Lifting the Minimum Wage Works Against the Neediest

Edward M. Kennedy and Augustus F. Hawkins are liberals. Liberals, as in help the underprivileged. Root for the underdog. Tax the rich, give to the poor.

But now, Kennedy (D-Mass.), chairman of the Senate Labor Committee, and Hawkins (D-Los Angeles), chairman of the House Labor Committee, propose stripping 300,000 low-paid teen-agers of their jobs.

They wouldn’t dare? They would and have. What they propose is raising the minimum wage from $3.35 an hour to $4.65 an hour (in stages over three years). Thereafter, the minimum wage would be set equal to half the average wage for non-supervisory private workers.

But higher wage rates mean fewer jobs. Inexperienced, low-wage teen-agers are especially vulnerable. The government can hike low wages. But it cannot force employers to hire. Hundreds of thousands of currently employed teen-agers do not produce $4.65 worth of output per hour. They will lose jobs. Exactly how many is impossible to pinpoint. The 300,000 figure represents a mid-range of currently accepted estimates.

Kennedy and Hawkins want to raise incomes of low-income workers. The goal is laudable. The method is not. There are better ways to accomplish the same thing.

Kennedy and Hawkins are correct: Wages of low-income workers are not keeping pace with the rest of the economy. The minimum wage has not been raised for six years; in the interim, inflation has eroded its purchasing value. Labor expert Sar A. Levitan estimates that the minimum wage buys fewer goods and services today than at anytime during the past 33 years. Even working full time at the current minimum, a mother cannot earn enough to keep her family out of poverty. At the minimum proposed by Kennedy and Hawkins, she could. The legislation will “make the minimum wage a living wage,” Kennedy has said. And it will--for those lucky enough to keep their jobs. But, as economist Milton A. Friedman has quipped, it does preciously little good for the unemployed to know they can’t work at a very high wage.

The minimum wage is poor welfare policy. It victimizes innocent, underprivileged workers who will lose jobs. And minimum wages do not provide targeted relief to the poor. Anyone--wealthy or poor--earning near the minimum wage who keeps a job wins. A healthy percentage of minimum-wage workers aren’t poor; many teen-agers earning the minimum live in middle-class homes.

Paul Osterman, a Boston University labor economist, reminds us that the minimum wage was originally passed to reduce competition in the labor force. Get the kids out and let adult workers reap the advantage. Unions have vigorously supported higher minimum wages. Union rhetoric has favored the legislation because it purports to help low-income workers; in fact, high minimum wages prevent low-pay, nonunion workers from competing for union jobs.

Arguably, protecting the jobs of higher-paid adults from the competition of low-paid teen-agers can be justified. But the minimum wage law works indiscriminately. Some of these “kids” who lose jobs have families to support. Many are destitute. We wind up aiding some not-so poor at the expense of some truly poor. And all in the name of liberalism.

Let’s try something else. How about expanding the earned income tax credit, part of the tax code since 1975. EITC provides a refundable credit to workers with very low incomes. Only workers with dependent children are eligible. First the taxpayer calculates his normal tax. Then he calculates his EITC, which equals 14% of the first $6,000 of earned income; nonlabor income is excluded. The maximum credit is less than $850. The credit is phased out as income rises so that individuals with incomes above approximately $15,000 receive no credit. The beauty of the EITC is that it is refundable: If the credit exceeds the individual’s tax liability, the government refunds the difference. Thus, EITC provides a gift to workers with very low incomes--a small-scale negative income tax.

Like the minimum wage, EITC boosts earnings of low-paid workers. But the differences are startling. First, employers pay no more for workers; workers are not fired. Second, EITC is targeted to poor families. No middle class or wealthy families qualify. Most economic policies that help the poor erode incentives to work. Refundable tax credits do no such damage. EITC is a jewel.

Rather than raising the minimum wage, expand the amount of the credit due under EITC. It could be applied to higher incomes. Or we could raise the rate above 14%. And, as experts Eugene Steuerle and Paul Wilson have argued, the system would be fairer if the amount of the credit rose with family size (under current law, the credit is constant for small and large families alike).

By increasing the size of the earned income tax credit for all poor working families, we can aid low-income families without victimizing jobs. Of course, other tax revenues would need to be raised to compensate the Treasury. Welfare relief is always a cost other taxpayers must bear. EITC is no exception. The difference is that the higher taxes needed to fund EITC can be spread equitably across those able to pay, but higher minimum wages punish the least fortunate.

Congress ought to consider at least one other modification of EITC. Now, the refundable credit applies only to individuals with dependent children. Noticeably excluded are workers--including teen-agers--with no children. Making any head of household eligible would be expensive but potentially worthwhile.

The Kennedy-Hawkins proposal is seductive. Kennedy labelled his plan, “the most important poverty program that we in this Congress can pass--without adding one nickel to the deficit.” Kennedy is wrong. His bill will hurt many underprivileged workers. If poverty is what we set out to reverse, there are far better policies than minimum wage hikes.