MINIMUM WAGE: REVIEWING RECENT EVIDENCE OF ITS IMPACT ON POVERTY
COMMITTEE ON EDUCATION AND
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
HEARING HELD IN WASHINGTON, DC, APRIL 27 and OCTOBER 7, 1999
Serial No. 106-29
Printed for the use of the Committee on Education
and the Workforce
Table of Contents *
THE MINIMUM WAGE: REVIEWING
OPENING STATEMENT OF THE HONORABLE WILLIAM F. GOODLING, CHAIRMAN, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *
OPENING STATEMENT OF THE HONORABLE WILLIAM L. CLAY, RANKING MINORITY MEMBER, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *
STATEMENT OF DAVID NEUMARK, PROFESSOR OF ECONOMICS, MICHIGAN STATE UNIVERSITY, EAST LANSING, MI *
STATEMENT OF DANIEL SHAVIRO, PROFESSOR OF LAW, NEW YORK UNIVERSITY SCHOOL OF LAW, NEW YORK, NY *
STATEMENT OF RICHARD BURKHAUSER, SARAH GIBSON BLANDING PROFESSOR OF POLICY ANALYSIS AND MANAGEMENT, CORNELL UNIVERSITY, ITHACA, NY *
STATEMENT OF JARED BERNSTEIN, ECONOMIST, ECONOMIC POLICY INSTITUTE, WASHINGTON, DC *
APPENDIX A -- WRITTEN OPENING STATEMENT OF THE HONORABLE WILLIAM F. GOODLING, CHAIRMAN, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *
APPENDIX B -- WRITTEN OPENING STATEMENT OF THE HONORABLE WILLIAM L. CLAY, RANKING MINORITY MEMBER, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES *
APPENDIX C -- WRITTEN STATEMENT OF DAVID NEUMARK, PROFESSOR OF ECONOMICS, MICHIGAN STATE UNIVERSITY, EAST LANSING, MI *
APPENDIX D -- WRITTEN STATEMENT OF DANIEL SHAVIRO, PROFESSOR OF LAW, NEW YORK UNIVERSITY SCHOOL OF LAW, NEW YORK, NY *
APPENDIX E -- WRITTEN STATEMENT OF RICHARD BURKHAUSER, SARAH GIBSON BLANDING PROFESSOR, POLICY ANALYSIS AND MANAGEMENT, CORNELL UNIVERSITY, ITHACA, NY *
APPENDIX F -- WRITTEN STATEMENT OF JARED BERNSTEIN, ECONOMIST, ECONOMIC POLICY INSTITUTE, WASHINGTON, DC *
RECENT EVIDENCE OF ITS IMPACT ON POVERTY
Tuesday, April 27, 1999
U.S. House of Representatives
Committee on Education and the Workforce
The Committee met, pursuant to notice, at 1:00 p.m., in Room 2175 Rayburn House Office Building, Hon. William F. Goodling, Chairman of the Committee, presiding.
Present: Representatives Ballenger, Barrett, Boehner, Hoekstra, McKeon, Castle, Talent, Ehlers, Tancredo, Fletcher, DeMint, Isakson, Clay, Miller of California, Kildee, Martinez, Owens, Payne, Andrews, Roemer, Woolsey, Romero-Barcelo, Hinojosa, Tierney, Ford, Kucinich, and Wu.
Staff Present: Molly M. Salmi, Professional Staff Member; Gary Visscher, Workforce Policy Counsel; Mark Rodgers, Workforce Policy Coordinator; Kevin Talley, Staff Director; Robert Borden, Professional Staff Member; Jason Ayeroff, Staff Assistant; Deborah Samantar, Office Manager; Gail Weiss, Staff Director; Cedric Hendricks, Deputy Counsel; Peter Rutledge, Senior Legislative Associate/Labor; Maria Cuprill, Legislative Associate/Labor; Marjan Ghafourpour, Staff Assistant/Labor; Brian Compagnone, Staff Assistant/Investigations; Cassandra Lentchner, Special Counsel/Investigations, and Gregory Jefferson, Counsel/Investigations.
Chairman Goodling. [presiding] The Committee on Education and the Workforce will come to order.
According to Rule 12(b) of the Committee rules, any oral opening statements at hearings are limited to the chairman and the ranking minority member. Therefore, if other members have opening statements, they will be included in the printed hearing record. This will allow us to hear from our witnesses sooner, and to help members keep to their schedules. Without objection, all members' statements and witnesses' written testimony will be included in the printed hearing record.
OPENING STATEMENT OF THE HONORABLE WILLIAM F. GOODLING, CHAIRMAN, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES
I have a brief opening statement to be followed by Mr. Clay's opening statement. The topic of today's hearing is the impact of the minimum wage on reducing poverty. I want to welcome our witnesses, each of whom has conducted research on the topic. I look forward to their testimony, which will be helpful in assisting us in sorting out the
claims and the counter-claims that are often made about the minimum wage.
Today's hearing is this Committee's first review of issues raised by the minimum wage in many years. Obviously, we are conducting this hearing in the context of calls by the President and some Members of Congress to increase the minimum wage, but this is not a hearing on any particular proposed increase. I am hopeful that we can take a step backward and examine the policy aspects of the minimum wage, rather than rely on the political rhetoric that often dominates this issue.
We chose to focus this hearing on the impact of the minimum wage on poverty for two reasons. One is that reducing poverty by increasing income for the lowest income families is the reason generally given for raising the minimum wage. The other reason for focusing on the minimum wage and poverty is that, in my view, there are few issues facing our country more important than addressing the persistent presence and effects of poverty in this country, even during this time of sustained economic growth.
I hope that we will not debate the minimum wage as though one side is concerned about poverty and the other is not. In fact, this Committee has worked a great deal on improving the programs that are intended to help low-income families out of poverty. For many years, the Federal Government's approach was that poverty would be reduced if we just set up enough programs and kept spending money on them.
Over the past few years, we have tried to change that approach. We have insisted that programs be evaluated as to how well they are actually doing, and we have insisted on quality, accountability, local control, and flexibility. Some of the programs that the Committee has been involved in include welfare reform, job-training reform, improvements in Head Start, and of course education reform. This shows the complexity of the challenge of helping individuals, families, and children out of poverty.
I understand that there was a press conference, and contrary to any of those assertions, no one has been locked out. We are having hearings, and all will have their opportunity. But, again, sometimes it is difficult to resist the whole idea that, ``what can I say that might be political rhetoric?'' So, I hope that this is a discussion not over who seeks to help low-income families, but how best to do so, and whether raising the minimum wage is effective in raising the incomes of low-income families. I look forward to the detailed testimony of those who are here to testify today at our first hearing.
I now turn to Mr. Clay.
WRITTEN OPENING STATEMENT OF THE HONORABLE WILLIAM F. GOODLING, CHAIRMAN, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES -- SEE APPENDIX A
OPENING STATEMENT OF THE HONORABLE WILLIAM L. CLAY, RANKING MINORITY MEMBER, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES
Mr. Clay. Thank you, Mr. Chairman. I'm sort of displeased that you announced that this is not a hearing on the minimum wage. I thought that the minority had repeatedly requested that we have a hearing on the minimum wage, and I thought that you had succumbed to our request. I think it is about time that this Committee does engage in activity like the minimum wage increase, rather than attempting to destroy overtime pay and cutting Davis-Bacon, and bringing back company unions.
In my view, there is no more pressing need than an increase in the minimum wage for those workers who are not sharing in this booming economy. The United States has enjoyed unprecedented prosperity in the last six years. Unemployment remains at its lowest level in three decades. The Dow Jones industrial average has reached above 10,000 and CEO's salaries of major corporations are 419 times more than the average blue-collar worker earns.
Yet this prosperity has not been shared by all. Low-income workers are being left behind. The minimum wage employee working full-time and year-round earns only $10,712 a year. The poverty line for a couple is $11,060 a year. A family of three must earn $13,880, and a family of four must earn $16,700 a year, just to stay above the poverty line. At its current minimum wage level, too many workers are not able to support their family. Some contend that we cannot afford to increase the minimum wage. But, at a time when stock prices and corporate profits are soaring, I think we cannot afford not to increase the minimum wage.
Despite the promise the majority leader made three years ago that the minimum wage would be increased over this dead body, Democrats literally stepped over his cadaver and forced an increase of 90 cents. Not only did the increase fail to result in any job losses, but since then, there has been an increase in the employment rates for low-income workers. The Chairman for the Federal Reserve, Alan Greenspan, has stated that if employment had increased any faster, he would have raised interest rates to slow it down. Increasing the minimum wage by one dollar will provide an increase of about $2,000 a year for a full-time, year-round minimum wage worker.
There are almost 12 million workers who earn between $5.15 and $6.14 an hour. More than 8 million of those workers are 20 years old or older. Almost seven million of those workers are women, and more than five million of those workers are working full-time. We should make work pay. No one who works full-time should live in poverty. The minimum wage must also be a living wage. Mr. Chairman, I hope that we take prompt action to pass the Bonior-Kennedy minimum wage bill. It ought to be our highest priority, and I yield back the balance of my time.
WRITTEN OPENING STATEMENT OF THE HONORABLE WILLIAM L. CLAY, RANKING MINORITY MEMBER, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES -- SEE APPENDIX B
Chairman Goodling. Today we have four witnesses here to testify. I've been trying to reduce the number of witnesses and the number of panels at each one so that some Members stay to hear everybody instead of hearing one or two and then leaving. People who come from hundreds of miles get no one to listen to what they have to say. So we're
trying to reduce the number of witnesses, and trying to keep it to one panel at each hearing, so that we don't have that problem.
Our first witness will be David Neumark, a professor of economics at Michigan State University. Next we will hear from Daniel Shaviro, a professor of law at New York University School of Law. Our third witness will be Richard V. Burkhauser, a professor of policy analysis and management at Cornell University. Our fourth and final witness will be Jared Bernstein, an economist with the Economic Policy Institute.
Your written statements will be included in the record. If you can summarize, it will give us more time to ask questions. We'll have the light on. We don't get too excited when it turns red. If you hear the tapping, then it is time to conclude. We will start with Professor Neumark.
STATEMENT OF DAVID NEUMARK, PROFESSOR OF ECONOMICS, MICHIGAN STATE UNIVERSITY, EAST LANSING, MI
Professor Neumark. Thank you, Mr. Chairman. The Fair Minimum Wage Act of 1999, if enacted, would raise the minimum by an additional dollar over the next two years, to $6.15. According to its proponents, the primary rationale for increasing the minimum wage is to raise the incomes of poor or near-poor families with members in the workforce.
It is natural to assume that raising the minimum wage will help poor families with working members. Indeed, this was my belief before I began conducting the research I will describe in this statement. After all, economists' estimates of the disemployment effects of minimum wages are usually characterized as small, suggesting that the main effect of minimum wages is to raise earnings of low-wage workers in low-income families. However, as it turns out, the link from the relatively small disemployment effects of minimum wages to their average effect on low-wage workers is not as straight forward as it may seem. Even more tenuous is the link to incomes of poor or low-income families. In my statement, I will briefly describe these linkages, as well as some new research that shows the effects of minimum wages on poverty.
My statement is based on research conducted jointly with William Wascher of the Federal Reserve Board, and Mark Schweitzer of the Federal Reserve Bank of Cleveland, although I absolve them from all responsibility for my comments, of course, especially the Federal Reserve Board, who would not like it.
The prediction that minimum wages will reduce employment of younger, less-skilled workers is well known, and has been the topic of numerous hearings held in this building. Earlier studies led to a consensus view that a 10 percent increase in the minimum wage reduces the employment of these workers by between 1 and 2 percent. Recent studies have produced a more diverse set of results, spurring some controversy regarding whether or not minimum wages actually reduce employment of low-skilled workers. Nonetheless, much of the recent evidence supports the textbook prediction that minimum wages reduce employment of low-skilled workers. Indeed, a leading economics journal recently published a survey of economists' best estimates of various economic parameters. One of the co-authors was a leading advocate of the view that minimum wages do not reduce employment.
According to their survey, the best estimates of the minimum wage effect for young workers are that 10 percent increases in the minimum reduce employment by 1 to 2 percent. Thus, although there may be some outlying perspectives, economists' views of the disemployment effects of the minimum wage generally have not shifted.
Far less, however, is known about the role of the minimum wage in reducing poverty, despite the fact that this is the main policy goal of raising the minimum. The prevailing view of minimum wages is probably that they reduce poverty. But, as emphasized in research by my co-panelist Richard Burkhauser as well as others, minimum wages do this in a relatively ineffective and inefficient manner.
Two things must occur if minimum wage is likely to reduce poverty. First, minimum wages should, on average, raise earnings of low-wage workers. Whether they do this is an open question. Given that there are some disemployment effects stemming from minimum wage increases, it will generally be the case that some workers will be helped by an increase in the minimum wage, while others will be hurt. The relatively small estimated disemployment effects might lead one to conclude that on average, low-wage workers gain. But, if the employment losses are concentrated among the lowest-wage workers, as seems likely, then it is entirely possible that, on average, low-wage workers instead lose.
The second requirement for minimum wages to reduce poverty is that the low-wage workers benefiting from a minimum wage increase are concentrated in low-income families. For example, if the job loss from a minimum wage increase is concentrated among teenagers in relatively affluent families, while, conversely, the wage gains are concentrated among poor single-parent heads of households, then a minimum wage increase is likely to help poor or low-income families. But this scenario is only hypothetical. Job losses are instead concentrated among low-wage workers in low-income families. Poor families could be hurt by minimum wage increases.
Which families actually gain from minimum wages? Do minimum wages reduce poverty, or otherwise help low-income families? To answer these questions, my co-authors and I have looked directly at the effects of minimum wages on family incomes, using data drawn from the Current Population Survey for the period 1986 to 1995. We classify each family in terms of its income-to-needs ratio, which is the ratio of total family income relative to the poverty line for that family.
For example, a family with income-to-needs equal to one is just at the poverty line. Families below this line are classified as poor, and typically families with income-to-needs between one and one-and-a-half are classified as near-poor. Figure 1, which is the smaller one to the right there, reports the empirical distribution of family income relative to needs. That is, simply, the observed proportion of families at each value of income-to-needs. It exhibits some well-known features. The right-hand tail is quite thin at high levels, reflecting the relatively small number of families with very high income,
and on the other hand, there is a concentration of families between the poverty line and about twice the poverty line.
Having classified families this way, we then use the data to estimate the effects of changes in the minimum. This requires an experimental design with a control group of States and years in which minimum wages did not rise. We use this control group to provide a baseline for how the income-to-needs distribution changed over the sample period for reasons unrelated to minimum wage increases. We can then estimate the effects of minimum wages on income-to-needs distribution as the difference between the changes in the distribution for States and years with minimum wage increases, and changes in States and years without. Figure 2 please.
Figure 2 displays the bottom line of the research, the estimated effects of minimum wage increases on the income-to-needs distribution. To better understand the figure, suppose that minimum wages had no effect on the income-to-needs distribution. In this case, the figure would simply be a flat line at height zero. Values of the income-to-needs ratio for which the graphed line in above that horizontal line indicate the minimum wage increases on the proportion of families at that income-to-needs level, and vice versa.
What does the figure show? Contrary to its intended effect, the estimated impact of an increase in the minimum wage is to raise the proportion of families at the lower end
of the income-to-needs distribution, both below the poverty line, and between one and one-and-a-half times the poverty line.
Conversely, the minimum wage reduces the proportion of families with incomes between one-and-a-half and three times the poverty line, families that might be characterized as lower middle class.
To conclude, legislators who support increasing the minimum wage typically state that they believe this policy will help poor families. However, our research indicates that past experience with minimum wage increases in the U.S. is at odds with this view. Minimum wages no doubt help some families escape poverty, because some low-wage workers retain their jobs and experience an increase in income. However, the employment losses associated with the minimum, coupled with the position in the income distribution of the families where those job losses occur, combine to cause some families to fall into poverty. On balance, our estimates suggest that the latter effect outweighs the former, and, therefore, the net effect of minimum wages is to increase the proportion of families that are poor.
I thank you for the opportunity to discuss this research with you and will be happy to answer questions later.
WRITTEN STATEMENT OF DAVID NEUMARK, PROFESSOR OF ECONOMICS, MICHIGAN STATE UNIVERSITY, EAST LANSING, MI -- SEE APPENDIX C
Chairman Goodling. Professor Shaviro, please.
STATEMENT OF DANIEL SHAVIRO, PROFESSOR OF LAW, NEW YORK UNIVERSITY SCHOOL OF LAW, NEW YORK, NY
Professor Shaviro. Shaviro, actually.
Chairman Goodling. Shaviro. I asked up here whether I pronounced it correctly, and they said ``yes.''
Professor Shaviro. Well, I'm sure they were telling the truth as best they knew it.
I have a somewhat different perspective on this issue. I bring a different expertise than most of the people who have discussed it. I am not a labor economist. I am a law professor with an interest in tax policy and related transfer policy. This causes me to approach the minimum wage debate by saying, ``how does this program compare to aid to the working poor through the explicit tax and transfer systems, and, in addition, how do those systems interact with the minimum wage to determine who is going to benefit from it?''
The main point I'm going to make is that workers in poor or near-poor households get disappointingly little benefits due to the phase-outs. This is really part of a broader problem that has nothing to do with the minimum wage as such, although it effects the minimum wage's consequences. I have found that in some plausible scenarios, it is possible for a single head of household with two kids to go up in earnings from $10,000 to $25,000 and actually be worse off afterwards, which is probably a situation that some other Committees might want to address.
The minimum wage is basically an off-budget mandate. It transfers to workers with low hourly wages, and is paid for in the first instance by employers. Both the financing mechanism, and the fact that, what I would call, a tax transfer program, which are basically off-budget, are of interest. But, also of interest is the relatively narrow definition of need in this program. It is based on hourly wage without regard to a broader measure of how well off you are, including household income, or anything like that. This caused the distributional impact of the minimum wage, just on the transfer side without wondering how it is paid for, to depend not just on who the minimum wage worker is, but also on how much he gets to keep of each dollar earned in different circumstances.
Now, most people like to think of us as having progressive marginal tax rates in this country, and that is indeed true under the federal income tax. But, if this were true overall, then people who are poor or near-poor would keep more of each minimum wage dollar that they earn compared to other people. But, if you define the marginal tax rate as the percentage of an extra dollar earned that you actually end up keeping after considering all of the effects that earning it has on what you pay and what you get from
the government, it turns out that really no one in our society faces marginal tax rates nearly as high as those poor and near-poor families with children.
Ironically, this is a function of the fact that they're getting benefits that they then lose. They're not necessarily being treated badly overall, but they're being treated badly at the margin, in that they lose their benefits as their income goes up. Just like everyone else, workers in poor and near-poor households may face federal and state income taxes once they're above a certain point such as payroll taxes, and a variety of state and local taxes. There is also a range where they are aided by the Earned Income Tax Credit, but then there is a range where the EITC begins to be phased out. In addition, as their incomes rise, they face either a sudden or gradual loss of various benefits, including Temporary Aid to Needy Families (TANF), or sometimes it is called welfare, food stamps, housing subsidies, and after a grace period, Medicaid benefits.
The work I did a few years ago initially asked the question, ``what are the marginal tax rates these people actually face?'' It's quite hard to say. Many of the income-conditioned benefits vary by state or have rules that are particular to that program. What your income is for one program may be different from your income under another program. In addition, how to treat social security is a very complicated question for various reasons, including what to make of the future benefits that you are hoping to get when you retire.
But, nonetheless, I've made very rough estimates of how the marginal tax, the effect of earning an extra dollar, might go as your income increases from zero to $25,000 under four circumstances. All four of these tables that I'm going to be showing today relate to a single-parent head of household with two kids. I make two rough shortcuts. One is they could be in a high-TANF state or a low-TANF state. The other is they could be getting a housing subsidy or they could not be getting a housing subsidy. These are the sort of federal voucher type programs that provide rent support that phases out with income.
These are meant just to give an approximate sense of what is happening in the field. As I could discuss, there are various ways you could argue that these marginal rates I show are too low relative to what is really happening. Or one could also argue that they're too high relative to what is actually happening. The main controversy probably concerns how to regard the social security that you hope you're earning by working and paying payroll tax.
