Minimum wage, marginal impact

With rhetoric at full blast on both sides, analysts say raising the federal payout is likely to have only a modest effect on the economy.

By Jeff Cox, CNNMoney.com contributing writer

NEW YORK (CNNMoney.com) -- Supporters of increasing the federal minimum wage contend it will offer significant changes to the lives of millions of working-class Americans.

Opponents insist the measure will cost the economy hundreds of thousands of jobs and provide only marginal help to a relatively small group of wage earners.

The numbers suggest the answer lies somewhere in between.

Increases in the minimum wage sometimes have been followed by dramatic spikes in the nation's unemployment rate, as was the case in the early 1980s, as well as lulls or even decreases in unemployment, as happened in the late 1990s.

Contrary to its more recent stagnation, the minimum wage increased almost annually in the 1960s and 1970s, hitting an inflation-adjusted high of $1.60 ($9.27 in 2007 dollars) in 1968 and staying around that level through the following decade, according to the U.S. Bureau of Labor Statistics.

During the 1970s, seasonally adjusted unemployment varied wildly, from 3.9 percent in January 1970 to 8.1 percent in 1975 and then back down to 5.9 percent in 1979.

The wage grew to $3.35 an hour in 1981, but would not budge from there until 1990.

Following the 1981 increase, national unemployment hit its highest rate since the Depression. The minimum wage held steady throughout the soaring unemployment rates of the early 1980s, including the 10.4 percent posted in January 1983.

The 1990s opened with two more minimum-wage increases, and unemployment zoomed.

But before Bill Clinton stepped down as president, the minimum wage would see two more increases, landing at the current $5.15 in 1997, when unemployment dipped to 4.7 percent. The jobless rate would drop to a low of 3.9 percent by the time Clinton left office three years later.

The numbers as recorded by the BLS leave many analysts at odds over the cause-and-effect relationship of what happens to the economy when the government increases the minimum wage.

An economic, and political, battle

The opposing sides continue to slug it out as the Senate considers passage of House legislation that will raise the federally mandated wage to $7.25 an hour, from the $5.15 point where it has stood since 1997.

With 29 states plus the District of Columbia already mandating pay for most full-time workers above the current federal standard, some experts in fact see the overall national impact as minimal at best, either for those who will benefit directly or the businesses that will have to pay the higher wages.

Most unions favor increasing the minimum wage. Some labor leaders see gains that would come also to those who earn slightly above the minimum wage, who can argue that their pay should increase proportionately.

But economists don't generally forecast a major impact on any sector.

"Whatever the effect is, it's not very large," said David Gleicher, a labor economics expert at Adelphi University. "First of all, minimum wage workers are a very small percentage of the whole labor force. ... It's almost impossible for it to have a major effect."

Fewer than 2 percent of all men and about 3.6 percent of women paid hourly make the minimum wage, according to BLS data.

Primarily, repercussions from raising the minimum wage occur among younger workers, according to Gleicher. Many of those teens and college-age workers belong in a class Gleicher called "target earners" who have a certain amount of money they wish to make, such as for college expenses or a car payment.

Once they reach their target, the incentive to work decreases, creating the possibility that a higher minimum wage could lead to somewhat lower productivity and employment.

Mostly, Gleicher joins others who view the minimum wage in its current context as far more a political issue than an economic one.

"It's a symbolic issue. It's a way for the Democrats to say 'we're going to do things for our base,'" Gleicher said.

Clearly, the minimum wage matters to some people, though the numbers tend to support the point of view that its constituency is primarily those under the age of 25.

According to the BLS, roughly half the workers earning the minimum wage or less are under 25, and half that number is in the 16-19 age group. Of the total workforce, just 2 percent of those over 25 are minimum-wage earners.

As a proportion of population, minorities would benefit more from the increase. Minimum wage earners also tend more to be part-time workers with high school educations or less who work in restaurants and other locales in the leisure and hospitality industry.

The latter statistic is one reason the National Restaurant Association has become one of the most ardent opponents of the minimum wage legislation. Association leaders have criticized the House bill both for the increase in the wage and for not including tax help for the small businesses that must pay the higher wage.

The association plans an intense lobbying effort to get safeguards included in the Senate version.

"Although we're very concerned with the potential impact of a wage hike, we are hopeful there will be some consideration to try to make it jobs-neutral," said Brendan Flanagan, vice president of federal relations for the restaurant trade group. "What happened in the past, at least as far as the experience in our industry, is there have been jobs lost."

The association says that the last wage hike cost restaurants 146,000 jobs and forced the postponement of 106,000 planned hires. Labor Statistics data bear out those claims, showing that the industry added 280,400 net jobs in 1995, a number that fell to 124,200 by 1998.

The drama behind the data

Still, some supporters of raising the minimum remain dismissive of such economic data and believe there are compelling reasons beyond politics that mandate increasing the federal benchmark.

"I think it is a political issue and it's a moral issue," said Heather Bouchet, senior economist at the Center for Economic and Policy Research, a liberal think tank in Washington. "There certainly is no evidence, academic-quality evidence, that shows raising the minimum wage has a negative effect on employment."

According to Bouchet, the proposed increase will raise the salary of the average minimum wage earner by $1,500 a year, allowing him or her to purchase 11 months of home heating utilities or nine months of groceries.

But James Sherk, a policy analyst at the Heritage Foundation, a conservative think tank also in Washington, said that in some respects society is ill-served by increasing the minimum wage, as it provides incentive for at-risk high schoolers to abandon their education and enter the workforce.

Donald R. Deere, a research fellow at Texas A&M and senior consultant at Welch Consulting in Bryan, Texas who has written and researched extensively on the issue, also sees negative economic impact.

Deere's research has led him to conclude that teenage unemployment has consistently increased when the minimum wage goes up. He further asserts that increasing the minimum wage actually harms lower wage earners by shrinking the amount of jobs available to them.

In the 1990 and 1991 increases, for instance, unemployment for teenagers and poorly educated adults climbed from 3 to 11 percent, Deere wrote in a policy paper prepared for the National Center for Policy Analysis.

"It is not that there are too many low-wage jobs, but that there are not enough jobs for low-wage workers, and minimum wages make things worse," Deere said.

The AFL-CIO has entered the fray as well, even though most of its members are not directly affected by minimum wage changes. Bill Samuel, director of the union's department of legislation, acknowledged that workers who earn, say, $10 an hour might argue that they deserve a proportionate increase as the minimum wage rises.

But he said that's not the prinicipal reason the union conglomerate backs the minimum wage increase.

"We think the minimum wage needs to be raised to a living wage ... which would be well over $8," he said. "What's really the appropriate level of the living wage for people working 40 hours a week?"

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.