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Memo to Greenspan: The Facts Support a Minimum Wage   Raise—Viewpoints | EPI

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Memo to Greenspan:
The Facts Support a Minimum Wage Raise

By Jared Bernstein

Federal Reserve Chairman Alan Greenspan may be doing a fine job managing the macroeconomy, but he’s got it all wrong on the minimum wage. In Congressional testimony over the past few weeks, the Fed chairman has repeatedly voiced his opposition to the president’s proposal to raise the minimum wage by one dollar, to $6.15, by September 2000.

The problem facing Greenspan and other opponents of the policy is that the last increase was such a resounding success. Thanks to both the tight labor market and the $0.90 increase in the minimum wage legislated in 1996, low-wage workers are finally gaining back some ground lost over the past two decades of real wage decline. Moreover, since the increase, unemployment fell to its lowest level in decades.

When confronted with this evidence, Greenspan has taken two tacks. First, he argues that the reason we haven’t seen any negative employment effects from the 1996 increase is that the minimum wage is “inoperative” in the current labor market. By this he means that, with wages rising for most workers due to the hot economy, nobody’s affected by a federal minimum wage of $5.15. Nonsense. We have solid evidence that a non-trivial share of workers, about 9% of the labor force (close to 10 million workers), got an average wage hike of around $0.40 per hour from the last increase.

So if the minimum wage is clearly operative on the wage side, why haven’t we seen any negative effects on the employment side? Here we have Greenspan’s other response. Although he acknowledges that the increase in the minimum has not harmed the employment prospects of low-wage workers, he claims it’s because the labor market is so strong right now. The unemployment rate for young workers (16-24 year olds), those most likely to be affected by a minimum wage increase, is at its lowest level since 1970.

That’s pretty circular reasoning for a guy who’s usually the picture of rationality. First, he tells us we shouldn’t raise the minimum wage because it will dampen demand for low-wage workers. But, the last time we raised it, low-wage workers’ wages went up, along with demand for their services, and their unemployment rates fell to historical lows. That’s only because labor demand is so strong right now, he says. But if raising the minimum wage was supposed to reduce labor demand, how do we account for the tight labor market …oh well, you get the point.

Mr. Greenspan’s opposition is predictable. He is consistently critical about most efforts of the government to occasionally guide the “free hand” of the marketplace (apparently, hedge fund bailouts are okay). But the fact is that the last increase had precisely its intended effect — it raised the wages and income of low-wage workers and their families without lowering their employment opportunities. Just as importantly, after decades of falling behind, the increase helped to reconnect the economic fortunes of those laboring away in the low-wage sectors to the growth in the overall economy.

Of course, no one is arguing that the minimum wage could be raised indefinitely without adverse consequences. But there is clearly a range in which modest minimum wage increases lift wages for the least well off workers without jeopardizing their employment prospects. One possibility is that the higher minimum helps firms reduce turnover and fill vacancies, generating efficiency gains that allow firms to absorb the increase in labor costs. This may help explain why — as Mr. Greenspan now acknowledges — increases in the minimum wage do not always reduce employment.

Even with the last increase, after adjusting for inflation, the minimum wage is still 20 percent below its late 1970s peak. Increasing productivity, the soaring stock market driving historically high corporate profits, and rising real wages for large segments of the workforce have been hallmarks of the U.S. economic recovery in the latter half of the 1990s. Given this scenario, we can certainly afford to increase the minimum wage by another dollar. Alan Greenspan has a well-deserved reputation for looking at the evidence. In this case, the evidence supports another increase.


Jared Bernstein is an economist at the Economic Policy Institute. He specializes in labor markets and wage inequality and is a co-author of The State of Working America 1998-99.

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