I also break out housing subsidies into a distinct variable in the tables because, since it is not, in any sense, an entitlement. Not all qualifying families get it. In fact, it is somewhat uncommon to get it. So, in the worst case scenarios, it is worth discounting by saying that while it is nice to get the benefit, it increases your marginal rate of taxes as your income increases.
I'll now direct people's attention to table 1. This is the estimated marginal tax rate with the effect of earning an extra dollar for one-parent, two child household residing in a high-TANF benefit State and getting a Federal housing subsidy. Now, again, these are the people who are, in a sense, being treated the best. They're getting the most, but their marginal treatment is the worst because it is phased out. You can see that people who are on the minimum wage full-time at $5.15 an hour, and say they went up to $6.15 an hour, they're approximately at the rates where their marginal rate is 89.6 percent, or even 109.2 percent, as the year proceeds. So, these are people who are really facing a tax rate on that extra dollar that is close to 100 percent on average.
I make a very rough estimate that someone in that situation might actually only end up clearing a dollar a week out of the $40 a week that is earned by the minimum wage increase.
The other tables are not quite as dire. My best case scenario under these four tables, and again in a low-TANF State, are not getting a housing subsidy. They are being treated worse overall, but their marginal tax rate is lower. It seems that out of the $40, they would clear as much as $26. The stereotypical middle-class teenager, who is really just paying payroll taxes and not much else during a summer job, would clear about $37 out of the minimum age increase.
So, I don't think that this by itself answers the question of what to do with the minimum wage or what it will do to poverty. But it certainly shows one element of the debate that has not received much attention. Namely, how minimum wage increases interact with how the other tax and transfer programs are treating a person as their earnings rise. Thank you.
WRITTEN STATEMENT OF DANIEL SHAVIRO, PROFESSOR OF LAW, NEW YORK UNIVERSITY SCHOOL OF LAW, NEW YORK, NY -- SEE APPENDIX D
Chairman Goodling. Professor Burkhauser.
STATEMENT OF RICHARD BURKHAUSER, SARAH GIBSON BLANDING PROFESSOR OF POLICY ANALYSIS AND MANAGEMENT, CORNELL UNIVERSITY, ITHACA, NY
Professor Burkhauser. Thank you, Mr. Chairman. As an upstate New Yorker, I can't resist opening my remarks with a quote from Mark Twain:
``The trouble with the world is not that people know too little, but that they know so many things that just ain't so.''
I can think of no better example of a government regulation to which this applies than the minimum wage. Increases in the minimum wage are routinely supported by overwhelming majorities in public opinion polls. Most Americans believe the government should make sure that full-time workers do not live in poverty. As a matter of fact, Mr. Clay opened this hearing by urging that goal for this Committee. I certainly agree with that social goal. But, to echo Twain, it just ain't so that minimum wage increases have, or will achieve, this goal.
As a review of those who gained from the most recent increases in the minimum wage tests, Chart 1 is over there next to Martha Harrison, my graduate student who actually cranked out these numbers. It uses data from the March 1996 Current Population Survey to show the distribution of hourly wages earned by workers in families living at various levels of economic well-being just prior to the federal increase in the minimum wage to $5.15 an hour. Those living below the official poverty line in 1996 had incomes-to-needs ratios of less than 1.0. That is the first row of the chart. To put this in context, the poverty line for a family of four was about $16,000 in 1996, and a worker living in a family of four with a full income of about $48,000 would have an income-to-needs ratio of 3.0.
Two facts are clear from that chart. First, in 1996, most of the working poor earned more than $5.15 per hour, and hence, were not helped by the minimum wage increase to $5.15. Second, most workers who did receive an increase in wages due to the minimum wage increase lived in families whose income was far above the poverty line. Thirty-eight percent of effected workers lived in families whose income was three times the poverty line, or more. Despite the prevailing stereotypes, the majority of minimum wage workers are not the heads of poor families struggling to earn a living wage. They are single persons or second or third earners in non-poor families.
Table 1a. focuses on teenagers, a demographic group whose wages were heavily impacted by the most recent increase in the minimum wage. In March 1996, 44 percent of teenagers earned between $4.25 and $5.15 an hour. However, over 50 percent of impacted teenagers lived in families whose incomes were more than three times the poverty line: $48,000 or more for a family of four. Only 18 percent lived in poor families. Hence, the vast majority of the working poor were not helped by the last minimum wage hike, and the vast majority of those helped by it were not poor or near-poor.
Today, the appropriate question to ask is whether there are better alternatives to minimum wage hikes available to help insure a living wage for the working poor? The answer to that question is, absolutely, yes. The Earned Income Tax Credit is a far better mechanism for rewarding low-wage workers who live in poor families.
In evaluating the impact of the EITC on the working poor, it is useful to consider the EITC in terms normally reserved for the minimum wage. Minimum wage earners currently receive $5.15 per hour. But, once EITC credits are considered, those minimum wage workers with children that actually live in low-income families effectively receive a much higher hourly wage. Because of the dramatic improvement in the EITC program, passed, by the way, by a bipartisan majority of Congress in 1993, workers with one child now have an effective minimum wage of $6.90; $5.15 minimum plus the 34 percent credit of $1.75. Workers with two or more children have an effective minimum wage of $7.21, the $5.15 minimum plus the 40 percent credit of $2.06. Hence, we now have, in this country, a two-tier minimum wage program: $5.15 to middle and high income households who have workers who earn minimum wages, and $6.90 or $7.21 for the low-income folks that we want to help, those folks with children.
Unlike the minimum wage increase in the 1990's, the increase in the EITC passed in 1993, and fully implemented in 1996, has primarily gone to workers in low-income families. I have lots of evidence that shows this in other papers. The reason is that all of the working poor in table 1 were helped by improvements in EITC because it is based on family income, not on the wage rate. Hence, a worker earning more than $5.15 an hour, who lived in a low-income family, is eligible for the credit. Such a worker gained nothing from the minimum wage increase to $5.15. Likewise, the vast majority of minimum wage workers who did not live in low-income families did not receive EITC benefits. Thus, the EITC is target efficient. Furthermore, because the employer does not pay directly, unlike the minimum wage increase, there will be no reduction in employer demand for vulnerable workers.
Aside from nostalgia, it is hard to explain continued support for increasing the minimum wage by those interested in helping the working poor. It is time to relegate the
minimum wage to the museum of antiquated policies, and use the EITC as a method of making work pay. Thank you, Mr. Chairman.
WRITTEN STATEMENT OF RICHARD BURKHAUSER, SARAH GIBSON BLANDING PROFESSOR OF POLICY ANALYSIS AND MANAGEMENT, CORNELL UNIVERSITY, ITHACA, NY -- SEE APPENDIX E
Chairman Goodling. Dr. Bernstein.
STATEMENT OF JARED BERNSTEIN, ECONOMIST, ECONOMIC POLICY INSTITUTE, WASHINGTON, DC
Dr. Bernstein. Thank you for the opportunity to testify this afternoon, Mr. Chairman. I think that most objective observers would agree that recent debates over whether to raise the minimum wage have generated more heat than light. This is unfortunate, because this is one economic issue for which we have a large body of empirical evidence. Here's what the evidence shows.
First, increases in the minimum wage that raise the earnings of the working poor have historically helped to lower poverty rates.
Second, this evidence is even stronger in the 1990's, as relatively large numbers of poor persons move into the labor market.
Third, the theory that small increases in the minimum wage lead to job losses has repeatedly been tested and repeatedly been found lacking. The estimates of the purported job loss hover at or close to zero. While this aspect of the debate may be an important one among economatricians, from the perspective of policymakers who are looking for ways to help the working poor, it is a distinction without a difference.
Fourth, evidence from the most recent increase in the minimum wage underscores all of the points I've made so far. The 1996-1997 increase helped to raise the earnings of poor workers, and to lower the poverty rates. In addition, there is no evidence of any negative employment impacts. To the contrary, the low-wage labor market is tighter now than it has been in three decades. Unemployment rates of low-wage workers stand at 30-year lows. Employment rates of women leaving welfare to work are at record highs. These facts clearly support the contention that if Congress wants to make work pay, the current proposal to increase the minimum wage makes sense.
Finally, while the proposed increase will help the working poor, it cannot, and should not, be viewed as a sole solution to the poverty problem. Poor families will continue to need income support such as the EITC and food stamps. The increase in the minimum wage, however, will generally lower their dependence on unearned income.
With regards to this question about the minimum wage and poverty, the vast majority of research on the question of minimum wages and poverty reduction finds small poverty reducing effects. Increases in the minimum wage are associated with small declines in the poverty rate. The channel through which this occurs is by delivering more earnings to the working poor. Virtually all of the research, including that of Professors Neumark and Burkhauser, finds that increases in the minimum wage raise the incomes of working poor families. Professor Neumark's recent work on this topic has been raised to cast doubt on this widely held conclusion, but their findings from an earlier paper than the one that he presented today actually underscore this point. This paper finds, and I quote, ``We also find that the minimum wages tend to boost the incomes of poor families that remain below the poverty line.''
With regards to the question of whether minimum wages lead to an increase in the family poverty rate, they report, ``this estimated net effect is insignificant.''
The reasons the anti-poverty effects of the minimum wage have historically been found to be small are twofold. First, many of the poor are only marginally attached to the labor market. Among those who work, many work too few hours to raise their incomes above the poverty line. Second, many of the benefits of the increase in the minimum wage flow to those in families with incomes above the poverty line. While much has been made of this last point, I do not view it as a flaw in the policy. Is a worker whose family income places her slightly above the poverty line any less deserving then a worker whose family income places her slightly below the line?
The point should be that the minimum wage is not targeted only at poor workers, but at low-wage workers in general, and most low-wage workers reside in low-income families. Over 70 percent of these workers are adults. Sixty percent are women. About half work full-time and they are disproportionately minority. More importantly, their families depend on their earnings. The average minimum wage worker brings home over half of their family's weekly earnings. These statistics clearly belay the claim that most of the benefits of the increase go to kids in rich families. What about the claim that the minimum wage increase leads to job losses? Despite the lack of empirical evidence, opponents of the minimum wage continue to raise this argument. In light of the last increase, and the current conditions in today's low-wage labor market, the argument is less convincing than ever. In a 1998 publication, my colleague John Schmidt and I investigated the employment effects of the 1996-1997 increase. We ran four separate tests of the employment impact and found no evidence of job loss. Since that research was completed, the labor market conditions facing low-wage workers have continued to improve contrary to predictions of those who opposed that increase. Month after month in the current labor market, low-wage and minority workers post historic gains. In recent
months, unemployment rates of African-Americans, Hispanics, and 16-to 24-year-olds, all of whom are likely to be low earners, all hit 30-year lows.
A further example from the current labor market is particularly relevant to the issue of minimum wages and poverty. Due to welfare reform, many single mothers are required to leave the welfare rolls and go to the job market. Did the 1996-1997 increase in the minimum wage impede their progress? In fact, the employment rate of single mothers, after stagnating for several years, rose steeply from 62 percent in 1995 to 69 percent in 1998, during the period when the minimum was increased. Of course, not all single mothers are on welfare, but among those receiving welfare, employment rates grew from 40 percent in 1995 to 49 percent in 1997, by far the highest level on record. Note that these gains were much larger than the increase in the overall rate of employment growth over this period.
Let me conclude by asking for a realistic assessment of the benefits of the current proposal. I think such an assessment would favor neither extreme. The increase will certainly not hurt the employment prospects of the working poor, nor will it end their poverty. Instead, it should be expected to raise the earnings of the working poor, lower their poverty gap, raise the share of their income derived from earnings, and lower the share of their income derived from benefits such as food stamps. It should also help to make work pay for families who are leaving the welfare rolls for the labor market. These benefits are particularly important, given the long-term increase in wage, income, and wealth inequality. Despite the fact that the economy's productive capacity has grown by 24 percent since 1979, low-wage workers' hourly earnings have fallen 11 percent since then.
Meanwhile, the low-wage workforce has increasingly become more educated and more experienced. Trends that should have led to higher, not lower wages. In this light, raising the minimum wage will not only help to lift the living standards of working poor families, it will help to reconnect their economic fortunes to those of the rest of America's workforce. Thank you.
WRITTEN STATEMENT OF JARED BERNSTEIN, ECONOMIST, ECONOMIC POLICY INSTITUTE, WASHINGTON, DC -- SEE APPENDIX F
Chairman Goodling. Before we begin our questioning, this morning we had a celebration and honored the senior Member of the Congress of the United States, and probably the senior Member of any Congress anywhere in the world, Strom Thurmond. So this afternoon, I think we would do well to recognize the senior lobbyist in the United States and perhaps in any country, Abbey Dubrow.
Mr. Boehner. Mr. Chairman, thank you. Let me congratulate you for holding this hearing, and what I expect will be future hearings on the true effect of raising the minimum wage, and whether raising the minimum wage is the most effective way of helping those we're intending to help, those that are at the poverty level. I think all of us in this room understand that the minimum wage debate that goes on in this Congress every even numbered year has a lot more to do with politics then it does with policy. As we've heard today from our witnesses, there is significant evidence to suggest that most of the minimum wage goes to people who, frankly, aren't in low-income
households. But, having said that, there seems to be some disagreement among the witnesses. That is what I want to get at in my questioning.
Dr. Bernstein, you suggest in your testimony that increasing the minimum wage over the years has lowered poverty rates. Secondly, you pointed out that even the increase that was phased in during 1996 and 1997 helped lower poverty rates, which seems to fly in the face of the testimony given by the other three panelists. Do you have any empirical data that supports that?
Dr. Bernstein. Yes. Absolutely. In order to prepare for today's hearing I did a review of the last 10 years of articles in peer-review journals in the economics profession on this question. I could not find one article in any of these peer-review journals that found anything other than the following effects.
Increases in the minimum wage had small anti-poverty effects. They either had a small poverty reducing effect or they had no effect at all. The most recent paper, which just came out in April 1999, is a paper that shows an increase in the minimum wage lowered the poverty rates of families with teenagers and families with high school dropouts, two groups that disproportionately earn the minimum wage. The only finding that I have seen that supports the other side is the one that David Neumark presented today. As I pointed out in my testimony, that finding is actually an exception, even among his own work. His prior paper, written a few months before that, went the other way. It found insignificant results. So, we have ten years of literature that support this contention. Small effects, not large effects, because part of what Dr. Burkhauser said is true. Not all of the benefits flow to the working poor; some flow to families making above the poverty rate. I don't see that as a problem with the policy. In fact, I see the poverty line as an artificial demarcation in this debate. I think low-income workers deserve an increase in the minimum wage, be they poor or above the poverty line.
Mr. Boehner. So, what you're saying is that while we raise the minimum wage for all workers that are covered by it, there is only a very insignificant change among those within the poverty level.
Dr. Bernstein. Well, insignificant means something specific. To an economist, statistically insignificant means you can't tell if there is any change at all. In fact, the research shows small statistically significant poverty reducing effects. They're not large. It's not going to get us out of the woods in terms of the poverty problem, but it does go in the direction that common sense would predict. It leads to small decreases in the poverty rate.
Mr. Boehner. So, you really wouldn't disagree with this first chart that is over here that shows that 85 percent of the benefits of the minimum wage increase go to families that have an average family income of over $35,600.
Dr. Bernstein. Actually, I would disagree with that, because I've done the same exercise with similar data sets, more contemporary data, and found numbers are actually, I believe, somewhat different from that. For example, I find that 58 percent of the benefits of the most recent increase went to families in the bottom 40 percent of the working family income distribution. Forty-five percent of the benefits went to families in the bottom fifth, whose average income is $15,700. That means most of the benefits go to families in the bottom 40 percent. Now, I did find that 27 percent of the benefits went to families in the top fifth. That means that, as has been suggested, this policy is not perfectly targeted, but we shouldn't let the best to be the enemy of the good. The benefits far outweigh the costs.
Mr. Boehner. Let me ask the other three panelists if they would care to comment on the real reductions in the poverty level, and whether this is an efficient and effective way of helping low-wage workers.
Professor Neumark. Thank you. I'll address your question, but I think it is best to do that in response to some of the things Dr. Bernstein said. He made two claims. First of all, if you search the literature for the last 10 years or whatever the time period is, you don't find studies indicating that minimum wages increase poverty. If anything, the vast majority, I think was the expression, find that minimum wages reduce poverty. I argue in my paper, and I think that it is well known to all of us
sitting here at this table, that none of that existing research does a before and after analysis of the effects of minimum wages on poverty.
Let's look at the income distribution, whether a number of different ways, or as we do it in terms of income-to-needs, before the minimum wage increase. Let's look at it afterwards, and, most importantly, let's have a control stage where the minimum wage didn't go up. What all of those studies do, except for one, which I'll mention in a second, is simply do the kind of exercise we've seen here. Let's look at where minimum wage workers are in the income distribution. Let's identify those whose wages, assuming people comply with minimum wage, which they mostly do, whose wages will be brought up if the minimum wages were increased, and let's make a lot of assumptions about what happens to them.
The typical assumption, I believe, is that there are no employment changes. If you do that exercise, then you get back to the debate that we're having right here in relationship to the blue and yellow chart there. Some workers are going to be helped, a lot of them, perhaps. I think everyone here agrees that a fair number are not in poor families. Some number of workers are. Our papers were the first to look at a before and after analysis of any kind. The first paper that I wrote, which Dr. Bernstein referred to, did find that the direction of the effect was that the minimum wages increased poverty. The evidence in that paper was insignificant. For that reason, I went on to the second paper, which I think is a more sophisticated analysis, and we again find that the evidence
points to minimum wages increasing poverty, but, in that case, the evidence is statistically significant.
The only other paper out there that I am aware of is the Addison and Blackburn paper, which was the one Dr. Bernstein mentioned. That paper finds for a very narrowly defined group, not families with high school dropouts, but junior high school dropouts, that minimum wage reduce poverty. That is nice but that is a very small group and it is getting increasingly smaller.
Chairman Goodling. Mr. Clay.
Mr. Clay. Thank you, Mr. Chairman. Mr. Chairman, I am sure that Mark Twain would probably agree with me when I say that this is a very strange phenomenon we are experiencing today. We are hearing that you help the poor by depressing their wages. We have called people who studied minimum wage to testify, rather than people that have to experience living by the minimum wage, to determine whether or not a wage increase helps them or not. I think it is a very strange kind of phenomenon that we find ourselves in.
At the same time, Mr. Chairman, I think we in Congress are going to give
ourselves a cost-of-living increase of 3 percent, which is about $4,000 a year. I am now afraid to support that for fear that it might cause me to go deeper into debt.
I just don't understand the relevancy of what is happening to us today. I would think that those best qualified to talk about what an increase does to them are those that are suffering the indignity of earning a minimum wage. We are all talking about disemployment and displacement of workers. When major corporations merge, they displace more workers than the whole minimum wage increase could ever displace. I would think, and if our concern is the displacement and unemployment of people, we ought to be having a hearing to determine whether or not this Congress ought to pass a bill to stop the mergers of major corporations. So, Mr. Chairman, I just think that we are going about this exercise in a very strange kind of way.
And I would like to ask Mr. Bernstein just one question. The past minimum wage that we increased, apparently, did not cause the loss of jobs; it may have increased the jobs. Tell me, why do we keep hearing over and over and over the argument that a minimum wage decreases the number of jobs, and puts people out of work? Why do some continue to argue negatively like this? Can you answer that question for me?
Dr. Bernstein. I think it is because the argument is essentially based on economic theory, derived from a simple textbook model, which has almost nothing to do with how the low-wage labor market actually operates. This is a theory which assumes all workers have perfect information, all employers have perfect information, there are no profits, everyone knows exactly how many jobs are available out there, and what will happen if they go across the street to look for another job. The assumptions generate the theory that increases in the minimum wage will lower employment. Well, we have had something like 16 increases in the minimum wage since the mid-1960's, and we have been studying this issue to death. What we have found is either small disemployment effects, zero disemployment effects, or in some recent research, actually positive employment effects.
