Raising the U.S. minimum wage is 'a really bad idea,' expert says

September 20, 1999

Chapel Hill - Washington, D.C. is currently awash in rumors that Republican leaders in Congress have purposefully blocked legislation to raise the minimum wage from $5.15 an hour to $6.15 to save it as a bargaining chip in coming budget battles, a University of North Carolina at Chapel Hill financial expert says.

Their belief seems to be that if they let President Clinton have his way on minimum wage, perhaps he'll provide some political cover for them as they break the budget ceilings in the 1997 budget law, said economist Dr. James Smith.

"The likely result is that if they do this, President Clinton will take all the credit and still leave them hanging out to dry on the budget," Smith said. "There's no obvious gain to him from saving their bacon."

Smith, professor of finance at UNC-CH's Kenan-Flagler Business School and chief economist for the National Association of Realtors, calls raising the minimum wage "a really bad idea."

Credited in January by the Wall Street Journal as being the nation's most accurate economic forecaster twice in three years, he made his comments in the October issue of "Business Forecast," a bimonthly newsletter he writes for UNC-CH.

"Even the dimmest member of the U.S. Congress can figure out that if you made the minimum wage equal to a congressional salary (about $72.50 a hour), the unemployment rate would go through the roof," Smith said. "For some reason, most of them cannot comprehend that the exact same thing will happen at $6.15 an hour. It just will happen to a lot fewer people."

In the private sector, workers are paid based on what they produce at the margin, he explained. Companies try to hire workers up to the point at which the pay of the last worker hired is exactly equal to the contribution that worker makes to the firm.

The overwhelming majority of people earning the minimum wage are teen-agers, the economist said. Usually, they are not people supporting a family. In August, the labor force participation rate of people aged 16-19 was only 50.9 percent. Their unemployment rate was 13.5 percent.

For white teen-age boys, the seasonally adjusted unemployment rate in August was 12.1 percent and for the girls in that category it was 10.9 percent, Smith said.

For black teen-agers, the seasonally adjusted unemployment rate was 28.6 percent, with boys at 29.4 percent and girls at 27.9 percent. Those rates compare unfavorably with the 6.2 percent seasonally adjusted unemployment rate for black men aged 20 and above or the 6.9 percent for black females in that age bracket.

"Most of these teen-agers who were looking for work in August and could not find it were unsuccessful because the organizations to which they applied felt they were not worth $5.15 an hour to the firm," Smith said. "It is very difficult to see how they are more likely to be employed if the minimum wage is increased."

Raising the price of labor artificially always lowers the demand for labor, he said. "The first place to look for the impact of an increase in the minimum wage is in pizza prices."
Note: Dr. James Smith can be reached at 202-383-1184 or 919-962-3176. As time allows, he's willing to discuss most economic issues. E-mail: jsmith@realtors.org Fax: 202-383-7568.

University of North Carolina at Chapel Hill

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