Raising New Jersey’s minimum wage is bad economic policy
Author: Craig Garthwaite
Publication Date: February 2005
Newspaper: Trenton Times
Topics: Minimum Wage
Some lawmakers are hailing the proposed 39% increase in New Jersey’s minimum wage as a life preserver for employees struggling in a stormy economic sea. But Trenton’s “heroics” ensure that thousands of low-skilled New Jersey residents who need entry-level employment opportunities will find it even more difficult to stay afloat.
The State House ought to remember that Federal Reserve Chairman Alan Greenspan cautioned Congress just last summer against raising the minimum wage. The chairman pointed out that such a move “increases unemployment and, indeed, prevents people who are at the early stages of their careers…from getting a foothold in the ladder of promotions.”
Once they’re on the job, low-skilled employees make dramatic progress up the pay scale.
Although proponents of state-level wage hikes often argue that minimum wage employees haven’t had a raise since Congress last increased the national rate, few entering the workforce at the minimum wage stay there for long. Nearly two-thirds get a raise within 1-12 months. After improving their skills and establishing their value, these employees receive raises at a rate nearly six times larger than everyone else. All without mandatory wage hikes.
A small group of the least skilled may remain at a minimum wage salary for extended periods. However, these are the people most likely to lose their jobs when lawmakers raise the minimum wage. Duke University researchers have found that after a wage hike, low-skilled adults are forced out of their jobs as better-educated teenagers (frequently from wealthier families) are drawn into the labor market. Their “need”? Simply to earn money for video games and iPods. These teenagers require less training and are an attractive hire for employers seeking to get the most out of their dramatically higher payroll costs.
Businesses also adapt to mandatory wage increases by turning to automation or reducing service to their customers. Think this is unlikely? Just look at the proliferation of ATMs and self-checkout lanes at grocery stores. They’re all designed to eliminate labor costs. McDonald’s, one of the most reliable sources of entry-level employment opportunities, is already experimenting with fully automated self-serve kiosks instead of cashiers.
Trenton needs to take a different approach toward bettering the lives of the state’s low-skilled workforce. Instead of bogging down in a debate over the minimum wage, the statehouse should increase the value of New Jersey’s earned income tax credit (EITC). State EITC programs (patterned after their hugely successful federal predecessor) provide substantial tax-free income, but only to those with a job. Economists from the Federal Reserve and Michigan State University have found that EITC recipients increase their work output and enjoy higher earnings, leading them toward self-sufficiency. And unlike the minimum wage, the EITC encourages employment.
Enhancing New Jersey’s EITC program is the best way to put more money into low-skilled employees’ pockets. But unless Trenton abandons its wage hike proposal, those crowded out of the workforce will lose their EITC benefits along with their paychecks.
Lawmakers who still consider wage floors the most effective way to help low-skilled employees are ignoring the changing demographics of the minimum wage labor force. Old picture: few women worked outside the home. Most teenagers had limited job opportunities. Consequently, in 1950, 77% of the families living in poverty received most of their income from a single low-wage adult employee. That number dropped to 45% by 1970. New picture: today, less than 30% of families in poverty depend exclusively on the earnings of a low-wage employee.
While proponents of minimum wage increases typically frame their efforts as a way to rescue society’s most economically vulnerable – seniors trying to supplement their Social Security checks or single parents struggling to raise their children – beneficiaries of the law are more likely to have a household income over three times the poverty line. A Cornell University study found only 15% of prospective wage hike beneficiaries across the nation are in poor families. Poverty is becoming a phenomenon confined largely to nonworkers. None of them will benefit from a minimum wage increase.
New Jersey’s low-wage employment debate needs new approaches to a changing workforce, not blind adherence to outdated labor policies. If lawmakers decide to get serious about helping low-income New Jersey residents, they can start by sinking their minimum wage proposal.