I think if you take an objective assessment of this research, you will conclude that this issue of the employment effect has been way overemphasized. I mean, the statistic that David Neumark cited, from a recent survey of empirical economists at the top forty research universities, was that the minimum wage would not lower employment by .1 percent per 10 percent minimum wage increase, but rather would reduce teenage employment. Now, less than thirty percent of minimum wage workers are teenagers. Seventy percent of minimum wage workers are adults. And here is where Rick
Burkhauser and I disagree. Most of these folks are low-wage workers in low-income families, and they depend on this for their income.
As that chart to the left shows, from a new economic policy institute issue brief on this topic, if we fail to increase the minimum wage, it will fall to $4.90 in today's dollar. That is not a wage floor for low-wage workers, especially for women trying to move into the labor market.
Mr. Clay. Let me make one other statement. What I am hearing, not just from these witnesses, but from many that come before us to testify against a minimum wage, is that it is perfectly okay for the government to subsidize businesses who don't pay a decent living wage. But that there is something sinister about the government insisting that everybody that works 40 hours a week, 52 weeks a year, ought to be making a living wage. Now, when I say that they argue that it is all right to subsidize businesses that do not pay the minimum wage, what I am saying is that these businesses do not provide health insurance, and they do not provide pensions. So, the government, eventually, has to provide the healthcare for the people that they are exploiting, and also has to provide retirement for those people. I think that is what is sinister, not the fact that some of us want to raise the minimum wage so that people can live in decency.
Chairman Goodling. Mr. Castle.
Mr. Castle. Well, thank you very much, Mr. Chairman. I have some general questions along for the professors and economists and people like this, that I would like answered.
Let me just start with you, Professor Neumark, and maybe you can help me with this. My state is Delaware, and in Delaware we have already passed a law to increase our minimum wage. I think it increased by the exact same amount that is in the proposals being discussed here. I think it was a dollar increase, but the length of time may be different. It is my understanding that the states have a legal right to raise a minimum wage above the federal minimum wage, but not below it, of course. Is that correct?
Professor Neumark. That is correct. But there is a small proportion of workers not covered by the federal law and the state laws.
Mr. Castle. I was wondering about that. There are some that are not somehow covered?
Professor Neumark. It has become an increasingly trivial amount, but the states are free to have a higher minimum.
Mr. Castle. And all states are allowed to do that? Do all states have the ability to do that? Is that correct?
Professor Neumark. As far as I know, yes.
Mr. Castle. Can you tell me how many other states have done that, or are doing that, at the present time? Do you have any knowledge of that? That, frankly, impacts my vote on this whole thing, to some degree. I pay attention to Delaware.
Professor Neumark. I have papers, not with me, which give you the full table of which states have higher minimums. I believe there are now on the order of 10 or 12.
Mr. Castle. So, it is a relatively small number of states that have done this so far?
Professor Neumark. Yes, typically, what happens, when the federal minimum stagnates for a while, states jump ahead. Since we had a relatively recent increase in the federal minimum, there are not many states that have felt the desire to jump ahead.
Mr. Castle. Exactly. Most of you have talked about the minimum wage. Most of these charts show the effect on tax items by the minimum wage, and I have some questions about those charts, but I don't want to get into that. I have always assumed that the minimum wage has a bumping effect to some degree. Well, it is not an assumption. It is obviously correct. Obviously, if you are going to raise the minimum wage by $1, somebody who is earning 50 cents more now is probably going to get their wages raised by $1.00 also. And it is probably on up the ladder, until you get the Internet people earning $10 million a year, at which point it might not affect them, but to some degree, amongst a lot of workers, it has that effect.
When I considered minimum wage, or voted on it, it was sort of always with that in mind. It was part of the economic change that was being made. Maybe you all mentioned it, but I didn't hear it heavily referenced in anything you said. I would be interested in hearing a little more about what I have just stated. Maybe my theory is a little bit wrong, or perhaps there are some other answers.
Professor Neumark. Let me just make a quick comment. I think Dr. Bernstein has more to say, which he did mention in his testimony. A lot of economists believe that happens. I would argue the evidence is somewhat shaky, and exactly why it occurs is unknown.
One reason it might happen, for example, is that if there is a raise to the price of minimum wage workers, employers tend to substitute away from them, and towards workers that earn a slightly higher wage, which bids up their price. That may be one reason it occurs. The other may be that employers simply like to preserve spreads for some other reason.
Mr. Castle. Right. Well, it almost has to work in the circumstance that you are running a fast-food place, and you are paying somebody $6 an hour and the minimum wage goes from $5.50 to $6.50. You almost have to take that person up higher. I would think at the lower levels, it almost has to have some impact. It is almost unavoidable.
Dr. Bernstein. If I may comment, I agree with David Neumark. I think there is, what we call, a spillover effect. I think it is there, and I think it may go up to 75 cents, maybe a $1 above the minimum wage; some estimates go higher. I mean, one interesting thing about that, and there is a new paper coming out in The Quarterly Journal of Economics that takes your point and looks at its impact on wage, and income, and equality.
If you look at that chart over there, it tracks the minimum wage over time. You will see that for nine years running, when Congress failed to increase the minimum wage, it fell by 30 percent, in real terms, over the 1980's.
Mr. Castle. Dr. Bernstein, can you stay with my question a little more?
Dr. Bernstein. No, this is exactly the point. The spread that Dr. Neumark was talking about got wider and wider over that period, between low-and middle-wage workers, because the bottom falls out of the wage distribution when we allow the minimum wage to fall that quickly in real terms.
Mr. Castle. Okay, here is my final question. The assumption of most of this, in terms of dealing with poverty, married families, or whatever it may be, is that most of these workers, as I understand it, are not married. In many cases they are teenagers. Let me throw out sort of a radical proposition. Should we encourage teenagers to work in our society today, considering the need for education? Is this an incentive to have them work, or is it a disincentive because more businesses will not hire people? Have any of you given any thought to that in any of your studies along the lines of employment, education, and the development of youth relationships?
Professor Neumark. We did study that in some of our earlier work on teenagers, which has been the focus of a lot of minimum wage research for not entirely good reasons. On this issue my research agrees with Card and Krueger and many others across the spectrum. What one finds is that for teenagers, there is not much net disemployment effect. The reason it occurs, according to the findings we have, is because the following thing happens. You have students who are full-time students and are not working. They are probably a little higher skilled. You have some students who are part-time, working afternoon jobs, and the like. When the minimum wage goes up, that latter group tends to
get bumped out of the labor market, and they get bumped out because some of the teenagers in school full-time take part-time jobs.
I can't address your question directly, whether that is or isn't a good thing, but the point is that there is some evidence that some teenagers are probably getting away from education and towards work. The important point there, aside from the direct response to your question, is that even though, there is no net employment effect, because of what is
happening is the composition of which teenagers are employed is changing a little bit; there still is some disemployment going on. Some teens are losing their jobs.
Chairman Goodling. Mr. Kildee. Oh, I missed his statement. Maybe I should put it in the record.
WRITTEN STATEMENT OF THE HONORABLE DALE E. KILDEE, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, DC -- SEE APPENDIX G
Chairman Goodling. Mr. Miller.
Mr. Miller. Thank you, Mr. Chairman. Thank you for your testimony, and I am struck by a couple of arguments. As I look at the question of what happens to these families, I am looking at something somewhat similar to Mr. Shaviro's paper. In my state of California, I am told that in the case of a single parent with two children, you take the increase, and you go from $10,712 to $12,792, a $2,000 increase for the family. Then, when you back out TANF and you back out food stamps, and in this case, assisted housing is included, and social security taxes, the person is left with about $319. So, you attribute that to, I think, somewhere around a 60 percent effective
marginal tax rate. I don't know where your cutoff point is, and you reel from that, and
you say, ``how can you do that to poor people?'' That is a hell of a good question. How can you do that to poor people?
But the interesting thing I find is the same people who say, ``This is a very inefficient way of doing this. We should do this to the EITC,'' voted, 227 to nothing, to cut the EITC. So, the poor people are in between a quandary. They wanted to take the EITC and use it for some other purpose. I think it was to pay for capital gains, but they don't want to raise the minimum wage. And as Mr. Bernstein points out, when we don't
raise the minimum wage, that household income does not move. We don't increase the EITC for a falling wage in relationship to inflation or the cost of living. So, the poor are trapped.
So, you say to this person, ``Well, you know, because of this terrible effective tax rate, I can't give you another $300 a year.'' But there is no other place to get that.
What I am struck by is that for an economy that essentially ended welfare, it decided there was only going to be two classes of Americans in the country. You are either employed or unemployed, and we have temporary assistance, but your real status is employed or unemployed. When we go to the marketplace, the state government, the federal government, and the federal and state taxpayers all have to kick in $2,000 to keep that person afloat at the poverty rate. I don't understand that. I mean, the real cost of that employment is not reflected, because the taxpayer is subsidizing it.
We sort of seem to want to have a mixed system here in terms of what we want to do. Do we want the economy to provide livable wages, or do we want to make it a matter of national policy, in which case, the EITC should move with the index, and all of the rest, that we are going to subsidize and provide a negative income for those people? Because we ought to tell the taxpayers which it is. Because if we tell the taxpayers we don't want to increase their taxes to do these things, but we also tell people we don't want to increase the minimum wage, then it seems to me that the person who is getting whipsawed is the low-income worker.
Professor Shaviro. Well, I can't comment on the motives of anyone.
Mr. Miller. It's not about motives; it is about the realities of the social policy as it has unfolded.
Professor Shaviro. On my table 1...
Mr. Miller. We vote on the EITC, and you take away benefits if
people do better in the economy, and yet people argue that you shouldn't do that, so the government should keep subsidizing these jobs.
Professor Shaviro. On my table 1, actually, the person really gains only about $1 a week.
Mr. Miller. I am looking at a thing from CRS, which is related to California, but it's the same idea, it's a high marginal rate if you back out benefits, if you say that is part of the tax rate, you lose those benefits, it's a very high marginal rate. But I don't see anybody stepping forward to fill the gap. So, this is not the best instrument, it happens to be the only one we have.
Professor Shaviro. This instrument, if you assume it was provided for free, based on my data, you probably think of there being some net progressive effect, and you might say, ``Gee, there are a lot of better ways of doing it.'' One part that is not here is who pays for it? Because, I know any government program has to be paid for somehow; this is, in effect, a mandate, and it's being paid for off-budget and in some ways it's very hard to tell.
Mr. Miller. When you go into the marketplace, you pay a livable wage, because we think the people who go to work every day, all year long, ought to end up, and be able to support their families. And the employer, today, continues to say, ``not really,'' unless the government wants to kick in some additional money.
Professor Shaviro. To the extent that a person's income stays constant, and I am not saying that it is 100 percent stays constant, but that person is no better off. In effect, you get $1 more from your employer; you get close to $1 less from other sources.
Mr. Miller. I understand that. But, why should the employer be able to dip into the taxpayers' pocket to support that job?
Professor Shaviro. Well, it depends on how you look at it. You could also say the taxpayer is dipping into the employers' pocket and saying, ``you are going to pay, instead of me.'' I don't want to judge who is the best person to pay necessarily, but one way or another, someone is going to be paying for it.
Mr. Miller. The employer is getting the work; they are getting 40 hours of work.
Professor Shaviro. Yes, but they are paying more than they would have, otherwise.
Mr. Miller. But they might not have had the work.
Professor Shaviro. Someone, somewhere is going to pay. It is very unclear whether it will be the employer or someone else. But somewhere, someone is going to pay, in any event.
Chairman Goodling. Mr. Ballenger.
Mr. Ballenger. Thank you, Mr. Chairman. I would like to say that I was on this
Committee when Tom Petri worked on the idea of the EITC, and I don't think the Republicans should be put down too badly, since I think Tom was the first one to really push it.
I would also like to say that when I worked at the minimum wage of 65 cents an hour, we didn't have AFDC, Medicaid, food stamps, SSI, daycare subsidy, or TANF. So, is there somebody that has charted the growth in the minimum wage, along with the growth of the welfare benefits that we have put into the system, so that your discussion, Mr. Shaviro, would make a little bit of sense? Each of you has charted various things, but nobody has put it all together into a single chart.
And I would like to say that, Dr. Bernstein, the statistics you quoted were for the last seven years, and I think that we have had the largest industrial growth in jobs and everything else in this country during this time. So, in reality, right now the minimum wage doesn't mean a whole bunch, because only in the worst parts of this country does anybody pay the minimum wage.
So let me ask a question of each of you. Other than raising the minimum wage, which I obviously don't think is very effective, are there other areas that Congress could look into that would increase the actual purchasing power of the low-income workers?
Let me again pose for you the problem. My wife and I ran a daycare center for welfare mothers for their children. They were all receiving food stamps. And they were also receiving the daycare subsidy, which also fed their children, and they received Medicaid. We found when we could get jobs for them that the hardest thing was the replacement of Medicaid. If you are poor and you have two kids, and you are going to go to work somewhere, it will be very difficult for you to find a job that pays for any health benefits. So, the fringe benefits are substantially better than what you could collect if you went to work, so it pays for people not to go to work. Now, raising the minimum wage does not address that.
Have you got any ideas, Professor Neumark? Let's have each of you answer.
Professor Neumark. I would like to make one comment in response to that question. I think Dr. Bernstein and Dr. Burkhauser know more about other income support programs. And despite what Mr. Miller said about the vote being 227 to 0 against raising the EITC, I think that the vote here would be 4 to 0 in favor.
Across the board, it's true of most other economists that you speak to, that they view the EITC as one of the wiser policies that has been invented to try and put more money into the hands of low-income people, and there are two reasons for that. First, as was mentioned earlier by Dr. Burkhauser, it targets people based on their family income. It does not go to a teen in an affluent family. It might go to a teen in a poor family, and it
will certainly go to a single-parent head of household with a couple of kids. The second reason is, it subsidizes work, instead of taxing work, quite simply.
Now, there are some problems with the EITC. The phaseout creates some labor supply distortions, but, in theory, and in terms of the evidence, the EITC does bring more people into the labor market over that first hurdle, from non-work to work. I think that makes it a very sensible policy. I understand that it is a budget item. Fortunately, that is your problem and not my problem.
But, in terms of the underlying wisdom of the policy, I think it's a flat-out winner.
Mr. Ballenger. Dr. Shaviro.
Professor Shaviro. I really think that the issue of how rapidly benefits to the poor are phased out is one that is not in this Committee's jurisdiction, but it's an enormously important one. Medicaid is a great example. When you have income-condition benefits, and you limit them to the poor, what that means is that you have a very high marginal tax rate on beginning to escape poverty. And if we took a comprehensive view of these things, things that would kind of look like bigger government spending would be seen more accurately as lowering some marginal tax rates and raising others, so that the near-poor don't have the highest marginal rates in this society.
Mr. Ballenger. Dr. Burkhauser, you have not had a chance to say anything.
Professor Burkhauser. Thank you. Let me answer in two ways. First, I have been very interested in looking at the transition from school to work for kids that have problems with disabilities, as well as low education. The EITC is a great program, but it could be broadened. For instance, we have 1 million kids who are on SSI disability right now, and no thought of how we are going to get them off, so they may be there forever. One thing would be to expand the Earned Income Tax Credit, to allow 18-to 25-year-olds, who are currently not eligible for the EITC, to get eligibility for EITC benefits.
But, more generally, you made a very important point. Over the last seven years, we have had economic growth. Quite frankly, the way to increase wages of all workers is to continue economic growth. That is the real story. And I think we would also get a 4-to-0 vote on that one.
But, let me comment on Dr. Bernstein's findings, that there was no significant decrease in the employment of minimum wage workers in 1996-1997. That is accurate. I am a New York Yankee fan from a long time ago, and one of my heroes was Mickey Mantle. Mickey Mantle won the Triple Crown in 1956, and he spent most of his nights drinking and carousing with women. In the short run, drinking and carousing with women did not affect Mickey Mantle's productivity, but over time, it had an effect.
You can raise the minimum wage when you have very strong economic growth, and you may not get much of an effect at that moment. Unfortunately, business cycles go up and down, and if you have that minimum wage too high when we get into a recession, I think you are going to see the real impact of having too high a minimum wage.
Chairman Goodling. Mr. Owens. Dr. Bernstein, do you want to respond?
Dr. Bernstein. Yes, I just want to make one comment. I think Mr. Miller raises some good cautions about the EITC. I mean, I support the EITC also, but we must not forget that the EITC is a complement to the minimum wage; it is not a substitute. You really need both.
I have exactly the chart you are looking for in my testimony. It shows that if you take the average hours of work of a single parent with two children, and you assign her the minimum wage, the EITC, and food stamps, she is still below the poverty line.
So the problem is twofold. One, the EITC by itself won't get you there, and two, you have to be cautious about subsidizing low-wage employers. That is a problem that was raised a few minutes ago.
Mr. Ballenger. Could I just ask whether you have a long-term chart like you have just mentioned? I see the single chart, but it's a one-shot picture.
Dr. Bernstein. Do you mean overtime? Yes, I don't have that in my testimony, but I think I can develop that.
Chairman Goodling. Mr. Clay, do you have a unanimous consent request?
Mr. Miller. Yes, Mr. Chairman, I ask unanimous consent to insert into the record a statement from John Sweeney, president of the AFL-CIO; from Alexis Herman, Secretary of Labor; from Representative Rush Holt, and Representative Carolyn McCarthy. The last two are on the floor right now debating.
Chairman Goodling. Without objection.
WRITTEN STATEMENT OF MR. JOHN SWEENEY, PRESIDENT OF THE AFL-CIO, WASHINGTON, DC -- SEE APPENDIX H
WRITTEN STATEMENT OF THE HONORABLE ALEXIS HERMAN, SECRETARY OF LABOR, U.S. DEPARTMENT OF LABOR, WASHINGTON, DC -- SEE APPENDIX I
WRITTEN STATEMENT OF THE HONORABLE RUSH D. HOLT, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, DC -- SEE APPENDIX J
WRITTEN STATEMENT OF THE HONORABLE CAROLYN McCARTHY, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, DC -- SEE APPENDIX K
Chairman Goodling. Mr. Martinez.
Mr. Martinez. Thank you, Mr. Chairman. You know, I have learned a lot from this first panel. Actually, I was going to just make my statement on how I feel about it, because I don't think anybody's mind is going to be changed here.
One thing I think the general public should know is that, when we arrange these panels, the majority gets three people that agree totally with them, and we get one witness that agrees with us. These are very slanted proceedings. I would much rather have an honest debate, where the panel was equally divided, where we would hear both sides, and some better information than what we have got here today. All I have learned here today is that the next time my employee comes in and asks me for a raise, I am going to tell him, ``No, I am not going to give you a raise, because it's going to hurt you. And I don't want to hurt you.''
Now, does anybody really believe that minimum-wage workers, and people who pay those minimum wages, would actually give those people a raise unless they had a minimum wage, and that minimum wage was increased? I don't think so. Now, Mr. Clay had said earlier that he wished that some people would be on the panel that would actually live under those minimum wage conditions. Well, I am one. I can remember working for Case and Mailer for three years, and never getting a raise until the first minimum wage was passed, and then we got a raise, and you ought to see how happy those people were. Now, they didn't know it was going to do them harm. And they didn't know they weren't going to have more money. The logic is that you are going to make more money if the employer keeps paying you that minimum wage, because you are going to get an income tax credit. Well, I always thought that if you got the income tax credit, that you would then be keeping more of your money. That's the way they sell it. You are going to get to keep more of your money, not that you are going to make more money. I don't know how you get more money when the employer is paying you a certain wage and that's all he is going to pay you.
I look at the panel and I wonder how many of them are really on a first-name basis with poverty. I don't believe any of them are really, to tell you the truth, from what I have heard here today. But I have a hard time swallowing the logic that increasing the minimum wage has a negative impact. Now, I have been in Congress 17 years, and I have seen it increase several times, and never, never did I see the signs in those fast-food joints go down that say ``employment needed.'' I haven't seen signs going down in a lot of those kinds of work that are low paying jobs. They were still hiring even though they paid more.
And the funny thing is, some of those fast-food places pay more than minimum wage to begin with. And they are right. If the minimum wage increases, the people that are making more right now will get more, and that is probably the only way they are going to get more.
