at which they are willing to workthen an employer will first hire those workers with the lowest reservation wages. As a firm hires more workers, it must raise the wage, but employers may not be willing to pay higher wages to all workers to attract additional workers. Under this theory, a minimum wage increase forces the employer to offer a higher wage and increases the number of persons willing to work, thereby possibly increasing employment. l 2 Another possibility is that existing work ers become more productive when the minimum wage is raised or higher skilled workers enter the labor market, and increased output balances out the higher cost of labor to employers. Civil Disobedience in American History EssayAlthough the minimum wage rose in 1997 to $5.15 an hour, this increase did not restore the minimum wage to its historic value. In the past, the minimum wage provided enough income to lift a family of three out of poverty. During the 1960s and 1970s, the poverty level for a family of three was roughly equal to the yearly earnings of a full-time, year-round worker earning the minimum wage. The minimum wage, however, remained unchanged at $3.35 an hour from 1981 until April 1990, and thus, minimum wage earnings slipped significantly below the poverty level. Recent increases have not restored all the lost value. To reach the poverty level for a family of three in 1999 ($13,290), a full-time, year-round worker would need to earn $6.39 an hour$1.24 more than the current minimum wage level. A 1999 study by the U.S. Conference of Mayors found that 67 percent of adults seeking emergency food aid were workers. Officials in 58 percent of the cities surveyed identified low-paying jobs as a primary cause of hunger. ?A full-time, year-round minimum wage worker in 1999 earned only $10,712$2,578 less than the $13,290 needed to raise a family of three out of poverty. Note: Annual minimum wage earnings are calculated by assuming a person worked 40 hours a week for 52 weeks. (p) Preliminary. This number is a preliminary estimate from the U.S. Census Bureau. The final 1999 poverty line estimate will be available from the Census Bureau later this year. Sources: U.S. Census Bureau, Table 6. http://www.census.gov/hhes/poverty/histpov/hstpov1.html; U.S. Department of Labor, http://www.dol.gov/dol/esa/public/minwage/chart.htm; U.S. Census Bureau, Poverty in the United States: 1997, p. 60-201, September 1998; U.S. Census Bureau, Poverty in the United States: 1998, p. 60-207, September 1999; U.S. Census Bureau, http://www.census.gov/hhes/poverty/threshld/99prelim.html, Jan. 19, 2000. February 15, 1995 50 Years of Research on the Minimum WageIntroductionFor many years it has been a matter of conventional wisdom among economists that the minimum wage causes fewer jobs to exist than would be the case without it. This is simply a matter of price theory, taught in every economics textbook, requiring no elaborate analysis to justify. Were this not the case, there would be no logical reason why the minimum wage could not be set at $10, $100, or $1 million per hour. Historically, defenders of the minimum wage have not disputed the disemployment effects of the minimum wage, but argued that on balance the working poor were better off. In other words, the higher incomes of those with jobs offset the lower incomes of those without jobs, as a result of the minimum wage l levitan. Now, the Clinton Administration is advancing the novel economic theory that modest increases in the minimum wage will have no impact whatsoever on employment. This proposition is based entirely on th e work of three economists: David Card and Alan Krueger of Princeton, and Lawrence Katz of Harvard. Their studies of increases in the minimum wage in California, Texas and New Jersey apparently found no loss of jobs among fast food restaurants that were surveyed before and after the increase l card-92b, l krueger, and l katz. While it is not yet clear why Card, Katz and Krueger got the results that they did, it is clear that their findings are directly contrary to virtually every empirical study ever done on the minimum wage. These studies were exhaustively surveyed by the Minimum Wage Study Commission, which concluded that a 10% increase in the minimum wage reduced teenage