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Alternatives to raising minimum wage

Marketplace Staff Aug 2, 2006

KAI RYSSDAL: The Senate’s debating a bill that would raise the federal minimum wage. It’s been stuck at $5.15 an hour for a decade. Lawmakers would boost it to $7.25 over the next three years. Seventeen states have their own minimums. And Chicago just passed a what’s called a living wage law. Big-box stores will have to pay workers at least $10 an hour with some benefits by 2010. Other cities have similar plans. But for economist and commentator Glenn Hubbard, it’s more complicated that just raising pay.

GLENN HUBBARD: Economists are skeptical about raising the minimum wage because of its effects on employment. You see, demand and supply of labor sets the market wage all by itself. If the wage is set above that — by a lot in the Chicago case — businesses will cut back on hiring and unemployment will rise, especially among teenagers and low-skilled workers.

But there’s a bigger problem with the plan to force big-box retailers to pay higher wages. First, raising costs could lead these competitive firms to raise prices, in some cases paid by other low-income workers who shop there. Firms have to earn a normal return on the capital invested in them and they won’t bear the full brunt of higher wage costs.

Second, a higher minimum wage isn’t the best way to raise incomes. As a society, we should — and do — care about the well-being of low-income households. And so it’s all of us, not just the owners and customers of particular firms who should pay.

How? Well, the earned-income tax credit already reduces the amount of tax low-income workers pay to Uncle Sam. And workers with very low incomes who don’t owe any tax receive a payment from the government. We should expand our support for work.

Compared with the minimum wage, the earned-income credit can increase the incomes of low-skilled workers without reducing employment. And strengthening support for work is a much better idea than lashing out against big stores.

We can also increase public support for training. Training, combined with on-the-job learning, offers the path to higher wages.

Legislation against large retailers, like threats against foreign competition, sounds like an easy way to raise wages. But there are costs, and they’re often shouldered by the very people the policy is trying to help.

If we’re really serious about helping, we need to move from bashing the big box in Chicago to thinking outside the box in Washington.

RYSSDAL: Glenn Hubbard is the Dean of the Graduate School of Business at Columbia University. He used to run the Council of Economic Advisors for President Bush.

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