current session of the Michigan Legislature, lawmakers
are being asked to vote on an
increase in the state’s legally mandated minimum
wage. We therefore reprint the following testimony provided to the U.S. Congress in May 2004 by Paul Kersey, a former Mackinac Center labor policy research associate who was then serving as the Bradley visiting fellow in labor policy at the Washington, D.C.-based Heritage Foundation.)
Testimony of Paul Kersey
Before the House of Representatives Subcommittee on Workforce, Empowerment and Government Programs
May 3, 2004
The Economic Effects of the Minimum Wage
gentlemen, it is understandable to want to help out poor families, and toward
that end it has been suggested that Congress increase the minimum wage, from the
current $5.15 an hour to $6.65 an hour.
Well, I have
good news and bad news for you. The bad news is that increasing the minimum wage
will do little to improve conditions for the working poor. This is because
relatively few of the recipients of such an increase are living in poverty. The
good news is that the working poor do not necessarily need government help.
Research shows that the "dead-end job" is largely a myth.
This is not to
say that the working poor do not have a hard road ahead of them, but for those
who persevere, it is a road that leads out of poverty. We should not block off
that path by making low-wage jobs more scarce, which is a likely result of an
increase in the minimum wage.
Our analysis of
2003 U.S. Census data shows that of 7.8 million American workers receiving an
hourly wage of less than $6.65 an hour — the immediate beneficiaries of a change
in the minimum wage — only 15 percent are currently living in poverty. Nearly
three-quarters of these workers, 72 percent to be precise, have a family income
that is at least 50 percent higher than the poverty line, and over half belong
to families earning double the poverty level. One fifth of low-income workers
belong to families earning over $80,000 annually.
The average family income of the typical low-wage worker was a respectable
$40,000 per year.
In other words,
the typical beneficiary of a minimum wage increase will not be a poor father or
mother scrambling to keep a family fed, clothed and housed. The recipients of
the pay raises demanded under this proposal are at least as likely, if not more
likely, to already be solid members of the middle class.
low-wage earners who are members of poor families, we should not overstate the
effects that an increase in the minimum wage will have. Our review of the Census
data indicates that fewer than one-quarter of those affected by the proposed new
minimum wage work full-time. There is no reason to believe that this percentage
is higher for poor families. In fact, last year Heritage scholars Robert Rector
and Rea Hederman looked at the average hours of work performed by adults in poor
families and found that a little more than one quarter, 27.8 percent, reported
2,000 hours or more. Two thousand hours would be equivalent to one parent
working full-time year-round. Nearly as many families, 27.4 percent, reported no
work at all. Median hours worked by adults in families with children were lower
than 1,000 per year, or less than 20 hours a week.
the value of a minimum wage increase for poor families is limited by the low
amount of hours that parents in poor families actually tend to work. Increasing
working hours would have a far greater benefit for these families, both
immediately and in the long term than increasing the minimum wage. Although the
minimum wage increase currently proposed may raise family income by as much as
30 percent in the short term, Rector and Hederman showed that increasing work
hours to the equivalent of having one adult working full time nearly doubles the
average income of these families, even after accounting for lost government
benefits and increased taxes.
Over the longer
term, minimum-wage or near-minimum-wage work can serve as a springboard to
better jobs. Unskilled workers may gain new skills or gain a record of
reliability that allows them to move on to better paying positions. Low-wage
earners frequently see their wages rise quickly: Researchers at two
universities, Florida State and Miami of Ohio, found that full-time workers
hired at the minimum wage received a median pay increase of 13 percent within
their first year, which shows that low-wage employees are able to work through
minimum-wage jobs into better ones. The schedule of increases
currently under consideration, first to $5.90 (and) then $6.65 an hour a year later,
is not all that much greater than the pay raises that occur naturally.
full-time work, including jobs at or near the minimum wage, provides the poor
with the means to escape poverty. Research by the Employment Policy Institute
shows 47 percent of families living below the poverty line in 1997 managed to
make it over the poverty line in 1998. The authors of that study concluded that
"earnings from minimum wage work and the Earned Income Tax Credit both
significantly reduced the number of working poor in the 1990s."
raising wages will cut off this difficult but direct path to greater prosperity
for many poor families and will delay the entry of other workers, including
youth, into paid work by needlessly increasing the cost of unskilled labor.
Employers will not be able to afford to hire as many unskilled workers and will
respond by cutting back services or replacing workers with machinery.
economists refer to the "elasticity" of demand for labor to describe the ratio
of jobs gained or lost when wages change. Estimates of this "elasticity" vary,
but the average estimate by labor economists is that for a 10 percent increase
in the minimum wage, employment among those affected drops by 5 percent. If the minimum wage is
increased from $5.15 to $6.65 per hour, demand for unskilled labor could drop by
as much as 15 percent in jobs that earn the minimum wage, resulting in the loss
of hundreds of thousands of jobs and making it more difficult for poor families
to take this escape route out of poverty.
thought about poverty. While it is natural to have sympathy for our fellow
citizens who work at low-wage jobs and still live in poverty, we should remember
that our notion of poverty is relative. Using U.S. Census data, Heritage
Foundation scholars examined the living standards of poor Americans and found
that the average poor American has a car, air conditioning, at least one color
television along with cable or satellite TV, a home that is in decent condition
and enough food in the refrigerator. Poverty in America, especially for
those who do not work, is less a matter of material deprivation than of
emotional and spiritual loss, the pervading worry that comes from knowing that
one is dependent on the arcane determinations of state and federal bureaucrats,
and the loss of self-esteem that comes from knowing that one is not
But for the
working poor, this type of poverty is largely abolished. They are able to face
the future with optimism and confidence, however modest their income, precisely
because it is earned. They know they are contributing to the national economy
and have taken control over their own lives.
minimum wage will do little to improve the conditions of poor Americans.
Relatively few of those workers who receive wages at or near the minimum are
members of poor families. For those poor who are working, wage increases are
substantial and come quickly as they accumulate job experience. Increasing the
minimum wage will, however, eliminate entry-level jobs for unskilled workers,
making it more difficult for those who want to work to find jobs.
There is no such thing as a dead-end job.
Low-wage jobs provide the poor with an escape route from poverty. It would be a
shame if in the name of helping the working poor, we made this escape route
more difficult for them to follow.
is a former labor research associate with the Mackinac Center for Public Policy,
a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are
Data tabulated using the March 2003 Current Population Survey.
Rector and Rea Hederman, "The Role of Parental Work in Child Poverty," Heritage
Foundation Center for Data Analysis Report No. 03–01, January 27, 2003.
Even and David MacPherson, "Rising Above the Minimum Wage," Employment Policies
Institute, January 2000.
Formby, John Bishop and Hoseong Kim, "The Economic Well Being of Low-Income
Working Families," Employment Policies Institute, March 2002.
 Victor Fuchs, Alan Krueger and James
Poterba, "Economists’ Views About Parameters, Values, and Policies: Survey
Results in Labor and Public Economics," Journal of Economic Literature,
Vol. 36, (September 1998) pp. 1387-1425.
 Robert Rector and Kirk Johnson,
"Understanding Poverty in America," Heritage Foundation Backgrounder No.
1713, January 5, 2004.