You know, what is surprising to me is that we are in the midst of an unprecedented growth period, and our economy is as good as I can ever remember it. So, a lot of people somewhere are making a lot of money. And when I drive through my district and talk to my people that I talk to, they are not benefiting from that great economy. The national unemployment average is 4.5; in my district it is a little over 8 percent. So, they are not benefiting from this great economy, and the only way they will benefit is if they get a minimum wage increase.
I talk to and see these people that are living below the poverty level all the time, and they know darn well that a minimum wage raise is not going to take them out of poverty. Nobody on this side has ever said we are going to eliminate poverty by doing this.
I remember the great war on poverty, to end all poverty, and it never did work. So, these people are still going to suffer in poverty, even if they get a little increase. But their life is going to be a little bit better, at least a little bit better. You know, someone said there, that if you take a guy from $10,000 to $25,000, it wouldn't do much good for him. If anybody believes that, I have got some ocean side property in Arizona that I will sell them. The fact is, you take me from $10,000 to $25,000, and I will show you how I will benefit by it, because I was there once, and I know exactly what you can do with more money when you get it. It depends on your ability to use that money wisely. That is really what the situation is.
You know, I have heard the hue and cry about people not making more if they are working at low-wage jobs because they are lazy, or they are unproductive, or they have no ambition. That is simply a big lie. In my district, those people working for minimum wage get up every morning, kiss their kids and close the door behind them. They go to work every morning where they sweep floors, sack groceries, cut lawns, or do any number of jobs that are low-paying. And then after work all day, just like the rest of America, they return to a house that is falling down. They eat the cheapest food they can find. They sit on second-hand furniture, and if they are lucky, they can sit back, and relax, and contemplate the American dream, and what a joke it is for them.
Despite that obvious difficult existence, we sit here today discussing whether or not we should add $1, one lousy dollar, to the minimum wage. I think that is a shame.
Chairman Goodling. Your questions were profound and stimulating. Mr. Tancredo.
Mr. Tancredo. Thank you, Mr. Chairman. I guess I am prompted more to raise the issue, or I guess respond the way my colleague has just done, in terms of a statement rather than a question, because of what he has just said. I had a number of questions for the panel. But I am perplexed by a mindset that gives anybody the reason to believe that we, a body of 535 people, could possibly begin to determine exactly what the right wage is for everybody in order to do everything. That is, to bring them out of poverty, bring them up to the poverty level, or anything else. It is astounding
to me that we think that much of ourselves and our ability to actually analyze this issue well and then to just say that a $1 increase is correct.
Maybe this is a good question for the panel. What is the right amount? How do we know that $1 is the right amount? What makes it $1, and not $1.10 or $2 or $20? Is there anything that tells us that we could actually establish a ``right amount'' of money that anybody should be paid for any job?
And I'll hold for just a second on that, while I go back and say, we all want evidence as to how the economy works, and all we have to do is drive down the street and see all the signs my colleague refers to as, ``help wanted'' signs. We recognize that has nothing to do with the minimum wage. It has everything to do with the marketplace. Likewise, if we get to the point where the market shifts and we are not expanding in the way that all of you agree we need to expand in order to create jobs, this phenomenon will cease to exist. And it will be the reverse. We will not see any signs for employment, but we will see a lot of people unemployed. It will have absolutely nothing to do with the minimum wage. It will have absolutely everything to do with the market.
And so, what makes us think for a moment we can intervene in that process to actually identify what is ``right'' for everybody, to do what we all would love to see happen, and that is to better the lives of everyone living in dire circumstances.
Professor Neumark. I'll just make a quick comment. First of all, I respectfully submit that one doesn't have to be poor to study these questions. I have a brother-in-law who is a renowned heart researcher, and knows a lot about different treatments. He knows what works and what doesn't. Yet, he has never had a heart attack. I think it is true that, if you put a minimum wage worker up here and said, ``Would you be better off if you got a raise,'' and that worker was assured that he or she would keep his job, the answer would, clearly be, ``yes.'' The issue, of course, is how many keep their jobs, and how many don't.
I think the question of what is the right policy goal here is the right one. I testified a couple of years ago on the disemployment effects of the minimum wage. I presented my evidence, which I felt was consistent with some disemployment effects. No one said they were huge, and somebody, towards the end of the hearing, said, ``Well, what should we do?'' And I thought about it. I hadn't really thought about the question from the pure policy perspective, and I said, ``I don't really know.''
I'm not going to tell you that any government rule, or regulation, that causes somebody to lose their job is necessarily a bad thing. It's probably true that some pollution regulations cause some employment, but they might be a good thing. By the same token, one might come to the minimum wage, as this Committee fortunately is doing, from the perspective of, ``what does this do for the income distribution?'' We might have some job loss and we might help the poor. We might have some job loss and we might hurt the poor. We might be willing to tolerate the job loss if, indeed, it helps the poor. We make many other decisions with respect to policy that have those sorts of effects. So, it's ultimately a distributional question.
I think the exercise of saying, ``What exactly is the right way,'' is not one you can possibly reach. I think the best we can do is look, as the research described here has done, at past experiences with raises of the sorts we have had, 75 cents, 90 cents, $1, and say ``look at what happened.'' The evidence, I would contend, certainly doesn't suggest that minimum wages help the poor a lot. It doesn't reduce the poverty rate, and if anything, it's most consistent with increasing the poverty rate.
Dr. Bernstein. Well, I just want to say that the minimum wage was established by Congress to set the wage floor on the labor market, because low-wage workers have the least bargaining power of any group of workers in this economy. Without a minimum wage, their rates of pay will just decline year after year, being eroded by inflation. So, I don't think you are asking that question of whether there should be a minimum wage. I hope you are saying that there should be a minimum wage, but are asking how high it should be? And that question, to me, is an important one.
If you look at the relationship of the current proposal, $6.15, to the historical level of the minimum wage, you will see that, even with this increase, it's still about 15 percent below where it was in 1979. But since 1979, wage and equality has increased tremendously, as the gap between middle-and low-wage workers has expanded. I think we need to set the minimum wage high enough so that it makes sure that the shape of the
income distribution is narrower at the bottom than it has been. Give low-wage workers a boost, because their bargaining power is simply too small for them to get the boost that ought to be fair in a growing economy like ours.
Mr. Tancredo. Thank you. You mentioned that it was initially put in to give those people making the least amount of money some power, because they don't have it in a bargaining sense. How do we explain the fact that there are so few people today who actually make the minimum wage? There is such a difference between those people who do, and what most people make, even at the margin. Who bargained for that difference? The marketplace did.
Dr. Bernstein. There are 11 million workers who will be covered by this new increase. That is slightly less than 10 percent of the workforce, not none. But you are right. It's a small pebble in a very large pie.
I like what Rick Burkhauser said. If you want to really increase jobs, it's the macro-economy, but if you want to really increase the pay of low-wage workers, then minimum wage is a key policy to do so.
Mr. Tancredo. Thank you, Mr. Chairman.
Chairman Goodling. Mr. Owens.
Mr. Owens. Mr. Chairman, and my colleagues who have previously spoke, the one thing we can do in America that would be worse than ethnic cleansing in Yugoslavia would be to abolish the minimum wage. The one thing that would bring out a revolution would be if you try to abolish the minimum wage.
There are some figures here that have been disputed. I haven't heard but one figure that was not disputed. That was when Mr. Bernstein said that 70 percent of the minimum wage workers are adults. My figure is 74 percent, so we are pretty close. Does anybody dispute that fact, that between 70 and 74 percent of the minimum wage workers are adults?
I think it's also important to note, for the benefit of my colleague, distinguished chairman of the SubCommittee on Workforce Protections, in North Carolina, 10.4 percent of the workforce would benefit from this minimum wage increase, because they are presently earning less than the minimum wage. You said that almost nobody who earns minimum wage anymore would benefit. But 345,218 people is a sizable number of people, I assure you. And I speak as a member of a family where my father worked all his life, died at 68, three years after he retired with social security, having never earned more than a minimum wage. The minimum was considered a really great thing by really poor people like ourselves. My mother's great fear was that when he was laid off, he wouldn't earn the hours to have that minimum wage add up.
So, I think it would be important for us to have some people in here who understand the mechanics of poverty. I don't want to repeat what my colleagues on this side have said so well already. But I would like to add as kind of a footnote and conclusion to the discussion, that we should stop for a moment and consider the fact that the worth of the stock market 10 years ago, in 1989, was $3 trillion. The value of the stock market now is $13 trillion. Ten years later, it's $13 trillion. Now, if I am correct, that is more than a 300 percent increase. With America having that kind of increase in its wealth for those people who benefit from the increase in the stock market, why are we quibbling about a small increase in the minimum wage? Why are we quibbling? It takes everybody to make this economy, and certainly working families have played just as much a role in building that kind of an economy as anybody else.
If you want to look at it from any point of view, America, with structures in place, has had a long history of peace because our soldiers have gone off and fought to prevent tyranny from coming to our shores. Look at the men who died in Normandy and Iwo
Jima and Okinawa, and the ones that died in Vietnam. The demographics of the 58,000
people who died that are listed on the wall show that most of them are from working families.
In Plato's time, soldiers were soldiers and you had sort of a stratification. Workers were not expected to go out and fight. But in our times, soldiers are usually working people, the people who actually go out there. When we go to Kosovo, the people on the ground will be working families. Don't they deserve to share in the wealth a little bit? The economy can stand it. If we have a 300 percent increase in the overall wealth, then certainly the economy will not be hurt by a $1 increase over the next two years. Why are we quibbling about a $1 increase in the minimum wage for working families? Why can't we share the wealth of a great majority of Americans? Where is the problem?
Somebody said we should relegate the minimum wage to the museums. I think we should relegate tax cuts for the rich to the museums. Dr. Bernstein, maybe you can comment on that? Where do tax cuts for the rich help our economy, when you already have a 300 percent increase, and the rich are the people benefiting mostly from that? How much more do they want? How much more do they want to save by exploiting workers? These people don't have a healthcare plan. Practically everybody on minimum wage, you can almost take it as law, don't have a healthcare plan or pension plan. The dollar they make by the hour is all they have, and yet, you want to block them from sharing in the wealth of America. Dr. Bernstein.
Dr. Bernstein. Well, you are absolutely right that the wealth distribution is more out of whack now than it has been in any period of the post-war history. The share of stock market gains, obviously, goes highly disproportionately to those at the top end of the wage scale.
The point that I was trying to make at the end of my presentation was that the productive capacity of the economy has really grown quite significantly since the last business cycle peak. It is twenty four percent if the minimum wage continues to erode as inflation takes away its buying power year after year. Now, the economists who oppose the minimum wage are not cold-hearted people who just don't want good things to happen to low-wage workers. It is that there is the misguided notion that, if you raise the minimum wage, you are going to hurt low-wage workers. What's that?
Mr. Owens. That's your opinion.
Dr. Bernstein. That's my opinion, right. In fact, the evidence is
very clear. Minimum wage increases have virtually zero employment effect. They don't
lower employment; they don't raise employment. What they do is raise the wages of low-wage workers.
Mr. Owens. The minimum wage should now be $7.90, correct?
Chairman Goodling. I am sure we can all agree that, if you are being ethnically cleansed, whether you are in the Sudan, Afghanistan, Kosovo, Tibet, or Rwanda, you would probably believe there can be nothing worse than that. Mr. Fletcher.
Mr. Owens. That's your opinion.
Mr. Fletcher. Thank you, Mr. Chairman. I certainly believe that we all are concerned about making sure that we provide the best for those that enter the workforce at the lower levels.
Could you list some of the things that impact an ability to earn a living wage? If you looked at education training incentives, welfare to work programs, growth in the
unemployment rate, minimum wage, and the structure of the tax system, which one of these really has the biggest impact on the ability of an individual to earn a living wage?
Professor Burkhauser. Let me answer that. I think there is no question that individual productivity matters most. So what we need to do in the long run is to train people through education and on-the-job training so that they have the productivity that merits a wage far above the minimum wage. As a matter of fact, the vast majority of workers in the United States earn wages far above the minimum wage. It is untrue that the minimum wage is a major factor in determining what the wage distribution is. What we need to do is focus on those factors that will improve productivity.
Professor Shaviro. I would add that the tax transfer system, the income tax, the EITC, TANF, food stamps, and all these programs are really not about raising productivity. They are about redistributing wealth in a progressive manner, with the benefits from that being as great as possible for the cost in terms of loss of productivity being as low as possible. It's always a trade-off between those two things.
I think that the tax transfer system could be made to do a more effective job of
transferring wealth and smoothing out the work disincentives so that they are not concentrated.
Mr. Fletcher. Let me interrupt you just a minute. I was talking about truly affecting the ability of an individual to make a living wage. We haven't defined that. I think that if we look at the poverty level, it is probably the minimum. So, you are talking about redistribution of income. It obviously will help an individual below the poverty level to receive an income that is higher.
Professor Shaviro. And will admittedly tend to hurt productivity.
Mr. Fletcher. But is looks to me that if we were talking about education training and some of the other incentives, we would get a much greater return on teaching an ability to an individual, especially supporting things like healthcare. So that when they do have those low-income or entry-level jobs, that they have the healthcare that they need rather than looking at possibly not having a job for them if the market falls and those low-income jobs are not available.
My dad didn't graduate from high school. He started at 75 cents an hour and worked very hard. And I think, as some have said here, sometimes it's not the first generation or the individual that it works for. But it gives his children something better. I think that certainly everyone wants us to give the opportunity to these low-income folks as much as possible for themselves and for their kids. I am just not convinced that doing something that decreases the number of entry-level jobs for these individuals will work.
You can use all the statistics you want, but this forces people to raise the income. Then the number of jobs offered is going to decrease. So, I think that is important.
Let me ask one other question to Dr. Bernstein. What is the reason for the gap between the low-income and the high-income? What is that actually due to in the last few years?
Dr. Bernstein. Sure. It is not due to one factor, and economists have actually studied this very carefully. If you look at the gap between low and high wage workers, about one-fifth of it is due to long-term decline in the minimum wage. About one-fifth of it is due to the decline in unionization rates. Another fifth is due to the increased return on education, the idea that college-educated workers earn relatively more than lower-skilled workers. That's why the training idea makes sense. That gets you up to about three-fifths. The rest is probably due to increased imbalances in trade. The fact that our trade deficit has continually grown has hastened the shift of manufacturing facilities.
Mr. Fletcher. Let me interrupt you. In the last five or ten years, did we have an increase in the poverty rate?
Dr. Bernstein. The poverty rate is higher now. It is half a percentage rate higher now than it was in 1989, during the last business cycle peak.
Mr. Fletcher. Okay. You're talking about influencing a fifth of one-half percent. My time is up right now, but my understanding of why we have the growing gap is that, actually, the middle-income folks have raised their incomes tremendously because of the economic growth.
But, thank you very much.
Chairman Goodling. Mr. Romero-Barcelo.
Mr. Romero-Barcelo. Thank you, Mr. Chairman. As a long-time advocate of the need to make the minimum wage a living wage, I am a strong supporter of the Kennedy-Bonior proposal to raise the minimum wage to $6.15 per hour by September of 2000. Let us realize, though, that minimum wage is actually also a minimum effort at a more equitable distribution of wealth.
I was born and lived all my life in Puerto Rico. Prior to the enactment of the minimum wage on the island in the 1970's, we did not have the Federal minimum wage. I lived through the level of exploitation that thousands and thousands of hard-working wage earners suffered in a system without a reasonable minimum wage. These workers could not adequately support their families. Many had to receive welfare assistance to help them clothe, feed, and shelter their families, even though they were working 40 hours a week. Now, is that fair? That's what the minimum wage is all about. The wage should be at least a substantial level. And now, I see minimum wage is no longer for a substantial level; it falls quite short.
So, while I was mayor of San Juan, during the early 1970's, I called for the application of minimum wage in Puerto Rico. I came to see Senator Harrison Williams of New Jersey, who was then the chairman of the Labor Committee in the Senate. I
successfully explained to him that our workers were being exploited. We were in the same economic system as the 50 states, and yet we were not covered by the minimum wage.
And, I remember one of the people I spoke to was Evelyn DuGrower, a senior lobbyist here, and the people at the International Ladies Garment Workers Union, ILGWU, which was one of the largest unions in Puerto Rico. At that time, unions in Puerto Rico, including the ILGWU, were convinced by the governor and others that we could not have Federal minimum wages because we would lose all of our jobs in Puerto Rico. I managed to convince the ILGWU that we could pay Federal minimum wages. People were being exploited, and they finally followed through. They gave instructions to the union at home to support me. I don't think that there is a single union or labor organization in Puerto Rico that would speak up against minimum wages today.
The introduction of the minimum wage allowed the hourly wage worker to earn a substantial wage that gave them a fighting chance to care for their families, without relying so much on government assistance. Now we criticize welfare. But if we criticize welfare, how can we go against providing for a substantial level for the minimum wage?
In a time when the economy has boomed to the point that we have baseball and basketball players earning millions of dollars, and CEO's earning tens of millions of
dollars and making billions of dollars in a few years, how can you not raise the minimum wage to a substantive level? Because we are going to go broke?
The opponents of the minimum wage always have argued, since Harry Truman proposed $.25 cents an hour, that jobs were going to be lost if the minimum wage was introduced or increased. In Puerto Rico, this has simply not been the case. Like most of the regions of the country, increases in the minimum wage appear to have no impact on the unemployment in Puerto Rico. In fact, between September of 1996, when the minimum wage was $4.25, and December of 1998, after the minimum wage had been increased to $5.15, the percentage of unemployed workers in Puerto Rico actually declined by 5 percent.
I would argue that rather then being a drain on the economy, the additional money earned by the minimum-wage workers has a positive impact, since these people have additional spending power. To say that an increase in minimum wage would not benefit those earning more than the new minimum wage is a fallacy. When the person's wages cannot afford to go to the beauty parlor, and she has a wedding or a christening in the family, she has to do a home permanent. When she gets an increase, she might be able to go to the beauty parlor. Somebody who cannot qualify to buy a home because of the income that he has, with an increase could buy low-cost housing with less support from the government.
I think that a minimum wage increase will have a beneficial effect, not only on the Puerto Rican-Americans, but the entire Hispanic-American population. Twenty-three percent of the hourly paid Hispanic workers earn between $5.15 and $6.14 per hour. This is a greater percentage than non-Hispanic whites, which are 16 percent and African Americans, who are 18 percent. Hispanic women are especially likely to be paid a low wage. Twenty eight percent of hourly paid Hispanic women receive $5.15 to $6.14 per hour. An increase of the minimum wage to $6.15 would have a significant effect on the lives of minorities, and particularly Hispanic-Americans.
Chairman Goodling. Mr. McKeon.
Mr. McKeon. Thank you, Mr. Chairman.
Dr. Bernstein, we have heard that ten 10 percent of the workforce receives the minimum wage, and there has probably been some reference to the fact that some of those workers spend their entire lifetime on the minimum wage. Do you, or any of the other panelists, have any numbers showing how long a person generally works on the minimum wage? How many of those ten percent are on there forever, and how many of them only stay at the minimum wage as an entry-level job and then move on?
Professor Neumark. I think it's fair to say no one on this panel has actually studied that question. Brad Schiller, who is at George Washington or somewhere else in town, American University maybe, has studied the question. I don't know enough about it to give you a very well informed opinion, but his claim is that, not surprisingly, many people begin with the minimum wage and then move up. That's simply because young workers, no matter how smart they are and what they are going to end up doing, when they first enter the labor market are fairly low-skilled. It's a tough question to study because we don't typically have long datasets that cover people over large portions of their lives over many points of the business cycle. So, we don't really know.
But, I think the perception that many people start there and move up is accurate. On the other hand, the likelihood that some stay there, the extremely low-skilled, who don't acquire more skills, is also part of the picture.
Mr. McKeon. One of the arguments on the minimum wage is that if you increase it, you
lower people's opportunities to start in at a young age or to gain the experience that they
would gain from their first job. At least it puts off that experience to a later time, when they would have that opportunity.
Dr. Burkhauser, one of the things that you talked about was that the economy has been great for a number of years. And so measuring the impact of the last minimum wage increase would probably produce distorted figures because the economy has been so good. But you talked about the effect of a downturn in the economy. If the minimum wage is increased, what effect would that have on lost jobs at that time? Can you comment on that?
