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Minimum Wage: Balancing Liberty and Equality PDF Print E-mail
Written by Rosalyn Crain   
Wednesday, 01 March 2006
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The federal minimum wage hasn't moved for nearly a decade. Is it time for a raise, or is an increase just problematic policy?
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March 1, 2006

 

The federal minimum wage just ain't what it used to be. In fact, when you factor in inflation, it's about 30% lower than it was in 1968. Is it a sign of the times, a symptom of Tom Friedman's flattening world? Or is the flat lined growth of the minimum wage simply bad policy?

The issue is often framed in terms of free market principles vs. government intervention, but the state has played a direct, if limited, role in the economy since the republic's early days. But the debate is not all dollars and cents. Deeper social issues come into play as legislators attempt to reconcile an individual's right to pursue his or her business with the best interests of an egalitarian society. As de Tocqueville noted, "liberty is not the principal and constant object of desire; what they love with an eternal love is equality."

Perhaps the search for answers on the minimum wage issue overlooks a more obvious solution: lowering the cost-of-living rather than artificially elevating wages. A globally competitive and emerging Indian middle class, for example, leads a comfortable life at roughly one quarter the wages of comparable American workers—because basic costs such as food, education and health care are a fraction of what they are in the United States. It's an idea, but is it achievable?

Social—not economic roots

President Franklin D. Roosevelt signed the Fair Labor Standards Act (creating the federally mandated minimum wage) in 1938. It has been a flashpoint for debate ever since. Last set by the United States Department of Labor at rate of $5.15 per hour for "covered" nonexempt employees, it hasn't budged for nine years. In that time, the country has experienced record economic growth and soaring CEO salaries, while a growing class of working poor has drawn the attention of legislators and economists alike.

Proponents of a minimum wage increase argue that a boost is essential for individuals and families struggling to secure life's most basic necessities. Opponents argue that raising the rate will wreak havoc on the American economy by pricing out low-skill workers and adding unnecessary financial pressure to small businesses. And while the arguments persist in think tanks and congressional committees, homelessness, health care and affordable housing concerns continue to grow.

If the status quo hasn't changed since the last minimum wage increase in 1996-1997, it's not for lack of effort. Several minimum wage bills have been introduced—and shot down—in Congress. And with the federal government's attention on more pressing issues like the Iraq war and homeland security, matters like minimum wage reform have largely fallen to the states. Several states are predicted to see increased policy activity on the issue. Ohio, Michigan and Arizona are expected to see initiatives on the ballot this year. Currently, 17 states and the District of Columbia have enacted state minimum wage laws higher than the federal rate and most recently on January 1, Santa Fe, New Mexico increased its minimum wage from $8.50 to $9.50 an hour, the highest in the country.

While burger flipping teens in Santa Fe may be better off than their peers in other cities, the policy issue remains: At $9.50 an hour, how much can you charge for a milk shake and still stay in business?

Two sides of the same coin

Legislators—not surprisingly—are divided on the issue. In Kentucky, the state legislature is currently weighing legislation that would increase the state minimum wage from the federal level of $5.15 to $6.00 this year and $6.50 next year. Representative J.R Gray, who introduced the legislation, believes increasing the minimum wage will only benefit the state. "I believe an increase will have a positive effect. Lower wage earners that will benefit will plow the money right back into the economy."

Gray also emphasizes current economic conditions, the effects of cost-of-living increases on the working class. "People have to make tough choices between health care, heating their home and paying for their groceries. Part of my motivation for this is the belief that everyone should have the opportunity to make a decent wage to take care of their families". While he agrees that there are other policy solutions to consider, he maintains that raising the minimum wage is "one of the most immediate actions that can be used" to help low- and moderate-income families.

New Mexico Representative Ted Hobbs disagrees. If New Mexico's pending minimum wage bill passes, it would increase the state minimum wage from the federal rate to $6.00 an hour next year and $6.75 in 2008. Hobbs has spoken out fervently against the measure. "We are a very poor state and there is no question that an increase to the minimum wage will negatively impact businesses and employment." And according to Hobbs, there are other inadvertent consequences to an increase.

"Another side issue is the unintended consequences to health care and other fringe benefits offered to employees." To accommodate an increased wage, Hobbs explains that employers may have to cut benefits. Ironically, he cites a concern for low-wage earners in his opposition to increasing the minimum wage. Hobbs stresses education as the critical tool in improving the lives of the working poor, explaining that increased skill increases an individual's marketability. "In the end, the market should set wages," he argues.

The experts weigh in.

Like politicians, re-searchers love to debate the minimum wage issue as well. Using various theories and economic models, their conclusion when stacked against one another—are at best in-conclusive. According to research from the Economic Policy Institute, effects from an increased minimum wage to businesses are mini-mal to nonexistent. And when specifically examining employments, a 1998 study conducted by the EPI "failed to find any systematic, significant job loss associated with the 1996-97 minimum wage increase," and that following the increase, "the low-wage labor market performed better than it had in decades."

Other studies show divergent results. According to research from the Cato Institute, an increased minimum wage will present an "artificial barrier" to low-wage workers rather than increasing their job mobility. The free-trade think tank contends further that increased wages result in lost worker mobility as employees lose incentive to bolster their skills. Finally, Cato submits the law of demand, arguing that if the price of labor increases, then the demand for workers—especially of the low-skilled variety—will decrease.

A matter of principle?

Ultimately, the debate over the minimum wage alludes to a greater ideological trade-off: free markets and limited government versus social responsibility. Policy makers on both sides of the aisle express similar concern for low-income families, racial minorities and small businesses, but the ideological divide prevents consensus public policy from emerging from the forge. And as the global market continues to change the rules, politicians—and the Americans they represent—may be better served by framing the issue in its broader terms—and looking for more creative solutions. Since this could mean massively reducing costs rather than benefits, our legislators may find themselves reexamining the billions of dollars spent on the Iraqi war or misspent on the graft worked into the Katrina clean-up. Perhaps these dollars could have been better directed to defraying medical insurance premiums for the middle class, boosting teachers' salaries at inner city schools or building lower-cost housing in under-populated rural areas.

About Rosalyn Crain

Rosalyn Crain is a freelance writer and policy associate for a Washington, D.C. trade association.





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