Magic of the market vs. the minimum wage

The Maine Center for Economic Policy (MECEP) recently released a study confirming what many have long thought: The level of income inequality in Maine is growing, albeit more slowly than the national average.

Such stories often produce an air of resignation. Corporate globalization has cost the state some of its best manufacturing jobs. Yet even in the short term the state can mitigate the most deleterious trends.

One step would be to increase the state’s minimum wage. The Maine House recently approved a two-step increase of 50 cents in the minimum wage. The fate of this bill now depends on a closely divided Senate. In today’s political climate, making the case for even modest and long-overdue initiatives requires challenging both market fundamentalists and cultural conservatives.

Market fundamentalists have a familiar refrain. Raise the cost of any production input and the demand falls. If government mandates a higher minimum wage, employers will hire fewer workers.

Persuasive as this argument may seem, empirical studies fail to bear it out. Boston economist Holly Sklar’s recent work, “Raise The Floor,” summarizes numerous scholarly studies of state and local laws mandating substantial increases in the minimum wage. Living-wage ordinances did not destroy jobs, even for the inexperienced teenagers regarded as the most vulnerable.

Newspaper reporters invariably find stories of business owners worried about their ability to compete if they have to pay their bottom-tier employees more. A recent Maine Associated Press story cited a local pizza parlor owner’s concerns that he will have to pay both his entry-level and also his more experienced workers, whose hourly rates are pegged to the minimum-wage, higher salaries.

These business owners forget that their competitors will have to absorb the same cost increases. In addition, higher minimum wages can also decrease worker turnover and enable more pizza purchases by all minimum- wage employees.

The same arguments now advanced against the minimum wage were raised against child labor laws. Deprive a business of its “right” to hire children and it cannot be competitive.

Child labor may benefit an individual business, but when many children lack the opportunity to develop their minds and bodies, society suffers. Businesses that pay employees poverty-level wages are parasitic on a whole host of social services, including food stamps, Medicaid and the Earned Income Tax Credit.

Wal-Mart has become notorious for encouraging its low-wage workers to draw on Medicaid and food stamps. Problematic as much of Wal-Mart’s behavior is, in this case it is merely making explicit the ways in which government subsidies enable minimum-wage employment. The same business leaders who denounce minimum-wage laws as “interventions in a free market” would have fewer productive workers to hire without those government subsidies.

In inflation-adjusted terms, Maine’s current minimum wage has fallen from its peak of nearly $8 an hour in 1968. MECEP estimates that statewide an average adult worker with one child would need nearly $15 an hour to meet basic needs. Increases in the minimum wage alone cannot close that gap. Enhancements of the earned income tax credit, worker training and better workplace practices are all essential, and any policy mix will need periodic adjustments. Nonetheless, modest increases in the minimum wage would leverage additional gains in the Earned Income Tax Credit and might catalyze other steps.

Some cultural conservatives also complain that many minimum-wage workers are teenagers who don’t depend on these incomes. This is a curious argument that may reflect a bias against teenagers. Though only one out of three minimum-wage workers is a teen, many teens are already out of school and working full-time. Many others are saving for college, an aspiration endorsed by our society yet ever less supported by governments.

In addition, as Sklar points out, many jobs performed by teens are dangerous and-or have a substantial impact on public health. (Consider fast-food work.) Perhaps we as customers get what we pay for when we send our teens to low-wage jobs lacking sick days.

Minimum-wage opponents also argue that if our poor, our teens, our minorities worked harder, they would prosper. Low wages reflect low productivity. Yet in the years since the real value of the minimum wage has fallen by about 40 percent, average worker productivity has increased by nearly 75 percent. The minimum wage has fallen even as CEO compensation in some of the worst-run companies has skyrocketed.

Some pundits also suggest that single women, teens and minorities need to learn from history. Earlier generations of Irish, Polish and Italian Americans worked themselves out of poverty. This argument is true. They worked hard, they formed unions, they became the backbone of a New Deal coalition that enacted minimum- wage standards and demanded full employment policies of their leaders.

All American workers benefited, just as they will today if our state and federal leaders do the right thing.

John Buell is a political economist who lives in Southwest Harbor. Readers wishing to contact him may e-mail messages to jbuell@acadia.net.