Professor Burkhauser. Yes. Much of the research on the increase in the minimum wage was done in 1990, 1991, 1992, when we were in a recession. I think that some of that work overstated the impact of the minimum wage, because there were downside macro-economic effects that were overstating its impact. I think the work looking at 1996 and 1997 has done the exact opposite. In some work that I have done, I have looked at data from 1976 through 1997, and I found the same consistent finding that most economists found prior to the work at Card and Krueger. We found that increases in the minimum wage have modest negative effects on teenagers and other vulnerable workers such as high school dropouts and minorities. So, macro-economic effects really matter.
I worry that those folks, who say that the minimum wage would not have an impact during this very high peak of the business cycle, are betting the jobs of minimum wage workers on their belief that the minimum wage will not have an effect when we eventually go into recession. We have had a peak in 1979, in 1989, and maybe we will have a peak in 1999, but I wouldn't want to bet my job on that.
Mr. McKeon. Are there any other comments on that?
Professor Neumark. I was having the same reaction that Richard Burkhauser was. If we were having this hearing in 1992, I imagine everybody on this side would be saying, ``we just raised the minimum, and look how high unemployment rates have gone.'' This emphasizes that we all have to get beyond the point of looking at a period of rapid change of aggregate activity, whether it is upward or down, and trying to infer a minimum wage effect from that. That is what we do in our academic studies. We either look at a long period when we have both recessions and booms, or we look at different states undergoing different economic conditions. That is the only way to draw any reliable inference.
Dr. Bernstein. I just want to say a short comment. As David Neumark just said, when we looked at the impact on employment of the 1996-1997 increase, we threw every macro-economic control we could think of into the model. So we tried to control, to extract, the fact that it raised. In an upturn, you are going to get job growth anyway. So the finding that the most recent increase had no disemployment effect controlled this issue of economic growth as best we could, and, as Professor Neumark said, so does all of the economic research.
Mr. McKeon. Thank you, Mr. Chairman.
Chairman Goodling. Congressman Andrews.
Mr. Andrews. Thank you, Mr. Chairman. I have heard the arguments from several of the panelists that there are more effective ways to reduce poverty than raising the minimum wage. One suggestion is that we significantly expand the Earned Income Tax Credit. Another suggestion is that we stop the practice of marginal tax increases on working lower-income people, by raising the level of eligibility for Medicaid, for food stamps, and for other kinds of social benefits. Those are interesting theories. They are also not before the Congress of the United States.
The majority has not proposed a significant increase to the Earned Income Tax Credit. The only increases in the Earned Income Tax Credit enacted in that last 15 years have come from this side of the House, not from that side. We are not in the majority yet. The majority has not proposed raising the eligibility level for Medicaid or food stamps or housing benefits. As a matter of fact, their proposals in recent years have been to go the other way, and to tighten up eligibility standards. So, we don't have in front of us the luxury of those proposals. We have in front of us a choice of whether or not to raise the minimum wage.
And I wanted to ask a related question of Professor Neumark, Professor Shaviro, and Professor Burkhauser because I think it might go to the underlying question. Professor Neumark, if you had to make the choice or cast the vote of whether to have a minimum wage at all, would you have one or not?
Professor Neumark. I think for the same reason anybody who thinks the recent studies don't show any disemployment effect, wouldn't want to raise the minimum to $12 an hour, but I wouldn't necessarily want to reduce it to zero. We have research experience, which again is based on what we have done in this country in the past 20 or 30 years. That experience tells us what happens with a $1 or so change in the minimum wage. I think the only way one could make an argument to reduce the minimum wage to zero is on theoretical grounds.
Mr. Andrews. So, I take it your argument is, yes, we should have a minimum wage? You just don't agree with the level proposed in the Democratic bill?
Professor Neumark. Yes, I think that what we are seeing is small increases.
Mr. Andrews. Professor Shaviro, what is your answer? Would you have one or not?
Professor Shaviro. Well, it's a tough question, because you have to ask what are the parameters of choice? I would.
Mr. Andrews. The parameters are the realities of 1999.
Professor Shaviro. I'm sorry. Let me just explain. If I had the power to enact the tax transfer scheme of my choice, I would eliminate it altogether if
I were to assume that scheme to be politically stable. Absent that, I suppose I would not.
Actually, there are labor economic issues here that are not my expertise. So, I am skeptical, but not convinced as to whether_
Mr. Andrews. So is that a ``yes'' or a ``no?'' Would you have one or not?
Professor Shaviro. I would not have one if I could have the tax transfer scheme of my choice.
Mr. Andrews. Okay, so your answer is, ``I wouldn't have one if I could do a larger income level for Medicaid, and for food stamps, and the like.''
Professor Shaviro. The general redesign of those programs is not really in this Committee.
Mr. Andrews. That choice is not in front of us. Professor Burkhauser, would you have one or not?
Professor Burkhauser. I would like to be cautious in this, as I am in all things, and say that I would not like to raise the minimum wage at this time, and not reduce it, because
the arguments for raising it just don't fly. Increases in minimum wage will not do what we want it to do, which is to help many of the working poor. I think we are deluding ourselves by using this instrument.
Mr. Andrews. So, I take it your answer is, ``yes,'' you would have one, but we picked the wrong amount in our bill?
Professor Burkhauser. That's right.
Mr. Andrews. Underlying this argument is that distortions in the marketplace are a bad thing for the economy. I wonder your position on eliminating other distortions, like any accelerated depreciation rates for holders of capital goods, or perhaps eliminating the FDIC insurance program, since that is a distortion in the marketplace that attracts deposits for national banks, but draws them away from other financial institutions? Would anyone support the elimination of FDIC insurance?
Professor Neumark. Since we are playing these rhetorical games, I would like to come back with my own, which is that I have voted for a Democrat for every election in my life. The reason is because I am sympathetic to the goal of trying to raise the incomes of low-income families.
Mr. Andrews. You know, it's a rhetorical question.
Professor Neumark. Well, you are backing us into a corner.
Mr. Andrews. Would you vote to eliminate the FDIC insurance?
Professor Neumark. Absolutely not.
Mr. Andrews. You would not?
Professor Neumark. Because this is not an issue of principle or of resisting every market distortion. It's an issue of whether this particular distortion has beneficial effects or not?
Mr. Andrews. We appreciate your vote. Is there anybody else at the table who would vote to eliminate the FDIC subsidy?
Dr. Bernstein. I just want to say that I think the line of questioning is interesting, in the sense that we are now arguing about what the level of the minimum wage should be. This is an argument we can have. One thing that you have got to accept is, if you like the current level, it's lower now than it was at the beginning of this hearing, because inflation continually erodes the value of the minimum wage. So, it's not going to stay where it is, as Richard Burkhauser said he would prefer. It's going to decline every year.
Mr. Andrews. The comment of the other three witnesses, of course, would have put them at odds with the majority in 1996, because they didn't want to raise it in 1996.
Chairman Goodling. Mr. Ehlers.
Mr. Ehlers. Thank you, Mr. Chairman. I found this panel to be extremely helpful. It's a good panel, and I commend you for the people you have invited. I will not have any questions. I have a policy in the Congress, which is a little unusual, which is that I don't add anything unless I think it is something unique to the discussion. I think virtually everything has been asked and answered.
I would observe a couple things. First of all, at the beginning, the minimum wage issue was a very simple issue, because that's all there was, in essence, to aid people at that wage level. Today, it's much more complicated by the Earned Income Tax Credit and food stamps. It seems to me that with these factors and the many other factors that affect those who are in poverty, it is a very complex issue. Judging whether or not to increase the minimum wage basically becomes a political and a personal issue.
I happen to be sympathetic to the minimum wage. I worked at minimum wage for a number of years. I decided I didn't particularly like it, so I went to college and managed to get off the minimum wage. Not everybody has that opportunity; not everybody takes that opportunity. But the political aspect is that the highest political impact, and the highest voter approval, comes from voting for the minimum wage because it has an immediate impact that is observable and highly visible.
Yet, I think the panel has pointed out rather well that if we really want to improve the lot of the poor, those below the poverty line, that is probably not the best step to take. The best step would be to raise the amount of food stamps provided, or increase the
Earned Income Tax Credit, or look at some issues involving the so-called welfare system, or even other things. But they have little political value. And that's why this becomes such a major issue.
Observations have been made that those on this side of aisle won't support anything that will solve the poverty problem. That's not true. There are a number that will, but we want it to be well thought out. We want to get the maximum bang for the buck, and really get something that works. And that's a concern that we run into.
Given the present options available, it seems to me that raising the minimum wage is not the best option in terms of truly helping the poor. It may, however, be the only option that is available within the Congress. And so, I urge all of us here to think this through very carefully, and recognize the complexity of it, and really try to do what is going to solve the problem of the poor.
There is a famous cliche that ``the problem of the poor is poverty,'' and that's very true. So, I think our efforts should be directed at resolving that, and not just asking ourselves what we can do to increase the minimum wage, which is an immediate impact item, and politically popular, but certainly not the best option. It is certainly not the best bang for the buck. So, I hope we can continue to work together on this and come up with a reasonable solution. Thank you, Mr. Chairman.
Chairman Goodling. Mr. Tierney.
Mr. Tierney. Thank you, Mr. Chairman. Thank you, members of the panel for your testimony. Mr. Ehlers might have said that virtually everything had been asked and answered, but I can assure you, not everyone has asked and not everyone has answered.
So I have a couple of questions. Let's assume, for a moment, that we know there are people who are still living in poverty while they are working, and as much as we like to idolize the free market, that doesn't seem to have resolved that issue yet. And I think that's really why we are here. Some of us are not about to wait forever for that to come around. No one is sure that is ever going to happen. Assume that we think an employer ought to pay a full value for the work that is done, and that a taxpayer shouldn't have to subsidize that employer for getting a full day's work out of somebody. Further assume that working people ought to be living beyond the poverty level. What are your respective opinions as to how we accomplish that goal? What wage policy do each of you recommend? We'll start with you, Dr. Bernstein.
Dr. Bernstein. Well, I support the increase in the minimum wage as one of those policies. And let me give you a statistic.
Mr. Tierney. I hate to do this, but rather than give statistics on that, I'd like to hear your whole policies so I can move along down there, and hear what each of you thinks about that. One is the minimum wage.
Dr. Bernstein. Okay. One is the minimum wage increase; the other is expanding the EITC. I support that, although I am mindful of your point that this is subsidizing low-wage employers, but the idea is to get water to the fire and that is one good way to do it.
Thirdly, what we haven't talked enough about is macro-policy. I won't say much about it, but keeping the interest rates low enough so that the economy can continue to expand probably does more for low-wage workers than almost anything we have discussed. So, I would increase the minimum wage, expand the EITC, and make sure that the macro-economy continues to expand.
Mr. Tierney. If we rely just on your third point, we would be here for quite a long time
waiting for that to come around, I think.
Professor, can you help us?
Professor Burkhauser. The effective minimum wage for the working poor with children is now $7.21. I am in favor of increasing that, or expanding the EITC to the working poor without kids. That would be my major proposal.
Mr. Tierney. So that taxpayers subsidize the employer?
Professor Burkhauser. Taxpayers would provide income to people who are willing to work.
Mr. Tierney. Right, but the employer wouldn't?
Professor Burkhauser. If their productivity doesn't
warrant $7.21, I would prefer us to provide it as a government, rather than for them not to be employed.
Mr. Tierney. Well, let's just stay with that for a second. So, if some employer decides that they just want to have the taxpayer pick it up, they just don't pay them the effective rate of $7.21. I mean, maybe their employment warrants it, but now you have a smart employer that just says, ``hey, the hell with you. I'll have the taxpayer pick it up.''
Professor Burkhauser. I believe that the way wages are determined for the majority of people in this country is through the market. Workers who have a wage that is too low to support them above a level of poverty ought to be supported through transfers, and that is why I am in favor of the Income Tax Credit.
Professor Shaviro. I would agree with what Professor Burkhauser said. I would just say that if someone who sometimes deserves better is earning a very low wage and the employer is paying the market wage, and this person is not doing well, that is everyone's problem. I think it is unfair to say it is just the employer's problem. It's the problem of our entire society. That is what underlies the thought of the tax transfer system in general, dealing with these problems. It's not necessarily subsidizing the employer if everyone shares in paying for a genuine social problem, which is that someone is not able to earn enough.
Mr. Tierney. Other than that, you agree totally with the professor?
Professor Shaviro. Well, I am not sure I vetted every line, but, in general, I was in agreement.
Mr. Tierney. Thank you. Professor Neumark.
Professor Neumark. I think I am, also, largely in agreement. I think the EITC ought to be more generous. To say we are subsidizing employers is, in a sense, correct. The problem that it creates is too much employment for poor people, which is presumably something we are not too worried about. It's like any other redistributive taxation, where we take money from people who make more and give it to those who make less. And, in general, I have no problem with that. I also think that
the much tougher solutions lie in the realm of increasing people's skills enough that this just becomes irrelevant. I think we all share that goal. We all are equally frustrated.
Mr. Tierney. It's another long-term goal, though.
Professor Neumark. Better training, better schooling, we know that's tough, but, ultimately, that is the ideal here.
Mr. Tierney. But, in the interim, you wouldn't recommend a minimum wage increase?
Professor Neumark. I wouldn't raise the minimum.
Mr. Tierney. You made the comment earlier that you wouldn't raise it, but you would not lower it to zero. What's your ideal minimum wage?
Professor Neumark. I don't think I can give any sort of objective answer to that question.
Mr. Tierney. But what would help you reach the conclusion?
Professor Neumark. I could look at the research and I can see small changes. I can easily turn my chart around and say that if $1 increase has this much negative effect, the $1 decrease has this much positive effect. So, if pushed to the wall, I would say a slight lowering would probably do more harm than good. I wouldn't project that beyond anything outside the range of what we have seen in recent experiences, because I simply wouldn't know what the answer would be as an empirical matter.
Mr. Tierney. Thank you. Mr. Isakson.
Mr. Isakson. Thank you, Mr. Chairman.
Dr. Bernstein, you had said there were approximately 11 million people at the minimum wage level at this time. Is that right?
Dr. Bernstein. Eleven million who would be covered by the proposed increase.
Mr. Isakson. Okay. I want to ask a question of you, to then be able to frame the question I want to ask. Of those 11 million, we have established that a number of them are people working a second job, working a part-time job, or moving up, so they are not, permanently going to be a minimum wage earner. Is that correct?
Dr. Bernstein. Yes, there are.
Mr. Isakson. Of that 11 million, what percent would predictably always be at the minimum wage level? What percent would predictably transition off of the minimum wage during their life cycle?
Dr. Bernstein. That's a question that David Neumark addressed earlier. I don't know how many folks would be there temporarily, and how many would move on. I do know that 70 percent of that group are adults. I do know that about half of them work full time, and I know that the typical worker in that group brings home at least half of their family's weekly earnings.
Mr. Isakson. I just wanted to get a number. Then half of 70 percent might be a good number for a constant. In other words, 35 percent of those people would probably be at the minimum wage, without moving up. Let's take that for an example.
Dr. Bernstein. I don't know.
Mr. Isakson. Here is my question. I haven't been here long enough to have any historical experience over this debate. Two months ago, I left being an employer of people for thirty-one years. My experience is that you have to pay far above the minimum wage in my market area to be able to compete for those few jobs in my company that fit in that category. It's also my experience in 1990 and 1991, which I wish I could forget, somewhat like 1973, 1974, 1975, and almost like 1981, 1982, that the competency level of people I could hire for those same jobs, while necessary at the time, was far greater even at a lower rate because unemployment was so high.
Here is the question that I want to ask you. It appears to me that comments were made about who would be hurt if the minimum wage were raised. The worker, who because of ability, desire, or maybe even because of infirmity, is not going to be better trained or move further up the skill level in their career. I compassionately care about them the most because they are actually out there doing what all of us wanted them to do, which is work and have that pride in work, and not rely on the system. But it seems to me that when the economy turns, a raise in the minimum penalizes the person for whom we have the most compassion.
Because I know, as an employer, I would have a broader choice of people who
would have higher skills to choose from, because they would be hurt by the falling
economy. Therefore, the people that get hurt, it seems to me, are those we care about the
most, to make sure there is a minimum wage in the first place, which I happen to support. So, is that a bad statement?
Dr. Bernstein. The statement is inaccurate in the sense that, if you look at the current labor market, you will find what Harry Holser, the current chief economist of the Labor Department, has shown. He has shown that in surveying the employers, the job vacancy rate is extremely high among low-wage employers. They are having to raise their wages, as you suggested, well above the minimum. Now we are beginning to bring workers into the labor market that have formerly been left behind. I cited the 69 percent of the single moms who are getting into the labor market now by coming off the welfare rolls.
The problem is that in the absence of a minimum wage, their wage level would be so low that they would come into the labor market without a living wage. I think that is a poor economic policy. This just makes sure that once they get there they get a decent wage.
Mr. Isakson. Maybe I'm not hearing you, or maybe I did a bad job. What I was trying to say was nothing against the minimum wage. But consider the possibility of raising the current minimum wage when you had an economic decline. We talked about some of the vast declines. Those for whom we are most compassionate about would seem to be the ones most vulnerable in the down economy if you had a higher minimum wage, because you would have far more skilled people available to take those jobs.
Dr. Bernstein. I see your point. So, during a downturn the least skilled get let go first. Absolutely. But the fact is, when we have looked at the impact of the minimum wage over the downturn, it doesn't seem to have anything to do with that. We examined this very question in 1990 and 1991, when we raised the minimum wage while the economy was in a downturn. Yet, again, we found zero negative employment effect. So, your argument absolutely makes sense.
Mr. Isakson. I'm not arguing, I'm asking.
Dr. Bernstein. Your question makes sense on the face of it, but reality doesn't bear that scenario out.
Chairman Goodling. Mr. Wu.
Mr. Wu. Thank you, Mr. Chairman. I have no doubt that the panelists are very smart and very well-informed on this subject area, but 2,500 miles from home, I have a sense that folks trust us to make decisions for them, not just with our heads, but also with our hearts.
And just to get a sense of what is informing your opinions, in addition to your data and your intelligence, this is a question I would like to ask other members, if I could. But I can only ask you at this point. When was the last time you worked for minimum wage? What was the job, and how did you feel about it?
Professor Neumark. Just like my brother-in-law has never had a heart attack, I have never worked for a minimum wage. As I suggested earlier, I don't think that really impairs one's judgment on these questions, when you are studying data.
Professor Shaviro. I dug up grass roots with a hoe in the New York Botanical Garden for the minimum wage when I was a teenager. At the time, I knew very little about how AFDC, food stamps, and Medicaid benefits for people, other than myself, would be affected by changes in their earning levels.
Professor Burkhauser. I worked for the Mercer County Corrections office. Prisoners and me cleared up garbage and other things at golf courses when I was a teenager, just before I started college. I would have liked to have had a lot more money, I must admit, but I was in a family where my father had a decent job. I saw that it was quite nice to have that kind of pocket money.
Dr. Bernstein. I was in my early 20's the last time I worked for a minimum wage, and I agree with what was just said in a sense that I, like most low-wage workers, wanted a wage increase. This is something that 90 percent of low-income workers support, and I can't believe they don't have their interest at heart. They have seen minimum wage increase in the labor market. Who better to know? And I think this kind of gets to the heart of your question which is who knows better what the employment outcomes of a minimum wage increase would be? Four economists who look at data on a computer screen or members of the low-wage labor market? Ninety percent support the minimum wage increase.
Professor Neumark. You have low-wage workers on your staff studying this question? I don't understand that point.
Mr. Martinez. Would the gentleman yield?
Mr. Wu. Yes.
Mr. Martinez. The question that should instead be asked is how many of you worked at minimum wage when you needed to sustain your livelihood?'' You see, because minimum wage is there, in a unsuccessful attempt to make sure that anybody that does any kind of work receive a livable wage, even though it doesn't actually succeed. It's not a question about what we talked about earlier, about the worth of the work. People are still living in poverty on minimum wage.