employment by 1% to 3%. The following survey of the academic research on the minimum wage is designed to give nonspecialists a sense of just how isolated the Card, Krueger and Katz studies are. It will also indicate that the minimum wage has wide-ranging negative effects that go beyond unemployment. For example, higher minimum wages encourage employers to cut back on training, thus depriving low wage workers of an important means of long-term advancement, in return for a small increase in current income. For many workers this is a very bad trade-off, but one for which the law provides no alternative. ?Summary of Research on the Minimum WageThe minimum wage reduces employment. Currie and Fallick (1993), Gallasch (1975), Gardner (1981), Peterson (1957), Peterson and Stewart (1969). The minimum wage reduces employment more among teenagers than adults. Adie (1973); Brown, Gilroy and Kohen (1981a, 1981b); Fleisher (1981); Hammermesh (1982); Meyer and Wise (1981, 1983a); Minimum Wage Study Commission (1981); Neumark and Wascher (1992); Ragan (1977); Vandenbrink (1987); Welch (1974, 1978); Welch and Cunningham (1978). The minimum wage reduces employment most among black teenage males. Al-Salam, Quester, and Welch (1981), Iden (1980), Mincer (1976), Moore (1971), Ragan (1977), Williams (1977a, 197 7b). The minimum wage helped South African whites at the expense of blacks. Bauer (1959). The minimum wage hurts blacks generally. Behrman, Sickles and Taubman (1983); Linneman (1982). The minimum wage hurts the unskilled. Krumm (1981). The minimum wage hurts low wage workers. Brozen (1962), Cox and Oaxaca (1986), Gordon (1981). The minimum wage hurts low wage workers particularly during cyclical downturns. Kosters and Welch (1972), Welch (1974). The minimum wage increases job turnover. Hall (1982). The minimum wage reduces average earnings of young workers. Meyer and Wise (1983b). The minimum wage drives workers into uncovered jobs, thus lowering wages in those sectors. Brozen (1962), Tauchen (1981), Welch (1974). The minimum wage reduces employment in low-wage industries, such as retailing. Cotterman (1981), Douty (1960), Fleisher (1981), Hammermesh (1981), Peterson (1981). The minimum wage hurts small businesses generally. Kaun (1965). The minimum wage causes employers to cut bac k on training. Hashimoto (1981, 1982), Leighton and Mincer (1981), Ragan (1981). The minimum wage has long-term effects on skills and lifetime earnings. Brozen (1969), Feldstein (1973). The minimum wage leads employers to cut back on fringe benefits. McKenzie (1980), Wessels (1980). The minimum wage encourages employers to install labor-saving devices. Trapani and Moroney (1981). The minimum wage hurts low-wage regions, such as the South and rural areas. Colberg (1960, 1981), Krumm (1981). The minimum wage increases the number of people on welfare. Brandon (1995), Leffler (1978). The minimum wage hurts the poor generally. Stigler (1946). The minimum wage does little to reduce poverty. Bonilla (1992), Brown (1988), Johnson and Browning (1983), Kohen and Gilroy (1981), Parsons (1980), Smith and Vavrichek (1987). The minimum wage helps upper income families. Bell (1981), Datcher and Loury (1981), Johnson and Browning (1981), Kohen and Gilroy (1981). The minimum wage helps unions. Linne man (1982), Cox and Oaxaca (1982). The minimum wage lowers the capital stock. McCulloch (1981). The minimum wage increases inflationary pressure. Adams (1987), Brozen (1966), Gramlich (1976), Grossman (1983). The minimum wage increases teenage crime rates. Hashimoto (1987), Phillips (1981). The minimum wage encourages employers to hire illegal aliens. Beranek (1982). Few workers are permanently stuck at the minimum wage. Brozen (1969), Smith and Vavrichek (1992). The minimum wage has had a massive impact on unemployment in Puerto Rico. Freeman and Freeman (1991), Rottenberg (1981b). The minimum wage has reduced employment in foreign countries. Canada: Forrest (1982); Chile: Corbo (1981); Costa Rica: Gregory (1981); France: Rosa (1981). Characteristics of minimum wage workers Employment Policies Institute (1994), Haugen and Mellor (1990), Kniesner (1981), Mellor (1987), Mellor and Haugen (1986), Smith and Vavrichek (1987), Van Giezen (1994Words/ Pages : 5,749 / 24