So the question to them should be whether they ever worked for necessity to sustain their lives on minimum wage? And I have. And I know darn well that, even though minimum wage was not enough, it was better than nothing. I sure as heck would want a raise. And the only way I ever got that raise was because of a minimum wage hike by the legislature.
Mr. Wu. I thank the gentleman from California. Will the gentleman yield back?
I'm glad to hear that, for a majority of panelists, there is a broader spectrum of experience in forming your recommendations. As you probably know, the State of Oregon, where I come from, currently, has the highest minimum wage in America. Can you give me what analysis you have at this point of the $6.50 minimum wage on job creation and development, and other social-economic effects in the state of Oregon?
Dr. Bernstein. I read a piece on this by Ed Lazere, at the Center for Budget and Policy, about our priorities, where he shows that women leaving the welfare rolls for the labor market in Oregon had their wages clearly lifted by the minimum wage increase, which you are mentioning. They also obviously found their way into the labor market. So, it appears that job growth was as fast in Oregon as it was
in neighboring states, where the minimum wasn't increased, and low-wage workers, especially those coming off the welfare rolls, clearly benefited from the increase. I recommend that piece for the interested persons.
Mr. Wu. Any other analysis?
Professor Neumark. I have not studied the Oregon experience, specifically. Typically, the studies that most of us have been engaged in are based on identifying effects of minimum wages off of state level increases. So, in general, the conclusions that I have stated, that Dr. Burkhauser has stated, and, to some extent, Dr. Bernstein has stated, are based on exactly the kinds of ``experiments'' that you are talking about. But I can't speak to the specifics.
Mr. Miller. Will the gentleman yield?
Mr. Wu. There is no specific data that you know of in this respect?
Mr. Miller. Will the gentleman yield?
Mr. Wu. Yes.
Mr. Miller. The reason it's going so well in Oregon is that Oregon has an immigration policy against people from California, so they are able to maintain their wages that way.
Mr. Talent. [presiding] Mr. Wu, you were generous enough, perhaps naive enough, given that you are so new, to yield to two of your colleagues. So if you would like a little extra time?
Mr. Wu. Well, I'm very junior, but I know enough to yield to the folks who are higher than me on these benches.
Mr. Talent. Perhaps you are not naive.
All right, I understand it's my turn, so I'll go ahead. I'll be happy to yield to my friend from St. Louis.
The chairman will be back in a minute, and he can address any concerns. I think, perhaps in the spirit of Mr. Ehlers' comments, I'll just offer a comment in maybe one area that I don't think had been covered enough in this hearing, and then you all can make comments, if you want. And this perhaps comes from my orientation. I am the chairman of the Small Business Committee, and it is, after all, small businesses and their employees who are mostly affected by increases in the minimum wage. I do think this panel has indicated pretty clearly that, from a scholarly standpoint and on the merits, there are arguments for and against this in terms of the impact on the working poor.
What has concerned me a little bit is some of the comments from the Committee that have reflected what I sense to be an obsessive distrust, bordering on dislike, for small business people which I get a lot of in the Congress. In the minds of some in Congress, these small business people commit what seems to be a sin by offering employment to people at wages not as high as people here would like. This is evidenced by comments that these workers would never get a wage increase if not for increases in the minimum wage.
A little while ago, I went out and called my brother, who owns and runs a tavern in St. Louis. He's one of the people in my family who does honest work. He didn't go into politics. I asked him how often he gives his people wage increases. He is not political at all. He said, ``once a year, sometimes more often.'' And I asked him why. He said, ``well, because I want to get good employees, and I like to keep the good employees that I have, and I want to reward the people who are working for me.''
Then I asked him why he doesn't give them bigger wage increases, and he said, ``because then I have to increase the price of a glass of beer, and I lose business. Or I increase the cost of a hamburger and people don't come in for lunch often.''
It wasn't that he was trying to suppress people's wages. It was that he is living in
a competitive environment. I think this is a quite typical answer for most small business people who would be affected by this.
There have been some comments about talking with people who earn the minimum wage, or people who are in the neighborhoods who earn the minimum wage. Mr. Chairman, you could restrain me from ranting and raving if I gave you back the chair.
I have talked with those people, because I am very interested in the whole subject of what I call community renewal, which is how we restore distressed neighborhoods. I have talked with people who are working in those neighborhoods, development associations. I have talked with people who are working low-wage jobs in those neighborhoods, and asked them what they think they need to help the working poor. And I have talked to people in Indianapolis, and in Washington, and in San Antonio, and in New York, and I've had them in hearings before my Committee from all over the country. And, Dr. Bernstein, not one of them asked for an increase in the minimum wage. I didn't know they weren't against it. I want to be fair. I didn't ask them whether they would you be for or against that.
What they said was that they would really like the government to pass measures that help them get these small businesses into their neighborhoods that people here seem to distrust so much. Cuts in the capital gains taxes to zero, increase in expensing requirements, which people here don't seem to like, cuts in regulations that drive up the costs that drive small businesses out of their neighborhoods.
And it just seems to me that this distrust of small business people is particularly ironic, in view of the fact that until a few years ago, the minimum wage didn't apply to congressional employment. So, evidently, we weren't concerned about whether the Congress would treat people like they were serfs or something, but we were concerned about all of these millions of small business people around the country who we just think
are out to create sweatshops and hurt their employees. I have to tell you, that is not my understanding or my experience in talking to these people.
Perhaps you'd want to comment. Also, I have one other point. How would an increase in the minimum wage help, hurt, or affect the new wave of welfare-to-work programs that have been instituted around the country?
Dr. Bernstein. I appreciate your comments, and as far as the welfare-to-work point goes, between 1995 and 1997, the employment rate of women coming off the welfare rolls and entering the labor market jumped from 40 to 49 percent.
Forty-nine percent is off the record for that kind of an employment rate. Obviously, that is welfare-to-work. That is welfare reform. That is what generated that increase.
But my point is that the increase in the minimum wage certainly didn't dampen their employment growth. I mean, I suppose you could argue it could have grown more. You could always make that argument. But, it clearly hasn't been binding for women moving from welfare-to-work. I think the macro-economy has really been drawing these women into the labor market, and the increase in the minimum wage helps them get a higher wage once they get there.
Mr. Talent. Dr. Bernstein, as a pure economics matter, if you increase the cost of an input to a person who owns a business, do they tend to buy more or less of the input?
Dr. Bernstein. If the input is a non-labor input, I suspect they might buy less, depending on lots of factors.
Mr. Talent. How elastic their demand is for it, right?
Dr. Bernstein. Right. Exactly. But, in terms of labor, it doesn't seem to work that way, especially in the low-wage labor market. Increases in the minimum wage don't seem to generate the disemployment effects that the simple theory underlying your comment generates.
Mr. Talent. Sorry, Mr. Chairman. Thank you very much.
Something is happening, a little earthquake here, and I yield to the Chair.
Chairman Goodling. Mr. Payne.
Mr. Payne. Thank you very much. I, too, am kind of baffled by the experts here who indicate that to increase the minimum wage is going to have a negative impact on low-income workers. You know, we have been finding out lately that economists, I am not saying you folks, have been wrong about most things. They say that if you have low unemployment, you are going to have spiraling inflation. I mean, they all write that. I am not an economist. I didn't do well when I took it in college. But, we find that this is wrong. They said if the stock market goes up, that is also going to have some impact on the whole question of inflation, the question of full employment. All of those theories that the economists have been talking about for years seem to be totally wrong. I, in all due respect, think that this theory about increasing the minimum wage also would have a negative effect.
A study was done in New Jersey by Economists Card and Krueger from Princeton and Katz from Harvard. From 1992 to 1995, they took low-income basic jobs in New Jersey that had a minimum wage higher than that of Pennsylvania. And they showed that the minimum-wage jobs that were in New Jersey grew at a much greater rate than they did in Pennsylvania. Now there may have been other factors, but everything that you said is totally different from the actual facts, not theory, not papers, not thoughts, but in actuality.
If minimum wage in 1968 were bumped up to where inflation is today, the minimum wage would be $7.33. So today people who are working are worse off than their predecessors were.
A very interesting story, when we talk about poverty and the gaps that Business Week reported, and I'm sure you all are cognizant, so you know it better than I do, that CEO's of major corporations made 42 times the pay of a typical factory worker in 1980. By 1990, the ratio doubled to 85 times the average income of a factory worker. In 1998, the average CEO made 419 times more than the average worker. And actually, if you continue exponentially, by the year 2050, the average CEO will have a salary 150,000 times more than that of an average worker.
Now, everyone here contends that the increase in minimum wage really does not help employees. Let me just ask this question: If there were no increases in the minimum wage, could each of you tell me, do you think the minimum wage would have been increased? If we had not legislated the last time we took 10,000,000 people up in that one fell swoop. My question is if there were not Federal legislation to increase the minimum wage, do you believe that the minimum wage would be where it is today? That is the easy question because you could just say, yes. But, go ahead.
Professor Neumark. I think you mean, would the wage of low-wage workers be where it is today?
Mr. Payne. Right. Yes.
Professor Neumark. There would be no legislative minimum wage if there weren't a minimum wage. The question is, where would the wage of low-skilled workers be? I think there would clearly be some people earning less.
There is a spike at the wage distribution at the minimum. There is no question about it. On the other hand, that is not how most workers' wages are set.
Many of you have said on both sides that if you happen to be in a district that is doing well, and of course many are, that there simply aren't many minimum-wage jobs. And there are fewer than there were four or five years ago. That is because the market largely determines the level of wages, and in the hot economy that we have, wages get bid up. If the economy went to the tank, the minimum wage certainly would provide a wage floor, by government fiat, it does that. There is no question. The question is, what does it do to employment and the income distribution?
Mr. Payne. Do you think the average low-income wage would be where it is today, or higher or lower?
Dr. Bernstein. If I may say one thing, there is a non-trivial group of workers whose wages would be a lot lower in the absence of the minimum; I am sure that is true. The minimum was introduced in order to make sure that workers were never paid a lower wage that we considered socially unacceptable. As this panel has said, wages are not set by employers measuring the exact level of productivity that their workers generate. They
are set in complicated ways. Discrimination plays a role. Macro-economics plays a role. The regional labor markets play a role. The minimum wage also plays a role, and that is an important wage floor.
Chairman Goodling. The late Ms. Woolsey.
Ms. Woolsey. Thank you, Mr. Chairman. I am sorry that I was late, but I am here.
I guess, in hearing your answers, none of you have tried to raise three children on minimum wage. I did. And, that was in the late 1960's, when the minimum wage did stretch. It had a lot more value than it does now. Because I was on minimum wage, and because my children's father did not pay child support, we also went on Aid for Dependant Children. I had a good education and good job skills. I just had an error. I thought I was going to be back in the workforce. It took time, and I got off, obviously. Look at me now.
But, you have to put a face on this. You cannot talk about numbers and not put faces on what this means to people. Do you put a face on the average chief executive officer's salary in this country of $5,300 an hour? The chief executive officers in this country earn in two hours what a minimum-wage employee earns in a year. This is not right, and if we raise the bottom, we raise the floor, then everybody benefits.
First of all, I have this wonderful delicatessen in Petaluma, California, where I live. When it is time to talk about minimum wage, he calls me ``Senator,'' and says ``Senator Woolsey, don't raise the minimum wage. I can't afford it.'' And I say ``Steve, just think how many more people can come in here and drink your expensive coffee.'' And all of his workers cheer, ``Yeah, Woolsey is sticking up for us.''
But, I am telling you that you can't have CEO's earning $5,300 an hour and the people doing the hard work at the bottom of the ladder earning $5.15 an hour. This is not what this country is about. We have to share some of the wealth.
So what if those at the top earn less? They ought to. Now, the small business people, their life is better off because they are competing on a level playing field. They know that everybody they compete with has to pay the same minimum wage, if they only pay minimum wage. They don't have to wonder. They don't have to hope they can pay less. So, that helps them too.
So, my major question is to Dr. Bernstein, because you weren't on welfare, either, and you didn't raise three children on minimum wage, but you still seem to get it. Tell us what this means to a single mom on welfare, going to work, and staying in poverty.
Dr. Bernstein. Well, I wish I could tell you it meant more than it does. Unfortunately, with or without the increase, the average working, poor, single mom, will still be under the poverty line by close to $1,000. There has been a lot of talk today about the EITC and I support it and I am sure many here do as well. But, even when you add the increase in the minimum wage, the EITC and food stamps, that woman is still below the poverty line because she is only working about 1,100 hours a year. Now that's pretty good, but she has also got child-care and transportation. Not only is increasing the minimum key to the type of constituents you are talking about, but increasing their ability to work more hours is important too. That is why subsidized child care is another nice complement to the kind of thing we are talking about.
Professor Burkhauser. I think you made a good point that one of the reasons why the working poor are poor is because they are not working full time. An increase in the minimum wage will do nothing to increase the hours of work of the working poor. The good news, Congresswoman, is that in 1967 you weren't eligible for the Earned Income Tax Credit. If you were earning at a minimum wage of $5.15 today, your minimum wage, in fact, would be $7.21 because you would get the $5.15 plus 40 percent of credit of $2.06. That is the way to target the minority of folks who currently are working poor or earning minimum wage.
Ms. Woolsey. Well, actually, if I could just respond to that, they would have taken that from my AFDC, so I would not have been better off at all.
Thank you, Mr. Chairman.
Professor Shaviro. Thank you for making my point actually by remarks, through what you said now, which is actually the main point I have been presenting today.
Chairman Goodling. Just think how better off you are since you have joined us.
Ms. Woolsey. Since I met you.
Chairman Goodling. I want to thank all of you. We so many times come to hearings, our minds are made up, and we really aren't listening very well. But, I watched all of you constantly, and I noticed there were many times that all four heads were shaking ``yes'' together. Many times they were all four shaking ``no,'' and then there were times when they were shaking differently. But, everything we do can be very confusing.
For instance, I looked at Robert Reich in 1993, when he was Labor Secretary, who said most minimum wage workers are not poor. In 1992, the President said that we should increase the Earned Income Tax Credit, and lift the working poor out of poverty far more efficiently than raising the minimum wage.
And I hear Chairman Greenspan say that all of the evidence that he has seen suggests that the people who are most needy of getting on the lower rungs of the ladder of our income scales, develop skills, getting the training, are unable to earn the minimum wage. As a consequence, they can't get started.
Then the last thing I heard him say was that his major concern would be, for example, that we be careful not to raise the minimum wage. So, we need intellectual discussion such as you four brought today, and I appreciate that.
All the statements of the members will be included in the record. Thank you for your patience. You have been sitting there a long, long time.
Mr. Clay. Mr. Chairman?
Chairman Goodling. Yes.
Mr. Clay. Do you plan to have other hearings on this subject?
Chairman Goodling. Yes, we certainly do plan to have other hearings.
Mr. Clay. People who are on welfare might come and testify.
Chairman Goodling. A cross-section. We start with hearing some of the statistics from research and, as we do in all hearings, we eventually hear from everyone.
And, again, I thank you very much for coming. I hope you won't misuse your voucher that you didn't get for your expenses for coming here. But, thank you very much.
Whereupon, at 3:31 p.m., the Committee was adjourned.
Table of Contents *
OPENING STATEMENT OF CHAIRMAN WILLIAM GOODLING, COMMITTEE ON EDUCATION AND THE WORKFORCE *
OPENING STATEMENT OF RANKING MEMBER WILLIAM CLAY, COMMITTEE ON EDUCATION AND THE WORKFORCE *
STATEMENT OF WILLIAM A. SIGNER, CHAMBERS ASSOCIATES, INC., COUNSEL TO NATIONAL EMPLOYMENT OPPORTUNITIES NETWORK (NEON), WASHINGTON, D.C. *
STATEMENT OF JOANNE E. SPETZ, RESEARCH FELLOW, PUBLIC POLICY INSTITUTE OF CALIFORNIA, SAN FRANCISCO, CA *
STATEMENT OF DEBORAH ROWE, DIRECTOR OF STAFFING SERVICES, GENESIS ELDERCARE, TOWSON, MD, ON BEHALF OF THE AMERICAN HEALTH CARE ASSOCIATION, WASHINGTON, D.C. *
STATEMENT OF DARRELL WOOD, VICE PRESIDENT, NEW CONCEPT DEVELOPMENT, LUBY'S INC., SAN ANTONIO, TX *
STATEMENT OF HEIDI HARTMANN, Ph.D., PRESIDENT AND DIRECTOR, INSTITUTE FOR WOMEN'S POLICY RESEARCH, WASHINGTON, D.C. *
STATEMENT OF ED LAZERE, SENIOR POLICY ANALYST, CENTER ON BUDGET AND POLICY-PRIORITIES, WASHINGTON, D.C. *
APPENDIX A - WRITTEN OPENING STATEMENT OF CHAIRMAN WILLIAM GOODLING, COMMITTEE ON EDUCATION AND THE WORKFORCE *
APPENDIX B - WRITTEN OPENING STATEMENT OF RANKING MEMBER WILLIAM CLAY, COMMITTEE ON EDUCATION AND THE WORKFORCE *
APPENDIX C - WRITTEN STATEMENT OF WILLIAM A. SIGNER, CHAMBERS ASSOCIATES, INC., COUNSEL TO NATIONAL EMPLOYMENT OPPORTUNITIES NETWORK (NEON), WASHINGTON, D.C. *
APPENDIX D - WRITTEN STATEMENT OF JOANNE E. SPETZ, RESEARCH FELLOW, PUBLIC POLICY INSTITUTE OF CALIFORNIA, SAN FRANCISCO, CA *
APPENDIX E - WRITTEN STATEMENT OF DEBORAH ROWE, DIRECTOR OF STAFFING SERVICES, GENESIS ELDERCARE, TOWSON, MD, ON BEHALF OF THE AMERICAN HEALTH CARE ASSOCIATION, WASHINGTON, D.C. *
EXAMINING THE IMPACT OF
THE MINIMUM WAGE ON WELFARE TO WORK
Thursday, October 7, 1999
U. S. House of Representatives
Committee on Education and the Workforce
The Committee met, pursuant to call, at 3:00 p.m., in Room 2175, Rayburn House Office Building, The Honorable William F. Goodling, Chairman of the Committee, presiding.
Present: Representatives Ballenger, Hoekstra, McKeon, Schaffer, Tancredo, DeMint, Clay, Martinez, Mink, Andrews, Roemer, Scott, Woolsey, Romero-Barcelo, Hinojosa, McCarthy, and Sanchez.
Staff Present: Molly M. Salmi, Professional Staff Member; Mark W. Rodgers, Workforce Policy Coordinator; Becky Campoverde, Communications Director; Rob Borden, Professional Staff Member; Rob Green, Professional Staff Member; D'Arcy Philps, Professional Staff Member; Dan Lara, Press Secretary; Jennifer Oschal, Staff Assistant; Michael Reynard, Media Assistant; Gail Weiss, Minority Staff Director; Alex Nock, Minority Legislative Associate/Education; Mary Ellen Ardouny, Minority Legislative Associate/Education; Roxana Folescu, Minority Staff Assistant/Education; Michele Varnhagen, Minority Labor Counsel/Coordinator; Peter Rutledge, Minority Senior Legislative Associate/Labor; Marjan Ghafourpour, Minority Staff Assistant/Labor; Brian Compagnone, Minority Staff Assistant/Investigations; Gregory Jefferson, Minority Counsel/Investigations; Liz Hollis, Minority Clerk; and Jill Warfel, Minority Executive Assistant.
Chairman Goodling. According to 12(b) of the Committee Rules, any oral opening statements at hearings are limited to the Chairman and the Ranking Minority Member. This will also allow us ample time to hear from our witnesses and help members keep to their schedules. Therefore, if other Members have statements they can be included in the hearing record. Without objection, all Members' statements will be inserted in the hearing record.
OPENING STATEMENT OF CHAIRMAN WILLIAM GOODLING, COMMITTEE ON EDUCATION AND THE WORKFORCE
The focus of today's hearing is the impact of the minimum wage, particularly on welfare to work efforts. I would like to welcome our witnesses and thank them for participating on the panel today and apologize for the delay. It could have been worse. It could have been midnight on next Wednesday, when we are going to finish all of our other activity.
Their testimony will provide us with important information as Congress considers various proposals to increase the minimum wage in the coming weeks. This is the second hearing the Committee has had this year on the effectiveness of increasing the minimum wage. Today we are not considering any specific proposal but rather we want to consider important policy aspects associated with the minimum wage, particularly issues on which there may be new or fresh evidence or research.
Today we will consider another important aspect of the minimum wage: the impact of increasing the minimum wage on programs and efforts to help individuals move from welfare and public support to work and self support.
Welfare reform has been one of the most successful pieces of legislation passed during my years in Congress. It has led to dramatic decreases in welfare caseloads and dramatic increases both in work participation by those on welfare and in general on incomes of those who have left welfare. More generally, welfare reform has helped to change the goal of the welfare system, from viewing welfare as a "government problem" of how people on welfare can be maintained, to enlisting the efforts of everyone, especially the private sector, in helping people get off welfare and into self-sustaining employment.
In welfare reform we sent a strong message that we favor work over welfare, and that the best first step to self-sufficiency is to get a job, even if it is low paying, because it can lead to further employment opportunities and self-sufficiency. Of course we want everyone who leaves welfare to make enough money so as to be totally self-sufficient. Now the question is, what effect would increasing the minimum wage have on welfare to work efforts?
That is what we are to hear about today. I yield to the Ranking Member, Mr. Clay.
WRITTEN OPENING STATEMENT OF CHAIRMAN WILLIAM GOODLING, COMMITTEE ON EDUCATION AND THE WORKFORCE - SEE APPENDIX A
OPENING STATEMENT OF RANKING MEMBER WILLIAM CLAY, COMMITTEE ON EDUCATION AND THE WORKFORCE
Mr. Clay. Thank you, Mr. Chairman. Let me thank you for holding this hearing. I would also thank the witnesses for joining us this afternoon. I especially want to thank Dr. Hartmann and Mr. Lazere, who had very little advance notice of the hearing and only a minimal amount of time to prepare for it.
Mr. Chairman, increasing the minimum wage is an issue of vital importance to low income workers. Since 1980 the pay of the average worker in those 19 years has increased by only 68 percent. Over the same period the pay of the average CEO has increased by an astounding 757 percent. Yet since 1980, the real value, the buying power of the minimum wage has decreased by 16 percent. Low wage workers do not benefit equally from the unprecedented prosperity that the country is enjoying. Today a minimum wage worker working full time earns an annual income of $10,712. That is $2,000 less than poverty level for a family of 3 and almost $6,000 less for a family of 4.
Our Democratic Whip, David Bonior, and I and the senior Senator from Massachusetts, Ted Kennedy, have introduced legislation to increase the minimum wage from $5.15 an hour to $6.15 in a 2-year period. Such an increase would provide a direct pay increase for almost 12 million workers. Opponents of this legislation contend that increasing the minimum wage will decrease employment opportunities for low skilled workers. However, the 1996 and 1997 minimum wage increases had no such effect. Since 1994 the pool of available workers, those looking for work and those who are not looking but say they want a job, has declined by 28 percent from 16.5 million to 10.8 million.
In May of 1994 slightly more than 11 percent of the working age population was not in the work force. In May of 1999 only 7.7 percent of the working age population was not in the work force. Unemployment rates for blacks, Hispanics, and 16 to 24
year olds are the lowest that they have been in 30 years. Employment rates for single mothers are at an all time high. Despite two increases in the minimum wage, this economy has continued to produce jobs at virtually the fastest rate possible.
Evidence clearly indicates that the economy is capable of exerting a modest increase in the minimum wage without any negative consequences. There are only two ways for a low income family to survive. Either the government provides welfare at taxpayers' expense or employers pay fair, adequate wages. Those who work 40 hours a week, 52 weeks a year should be assured that their labor will produce a living wage.
Increasing the minimum wage is among the most important issues facing working families and this Nation. So far this is a Congress that has failed to enact meaningful campaign finance reform legislation. We are still trying to enact real managed care reform. Despite the fact that the new fiscal year began a week ago, we have not yet finished the appropriations process. One of the few things this Congress has managed to do is give itself a pay raise. I supported that pay raise and strongly believe that it is merited. If we have the time and the resources to give ourselves a pay raise, then certainly we have time to give one to the lowest paid workers in this country.
Mr. Chairman, I yield back the balance of my time.
WRITTEN OPENING STATEMENT OF RANKING MEMBER WILLIAM CLAY, COMMITTEE ON EDUCATION AND THE WORKFORCE - SEE APPENDIX B
Chairman Goodling. We have indicated that there is a shift in how the witnesses will go. Mr. Signer, I understand, must leave, but will be back in time for the question and answer period.
So Mr. William Signer from the National Employment Opportunities Network, will be first, then Dr. Joanne Spetz, Public Policy Institute of California, Ms. Deborah Rowe, Genesis ElderCare, Mr. Darrell Wood, Luby's Incorporated, Dr. Heidi Hartmann, Institute for Women's Policy Research and Mr. Ed Lazere, Center on Budget and Policy Priorities.
I recognize Mr. Signer first.
Mr. Signer. Thank you, Mr. Chairman.
Chairman Goodling. If you want to summarize your statement, all of it will appear in the record.
STATEMENT OF WILLIAM A. SIGNER, CHAMBERS ASSOCIATES, INC., COUNSEL TO NATIONAL EMPLOYMENT OPPORTUNITIES NETWORK (NEON), WASHINGTON, D.C.
Mr. Signer. Thank you. Good morning. Originally, it was good morning, but now it is good afternoon.
My name is Bill Signer. I am here today in my capacity as counsel to the National Employment Opportunities Network, NEON, a group of management assistance companies that provide technological services to thousands of employers who participate in hiring tax incentive programs.
The good news for the Committee is that the work opportunity tax credit and the welfare to work tax credit have become integral parts of the national welfare to work initiative. The credits have become widely accepted hiring incentives for employers of entry level workers. The programs work.
The bad news is that for the second year in a row these two worthwhile programs have been allowed to expire on June 30. That is a tragedy for welfare recipients. While NEON takes no position on whether the minimum wage should be increased, it should be noted that more than half of those hired under these two hiring tax incentive programs are paid in excess of the minimum wage. Whatever the wage, WOTC offsets 40 cents of every dollar paid at least up to the first $6,000 of wages. If Congress expanded the eligibility criteria to include more of those who face significant barriers to employment, a minimum wage increase would be more affordable for employers of entry level workers.
But the biggest problem on employers' minds right now is the fact that both tax credit programs have expired. Unless they are renewed, employer costs for hiring those otherwise eligible would have increased dramatically. A minimum wage increase would only compound the problem.
Let me give you an example. An employer paying a minimum wage of $5.15 today also pays payroll taxes and benefits. If the employee is WOTC eligible, a 40 percent credit on wages, but not the payroll taxes and benefits, is available. Costs to the employer, after the tax credit is computed, are $3.09 an hour. Now, suppose WOTC is not renewed and the minimum wage increase of $6.15 goes in. The cost to employers of those on welfare would jump to $6.15 an hour, nearly twice what it would cost today with WOTC. Welfare recipients will find it exceedingly difficult if both the minimum wage is increased and WOTC is not renewed.
Employers participating in the program understand that hiring entry level workers who have a history of public assistance dependence translates into added labor costs and certain inefficiencies in their work force. But they are willing to do so for a number of reasons. Many employers have made a commitment to participate in the national welfare to work initiative. These employers are willing to invest the added cost of outreach, screening, training, and retention of welfare recipients so long as WOTC and the welfare to work tax credits are available to help offset the higher cost. These employers find that the administrative requirements of participating are manageable. They know that in most states they will receive a certification of eligibility within 30 to 60 days of application.
Employers, as a direct result of welfare reform, have developed a job referral partnership with community based organizations. This is because for the first time community based organizations are being judged according to how well they do in placing welfare recipients into the private sector. Accordingly, employers are placing job orders to community based organizations in an effort to expand referrals of WOTC and welfare to work eligible applicants.
As of June 30, despite some initial program start-up delays, over 700,000 individuals dependent upon public assistance have been hired by employers utilizing these hiring tax incentives. Even more impressive, Mr. Chairman, is the fact that over 80 percent of those hired have come from public welfare rolls. The number would be even higher if the program had not been interrupted. A hiatus, and we experienced two, one this year and one last year, also causes many states to slow down and to stop their eligibility certifications. As a result, employers are punished financially by backlogs and certification denials due to lost or misplaced paper work.
Employers who use the tax credits constantly evaluate whether they want to continue assuming the actual costs and risks associated with participating. Since employers usually just recover a portion of their added cost, it should be no surprise that some employers quit the program when it expires and still others never start. That is why thousands of employers support the Houghton-Rangel Bill, H.R. 2101, which would permanently extend the programs and combine the two programs into one.
Attached to my testimony is a letter to the President from 615 employers supporting a multi-year extension of the program. But in the final analysis, the WOTC and the welfare to work community believe that a multi-year extension is essential to the continued success of their welfare to work initiatives. Thus, we urge you to communicate to the leadership the importance of a multi-year extension to these programs and any
legislative tax vehicle that you consider between now and when you go home, whether
that be a minimum wage offset tax package, a tax extended bill, or any other tax bill that comes to the House floor.
Thank you for the opportunity to speak to the Committee.
WRITTEN STATEMENT OF WILLIAM A. SIGNER, CHAMBERS ASSOCIATES, INC., COUNSEL TO NATIONAL EMPLOYMENT OPPORTUNITIES NETWORK (NEON), WASHINGTON, D.C. - SEE APPENDIX C
Chairman Goodling. Dr. Spetz.
STATEMENT OF JOANNE E. SPETZ, RESEARCH FELLOW, PUBLIC POLICY INSTITUTE OF CALIFORNIA, SAN FRANCISCO, CA
Dr. Spetz. Members of the Committee and Chairman Goodling, my name is Joanne Spetz. I am a research fellow at the Public Policy Institute of California. PPIC is a nonpartisan research institute that was established about 5 years ago with a donation from Bill Hewlett of Hewlett Packard. Our mission is to focus on policy issues relative to California. As you know, there is great interest in the effect of minimum wage on families living in poverty and on families receiving welfare benefits.
On one hand the minimum wage could reduce welfare caseloads by giving welfare recipients a greater incentive to seek jobs or by increasing their incomes. On the other hand, the minimum wage could increase welfare caseloads. One possibility is that the minimum wage reduces the number of jobs available in the economy. The other possibility is that the minimum wage brings more non-poor workers into the labor markets, such as teenagers, and those non-poor workers push welfare recipients out of minimum wage jobs.
There has been a lot of research on the relationship between minimum wages and employment, as most of you probably know, and most of that research is fairly controversial and inconclusive at this point. There is also a growing literature on minimum wages and poverty, and I understand that you heard about this in a hearing earlier this year.
Mary Ann Page, an assistant professor at the University of California at U.C. Davis, and I decided that we wanted to study the direct effects of minimum wages on welfare caseloads. When we began our study, we could find no other research on this topic in any peer reviewed research journal even though this is one of the most important issues with the minimum wage, whether it can help remove people from welfare programs.
Our approach was to look at states with minimum wages that were different from the federal minimum wage and we wanted to see whether states with these different minimum wages had different welfare caseloads from each other. We controlled for a variety of factors in our analysis that might also effect welfare caseloads such as the value of AFDC and food stamp benefits, unemployment rates in states, the wages of production and other types of workers, and so on. We looked at data from 1981 through 1996 from a variety of state and federal sources. We found that a 10 percent increase in the minimum wage is associated with a 2 percent increase in welfare caseloads, all other things being held equal.
To put this estimate in perspective, we would imply that in California the recent minimum wage increase from $4.25 to $5.75 would be associated with a 7 percent increase in welfare caseloads if everything else were held constant. Now, of course, we haven't seen an increase in welfare caseloads in California because not everything else has been held constant. California, as well as the rest of the U.S., has enjoyed a very significant economic expansion and welfare reform was implemented. We know from other research that both of those things have led to declines in welfare caseloads across the country. But if everything were held equal and the economy weren't in this expansion and there weren't other policy changes, our results imply that increases in the minimum wage are associated with increases in welfare caseloads.
There are two possible reasons for that that warrant more research. The first is that the minimum wage might reduce the number of jobs in the economy, as you, I am sure, have heard from other people, or that the number of jobs are the same but employers offer people fewer hours. The other possibility is that there is more competition for jobs perhaps from teenagers deciding that it is more attractive to seek work now that the minimum wage is higher. Our findings do suggest that both of these ideas warrant more research because we obviously can't address that when we have only state level data. But our findings do suggest that the minimum wage may not be the best approach for helping poor families.
Programs like the earned income tax credit that more directly target poor families without having an effect on the supply of jobs available may be more effective in reducing the level of welfare caseloads.
WRITTEN STATEMENT OF JOANNE E. SPETZ, RESEARCH FELLOW, PUBLIC POLICY INSTITUTE OF CALIFORNIA, SAN FRANCISCO, CA - SEE APPENDIX D
Chairman Goodling. Thank you. Ms. Rowe.
Mr. Ballenger, will you Chair while I do a quick TV interview? Ms. Rowe, you are recognized.
STATEMENT OF DEBORAH ROWE, DIRECTOR OF STAFFING SERVICES, GENESIS ELDERCARE, TOWSON, MD, ON BEHALF OF THE AMERICAN HEALTH CARE ASSOCIATION, WASHINGTON, D.C.
Ms. Rowe. Thank you, Chairman Goodling, and the members of the Committee for the opportunity to speak to you today. My name is Debbie Rowe. I am the Director of Staffing Services for Genesis ElderCare. I am here today on behalf of the American Health Care Association representing nursing home providers nationwide. I am here to discuss the effects the increase in the minimum wage have on the long-term care community and on the ability to provide employment and career opportunities to economically disadvantaged people.
Mr. Chairman, before we get into detail about the relationship between minimum wage and also welfare reform, it is important to understand the unique position that confronts our nation's nursing homes. Nursing homes provide care to our sickest and most frail elderly citizens. More then three-quarters of our residents need help in bathing, dressing, and toilet use. Caring for these residents is a challenging job and we do this difficult job every day with dedication and compassion. But there is one major problem. Providers of long-term care and the patients we serve are almost completely dependent on government programs for payment and in many cases the government payment is less than the cost of care.
As you may know, nearly 70 percent of all nursing home residents rely on Medicaid to pay for their care. The average Medicaid payment for nursing homes is $88 per day and only another 10 percent of our residents rely on Medicare to pay for their care. I am sure that you have heard the Balanced Budget Act of 1997 has dramatically reduced Medicare payments to nursing homes. So please understand that nearly 80 percent of our residents are dependent on government set payment rates to cover their care and only 3 percent have long-term care insurance.
This government dependence puts nursing homes in a very unique and difficult position. First, we can't raise the prices of our services to offset higher labor costs, and, secondly, we don't have the ability to change the make-up of our patient mix or to shift costs to insured residents. And third, we will not reduce the quality of care that we provide. This ensures that any cost increases must be offset in the operating budget of a nursing facility. Therefore, cost increases will affect the employees in a very direct way.
We believe that to attract and retain the best people to do this difficult job we have to compensate the care-givers well, but nursing home care is extremely labor intensive. Typically, labor costs represent 67 percent of all nursing home costs. This minimum wage increase will have a major impact on us. A one dollar increase will cause salary compaction which forces entry level wages higher across the board. Those earnings above the proposed new minimum will be under pressure for wage increases as the salaries of competing jobs increase and draw away workers. This reduces our ability to hire and attract new employees, including public assistance recipients.
Under our reduced payment environment, a hike in the minimum wage will not be reflected in state or federal payment rates. Since we cannot let our funding shortfalls compromise quality of care, a hike in the labor costs in the nursing home community will have a direct negative impact on our ability to fund training, outreach and to hire welfare recipients.
Some argue that the additional labor costs simply can be taken out of profits, but a quick look at the bankruptcies of the largest nursing home providers will attest that most nursing homes are currently operating at a loss and many may not survive. The only area whose costs could possibly be reduced are in staffing or reducing the amenities that are provided that add to the quality of life of our care. This special problem has been recognized in past debates over minimum wage increases, but this time providers are less able than ever to deal with the cost increases that come with the minimum wage increase.
Nursing homes are well named for their active role we play in our communities and the efforts we make to hire people from public assistance roles. We utilize the work opportunity tax credit to help us offset the cost of training these individuals. In the past 3 years, nursing facilities have hired over 50,000 public assistance recipients and we are one of the best employers who participate in welfare to work. I say this because 85 percent are women, and we hire many single mothers from the welfare rolls. We train them. We actually provide them our 75 hour course and they also go through a nationally recognized certification test.
Our goal is to put them on a career path that puts them in a high demand health care field that keeps them off welfare permanently. As I mentioned, the WOTC program helps us offset the cost of training these new hires and the new cost of a CNA is 1,500 to 2,000 per employee. On top many homes are offering sign-on bonuses, transportation, child care and other services that attract and retain those workers in a highly competitive workforce.
In conclusion, nursing home providers are in a bind. We are dependent on the federal and state governments for payment. These payments often don't meet the cost of providing care. A minimum wage increase will increase those costs and hurt our ability to do outreach program training and provide our programs. Our recommendation is please expand the concept of the minimum wage to create a higher nursing home wage with requirements for government to pay that wage increase through Medicaid and Medicare reimbursement. Extend the WOTC and allow us to deduct WOTC from the alternative minimum tax. Enact the special training tax credit for these employers and enact enhanced visas. Thank you very much.
WRITTEN STATEMENT OF DEBORAH ROWE, DIRECTOR OF STAFFING SERVICES, GENESIS ELDERCARE, TOWSON, MD, ON BEHALF OF THE AMERICAN HEALTH CARE ASSOCIATION, WASHINGTON, D.C. -
SEE APPENDIX E
Mr. Ballenger. [Presiding] Thank you, Ms. Rowe. Mr. Wood, you may begin.
STATEMENT OF DARRELL WOOD, VICE PRESIDENT, NEW CONCEPT DEVELOPMENT, LUBY'S INC., SAN ANTONIO, TX
Mr. Wood. Mr. Chairman, Members of the Committee I would like to thank you for the opportunity to testify before you all today. I am Darrell Wood, Vice President for New Concept Development for Luby's Inc. of San Antonio, Texas. My company hired over 1,000 people off welfare in the past couple of years and has clear evidence of the impact of minimum wage hikes on our employees and our business growth.
In order to present our story first I would like to tell you a little bit about Luby's and some of the people who work for us. I will then relate our experience with moving welfare recipients into jobs and discuss how the last national minimum wage increase affected us. Finally, I would like to urge the Committee to take a serious look at the state flexibility approach offered by Representatives DeMint and Stenholm as a solution to several of the problems that I will discuss.
Luby's, based in San Antonio, owns and operates 224 restaurants in the southern United States, serving nearly 90 million people a year. We bring diners back to our restaurants with good food and an average ticket price of just under $6. Luby's quality and pricing are attractive to those who might otherwise be eating at home.
The culture among our 13,600 employees at Luby's is one of a family. Everyone from a recently hired busser to employees with 30 years of experience participates in the company's profit sharing plan. It is not unusual for a long-term employee in our restaurant to retire with a lump sum check of more than $100,000 from their profit sharing account. In addition, we also offer health care benefits. The average tenure at Luby's is around 3 years. Our 160 hourly paid supervisors, all of whom started at or near the minimum wage, have an average tenure of 10 years. About half of our employees have achieved high school diplomas.
In my written testimony I introduced you to three other employees at Luby's. For the sake of time let me talk to you about one employee, Rosa, and then ask you to review my testimony to learn about Les and Keith. I had the pleasure of hiring Rosa several years ago. She drove up to the restaurant that I was managing in a car that barely ran, she spoke no English and had zero restaurant related skills. I am glad I had the opportunity to hire her as a busser working for the minimum wage. By the time I left that unit, Rosa could speak English, had a wonderful relationship with the regular customers, and was responsible for checking and handling all money on any given day. She had gone from earning the minimum wage of $4.25 at that time to around $7 an hour in 2-1/2 years. Today she is still working for us and even making more.
Rosa's story and others in my written testimony underscore the point that those who start at or near the minimum wage are building a base of experience and skills upon which they can increase their earnings. Certainly at Luby's the minimum wage is a starting wage and not a dead end.
Over the past couple of years, Luby's hired around a thousand individuals off the welfare rolls. They are eligible for the same profit sharing and other benefits of all other employees. Of the 1,000 persons hired 225 were still working for us after 3 weeks and 60 are still employed today. One of the 60 is a single parent named Shirley, who works as a baker in our Abilene, Texas, location and has become a star employee after one year. We have recently started an expanded outreach effort to bring in more applicants on welfare.
Generally, a person who has never worked in a restaurant needs more supervision than a restaurant veteran. People who cannot read and write or have difficulty with English require even more instruction and hand-holding. We are now seeing further deterioration of skill levels and work experience as the welfare rolls continue to shrink and those left behind are now looking for work. By necessity, we are showing even
greater scrutiny in making hiring practices. These hiring decisions have to be more closely scrutinized if the minimum wage is increased in areas where unemployment rates are not at historical lows.
Our experience with the last round of increases is very instructive. First, we can simply raise prices, as some have suggested. Luby's instituted a 4 to 6 percent price increase after we felt the first effects of the national minimum wage increase. Customer counts decreased and sales declined as well. Simply stated, the increase in prices didn't cover the loss in sales.
Second, the unit per hours dropped from an average of 2,000 hours a week to 1,900 hours a week. Roughly, that is 500 jobs company wide. Luby's stopped growing while these increases went into effect. Finally, the national minimum wage hikes costs all employees. At Luby's the 1996-1997 national minimum wage increase were paid to some out of the pockets of all other employees of the company. The simple reason, our profit sharing plan is paid only after labor and all other costs are deducted. This increase is estimated at $10 million additional cost to our company a year.
Finally, I would like to direct your attention to a proposal by Representative Jim DeMint and fellow Texan, Charlie Stenholm. I feel certain that their bill H.R. 2928, the Minimum Wage State Flexibility Act, would allow the states to avoid most of the problems I have outlined here today. Almost everyone will recognize that the economies and costs of living vary widely from region to region and state to state. Labor markets even within our region sometimes vary within a dollar.
Luby's growth plan is based on identifying and satisfying customer demand. The states are better equipped to address wage rates based on local economies, the needs of welfare reform and economic development. For this reason, I urge this Committee to accept the state flexibility approach that allows the states to adopt their own minimum wage laws, setting the most appropriate rates for their communities and their regions.
Thank you very much for your time.
WRITTEN STATEMENT OF DARRELL WOOD, VICE PRESIDENT, NEW CONCEPT DEVELOPMENT, LUBY'S INC., SAN ANTONIO, TX -
SEE APPENDIX F
Mr. Ballenger. Thank you Mr. Wood. Dr. Hartmann.
STATEMENT OF HEIDI HARTMANN, Ph.D., PRESIDENT AND DIRECTOR, INSTITUTE FOR WOMEN'S POLICY RESEARCH, WASHINGTON, D.C.
Dr. Hartmann. Good afternoon, Mr. Chairman, Mr. Clay, Members of the Subcommittee. I am Heidi Hartmann, President and Director of the Institute for Women's Policy Research, an independent, scientific research institute that studies issues of particular concern to women. I am an economist with a Ph.D. Degree from Yale
University and also a research professor at the George Washington University. I am delighted to have the opportunity to testify today to make the case for raising the minimum wage.
I want to make five points today. First, it is important to understand why societies commonly set a wage rate floor. While economists generally argue that competition operating through a free market results in an efficient and socially desirable allocation of resources, I am sure you all recall the operation of the invisible hand that you learned about in school. Economists also recognize instances of market failure, instances when markets left on their own produce undesirable results.
In fact, history shows that if workers are allowed to compete with each other at the bottom of the labor market, unskilled workers will bid wages down to very low levels indeed. They will try to meet their pressing short term needs and they will drive wages below the level needed for long-run survival, leading to the result that Malthus told us about that workers and their families would actually starve to death. In other words, the equilibrium wage set by the operation of the market would be below a survival wage. Thus, throughout history wage rates have generally been set collectively, indeed virtually since the beginning of wage labor. The consequences of not intervening in the market would simply be too dire.
My second point, I want to discuss why it is important to have a national standard that determines the uniform wage rate floor in the United States today and against the flexibility notion.
Again, establishing a firm floor for all the states prevents competition among them and forestalls a race to the bottom. Such a race could easily become a never ending spiral in which states with low wages generate a weak purchasing power, lack strong markets, and have low tax revenues which limit public investment and economic growth still further. Federal public policy has generally sought not to allow this type of damaging competition between the states. For example, federal benefit levels are often not adjusted to cost of living differences among the states. Food stamp benefits awarded in accordance with uniform income eligibility guidelines provide one example. Such a policy helps to direct federal funds toward lower income states and helps to spur economic growth in those areas by boosting purchasing power.
The U.S. south, a region that has suffered in the past from low levels of economic development and today still has the largest proportion of hourly wage workers earning the minimum wage or less, has benefited tremendously from these federal policies. The south is currently experiencing strong employment growth and abiding by national minimum wage has not hurt it. According to data from the Bureau of Labor Statistics, employment grew 13.9 percent in the south compared with 9.2 percent in the rest of the nation between 1990 and 1998.
The third point, where you set the federal minimum wage is a matter of trial and error. Currently the minimum is low relative to our historical experience and the low minimum is contributing to several social problems such as the growing gap between the top and the bottom. In real terms, the minimum wage peaked in 1968, more than 30 years ago. Even the 1997 increase in the minimum wage to $5.15 per hour leaves the federal minimum wage about 20 percent below where it was in 1979 in real terms. That is, in 20 years the value has fallen 20 percent.
I would also like to point out that while not all minimum wage workers live in low-income families a substantial amount of the gains in family income that would result from an increase in the minimum wage go to low income families. A recent analysis by my Institute and the Economic Policy Institute shows that more than half of the income gains from an increase in the minimum wage to $6.15 would go to working families with less than $25,000 in annual income.
Of the nearly 1 million single mothers working for less than $6.15 per hour in 1998, 85 percent have household incomes below $25,000, according to data from the current population survey. In 1979, a single mother with two children working full-time at the minimum wage would have earned enough to lift her family above the poverty line. By 1998 that same family would be 18 percent below the poverty line.
My fourth point, because nearly three-fifths of workers earning at or near the minimum wage are women, raising the minimum wage is a women's issue. Women workers are 58 percent of those who would benefit from an increase to $6.15 an hour. This is 12.6 percent of the female labor force nationally.
I would like you to take a look at these two charts. They show the states in which the most women would benefit; both the number of women and the percentage of the female workforce. You can see that in terms of the percentage of the female workforce, three of the states are in the south but three of them are not. West Virginia I guess is not quite the south, Montana, Oklahoma. And on the other side, largest states Texas, Ohio, California, Pennsylvania, New York, Florida would all have more than 300,000 working women who would benefit from an increase to $6.15 an hour.
While opponents of the minimum wage increase often make much of the fact that a high proportion of minimum wage workers work part-time, among women that is 55 percent who work part-time. I do want to point out that women very often don't have a choice about working part-time. They have family obligations and when they look for the job and the hours in which they can work, all they can find are minimum wage jobs. This hurts them in their retirement. We can help women in their old age by raising the minimum wage now.
Fifth, I would like to point out that it is important to remember that the low minimum wage is actually placing costs on society. Consumers who think they are buying cheap products are actually benefiting from low wages and it is kind of like air and water pollution. It forces cost on the rest of us in the form, for example, of the earned income tax credit, food stamps and Medicaid.
While these are good programs, there is a disadvantage to the employer who pays a fair and living wage to have to compete with these employers who are subsidized by the taxpayer. In general, economists believe that all economic activities should at least pay their own way. Failure to properly assign all the costs of an activity distorts the market. We produce too many of these cheap goods, for example, and that is not an optimal allocation of our resources.
While potential job loss can be a concern with any wage increases, current economic climate suggests that job loss will be unlikely. In particular, the demographic groups often thought to be most severely affected by minimum wage increases, minorities, teens, and welfare mothers, have experienced strong economic growth and low unemployment, despite the increases in the minimum wage in '95 and '96-'97. Unemployment rates of African-Americans, Hispanics and 16 to 24-years-olds hit 30-year lows in 1999. Between 1995 and 1988, single mothers in particular increased their labor force participation sharply.
Moreover, research shows that any negative effects of wage increases can be reduced by phasing in increases over time. For this reason, it not only makes sense to phase in increases over more than one year; it also makes sense to index the minimum wage to increases in inflation or the average wage so that future increases will be relatively small and would occur predictably at a given time of year.
Thank you for this opportunity, I am happy to respond to any questions.
WRITTEN STATEMENT OF HEIDI HARTMANN, Ph.D., PRESIDENT AND DIRECTOR, INSTITUTE FOR WOMEN'S POLICY RESEARCH, WASHINGTON, D.C. APPENDIX G
Mr. Ballenger. Thank you Dr. Hartmann. Mr. Lazere, you may begin.
STATEMENT OF ED LAZERE, SENIOR POLICY ANALYST, CENTER ON BUDGET AND POLICY-PRIORITIES, WASHINGTON, D.C.
Mr. Lazere. Mr. Chairman, Mr. Clay and the remaining Members of the Committee, thank you for this opportunity to testify today. My name is Ed Lazere, and I am a Senior Policy Analyst at the Center on Budget and Policy-Priorities here in Washington. The center is a nonprofit research organization that focuses on an array of policies at the federal and state level that affect low and moderate income families. We receive no government funding. I have been employed with the Center for the past 11 years.
While it probably comes as no surprise to the Members of this Committee or anyone else in this room that most welfare recipients that have found jobs in recent years have landed in low-wage jobs, it probably is worth exploring some statistics. A recent study from the Urban Institute looked at a nationally representative sample of women who left welfare between 1995 and 1997. The study found that fully 29 percent of those women who had left welfare for work were earning less than $5.75 an hour, or less than a dollar above the minimum wage that was in effect in 1997 when the study took place. They also found that 37 percent of welfare recipients who were now working were earning less than $6.15, or less than a dollar above the current minimum wage.
The study also casts serious doubt on the notion that welfare recipients who start in low wage jobs will quickly move up the wage scale. The study also, in addition to looking at former welfare recipients, looked at the earnings of women in low and moderate income families who had not been on welfare for a number of years. They found that the wages of those women, who presumably had been working for many years longer than the former welfare recipients, were no higher than the women who were working and had just gotten off of welfare.
Taken together, these findings suggest that an increase in the federal minimum wage would have a significant positive effect on the earnings of former welfare recipients. An analysis I did last year provides I think a useful case study of what happens when the federal minimum wage goes above $5.15 an hour. In 1996 Oregon voters passed a ballot initiative to raise the minimum wage to $5.50 an hour in 1997, $6.00 an hour in 1998, and then $6.50 in 1999.
My analysis looked at the wages of former welfare recipients who found jobs both before and after the minimum wage increases. The analysis is attached as part of my testimony and the key findings are as follows:
In the 3 years before the minimum wage was increased, and when the minimum wage was flat in Oregon, the average earnings of women who left welfare for work fell 5 percent after adjusting for inflation. This trend reversed itself immediately in 1997 when the state's minimum wage was increased. Over 1 year, the average earnings of former welfare recipients rose $.50 cents. Over 2 years the increase was $.94 cents an hour. That is a 12 percent increase after adjusting for inflation in 2 years when in the 3 years before the minimum wage increase went into effect the average wage fell by 5 percent.
Critics of a minimum wage increase obviously will agree that some families benefit from raising the minimum wage but will bring up the notion that some families will lose their job as a result of raising the minimum wage. While I do not have a systematic analysis of the employment impact of the Oregon minimum wage increase, all available indicators provide no evidence that there has been significant job loss in Oregon. For example, the Oregon Welfare Department reports that the percentage of welfare recipients who moved into jobs increased in 1997 after the first step of the increase there and increased again in 1998 after the second step of their minimum wage increase.
I have also looked at the trends in retail trade employment in Oregon, retail trade being the one that is most likely to be affected adversely by any minimum wage increase. If the minimum wage increase were having a negative effect on jobs you would expect that the employment trend in retail trade would be worse than the overall employment trend in the state and, in fact, that was not the case. The employment trend for retail trade in Oregon since 1996 has been virtually the same as the state's overall employment trends.
The findings from Oregon confirm what national research has shown, that raising the national minimum wage has little or no impact on job loss. Some critics have noted that welfare recipients are at a particular disadvantage because of their limited job skills. Dr. Spetz noted that raising the minimum wage has a positive impact on welfare caseloads.
I would like to point out that there are also academic studies that have found just the opposite when you raise the minimum wage by making work pay better. It actually leads to a reduction in welfare caseloads.
Two witnesses today have stressed the importance of tax credits for employers who hire welfare recipients to offset the costs related to the low skills of welfare recipients. While I think those tax credits probably are important for a certain segment of the business community, my reading of the literature suggests that the primary concern with hiring welfare recipients is not a matter of costs for most employers. It is a matter of getting a reliable employee who can do the work. If an employee cannot show up on time or act professionally on the job, he or she is unlikely to be desirable as an employee at any price.
Which leads me to my final point. If we are concerned about welfare recipients entering the job market and becoming self-sufficient, there have to be better solutions than keeping the minimum wage at $5.15 for all workers. States have substantial sums of unspent TANF block grant funds and many localities have substantial amounts of unspent welfare to work block grant dollars. It seems wiser to me for states and localities to use those funds to invest in families who are on the welfare rolls and face barriers to work to help those families become job ready. To keep the minimum wage at $5.15, a very low level, and pray that they will find a job clearly will not allow them to support their families.
Thank you very much.
WRITTEN STATEMENT OF ED LAZERE, SENIOR POLICY ANALYST, CENTER ON BUDGET AND POLICY-PRIORITIES, WASHINGTON, D.C. -
SEE APPENDIX H
Mr. Ballenger. Thank you Mr. Lazere. I thank the witnesses and I remind the Members that Committee Rule (2) imposes a 5-minute limit on questions and the Chair will recognize Members for any questions they may wish to ask the witnesses. We will start with Congressman DeMint.
Mr. DeMint. Thank you, Mr. Chairman. Thank you all for your testimony. It has certainly been helpful.
I am sure that everyone in this room would like to have wages as high as we possibly can without eliminating the jobs that are needed. I think that the struggle here is how can we have the highest possible minimum wage without beginning to eliminate jobs. We have two challenges. One, of course, is we need to make sure that the people who are already working have a livable wage. While I think we can look around and find some workers who only have the minimum wage to live on, in some cases like some of the testimony today, some have other benefits such as profit sharing and health care. So we need to weigh all of that and to ask, if we raise the actual wage will that just mean a comparable loss in benefits?
I think the most important part about the discussion today and what I want to focus on in my questions is the challenge that we have given states to move people from welfare to work. In the future, the minimum wage is going to affect mostly people who have not been working, and that is the issue I think we really need to address. How can we make sure that there are entry level positions that employers can afford?
My concept of state flex is not designed to be against minimum wage. It does not eliminate a federal minimum wage of $5.15. What it does is set a floor at $5.15 and allows states to play a role in future increases. So states like Oregon that have a good economy and can move their rate up can do it. But other states with high welfare rolls not meeting their federal quotas, stand to lose millions of dollars of federal assistance.
If they do not meet those quotas they can adjust the way they raise their rate within their state, if necessary, for high poverty or high welfare areas to give the states the flexibility in the future to address the cost of living, and the welfare challenge as well as the unemployment rate.
I did want to ask and I appreciate all the testimony, but I am particularly interested in those on the panel actually creating jobs. Mr. Wood, you are one of them, and I think you have dealt with a lot of welfare cases; just one question. I read in your written testimony that you have developed a prototype restaurant. Could you tell us why you have made these changes and how it affects business growth and particularly this subject of getting more people into the workforce?
Mr. Wood. Sure. A couple of years ago as the national minimum wage increases took effect, we saw our labor cost increase and we also saw a loss of jobs. So, our desire was to reengineer our restaurant prototype from the kitchen to the dining room and the complete layout. What that really did is just eliminate the number of jobs that it takes us to run one of our current prototypes. It is about 3,000 square feet smaller and it has 20 fewer employees. Granted, it is designed for a smaller market. At the same time, that was just one of the answers that we felt like we needed to address as a company moving forward. How to address these high labor rates as well as fewer number of people being available to work; high skilled.
Mr. DeMint. You mentioned that some flexibility at the state level might help you since you are in many markets across the country. Why is that so?
Mr. Wood. Well, I believe that my concern with the minimum wage increase is for someone like Rosa who I hired when I was a unit manager. When she walks in the door and a part-time college student walks in the door, my training issues are going to be much easier with the college student. Rosa in all fairness spoke very little English and had no restaurant skills, and so I needed the opportunity to spend more training dollars on her to get her to a level that was very productive. That was accomplished because of that.
But my concern is that we may miss out on the lowest skilled as the welfare rolls continue to drop. That is my concern.
Mr. DeMint. Okay. My time is up.
Mr. Ballenger. Mr. Clay.
Mr. Clay. Thank you, Mr. Chairman. I am having a difficult time trying to figure out how you justify say employing 100 people with a wage that gives none of them the opportunity to sufficiently take care of themselves and their families, instead of letting 50 of them go and giving the other 50 a sufficient wage to take care of their family. Now that to me is like trying to justify saying 100 people who would need a heart transplant, saying why don't we give each one of them, I have only got 25, give each one of them a fourth of a heart and that way we serve 100 people but you don't serve them too well.
Now, I also don't understand how you justify in one instance saying that this policy ought to be such because if you increase the wages, you eliminate jobs. And in other arguments, or not arguments, you don't raise any issues about the elimination of jobs. We just had a proposal for MCI to merge with Sprint. We are going to lose a lot of jobs but nobody is outraged about it. When Time Warner merged with Turner, we lost a lot of jobs because you don't need duplication. But nobody in Congress is saying we ought to prohibit the mergers of major corporations because jobs are going to be eliminated.
I don't quite understand it. My philosophy is that we ought to pay people a living wage or we ought not to be permitted to stay in business if we don't. And we ought to stop subsidizing those people in the industry who cannot pay a living wage. We might as well go back to the old thing where the government ought to hire them and let them do public service work as opposed to funneling the money to a corporation that apparently cannot provide, or can't stand on its own without exploiting the labor of individuals.
I have a problem with that. And I have a problem sitting here year after year hearing people come in and saying if you increase the minimum wage so that a person will make a decent wage, it is wrong because some other people are going to lose their jobs. Well, some companies ought to lose their jobs, and especially companies who don't provide health insurance, and don't provide retirement even though we are subsidizing them.
So I am having problems with some of this logic that I hear.
I would like to ask Dr. Hartmann, can you tell us exactly what a single parent can do who works for minimum wage and brings home $10,000 a year?
Dr. Hartmann. Well, fortunately because we do have some subsidy policies, if she has two children she can probably get close to $4,000 in the EITC. She can get $2,000...
Mr. Clay. That is the program that they are talking about delaying or abolishing right now. These people who are concerned about those jobs.
Dr. Hartmann. The earned income tax credit is an ongoing program.
Mr. Clay. The Republican Leadership is talking about delaying it so they can have their balanced budget.
Dr. Hartmann. You are right. I guess we should say that that is a bad idea. I guess I could say that I agree with George Bush that that is a bad idea.
Mr. Clay. Yes, it is.
Dr. Hartmann. Yes, that is the very program they are talking about delaying. She would get $4,000 a year from that. Maybe about $2,000 a year in food stamps. So with all of that, she would be just at about the poverty level. But that is at a cost of $6,000 to the taxpayer and only $10,000 to employers like those represented here. That is a serious problem. And I think that in a period of incredible economic growth where wages are going up and employment is still going up, we have plenty of room to increase the minimum wage to get that mother more of a living wage on the job. Then the tax dollars that we all have can go to people who need it more if they can get a living wage on the job.
Basically, I think most people feel that a good standard of living is at least $20,000 a year in America today and I think we should be looking for ways to raise wages closer to that level.
Mr. Clay. Thank you. I have no further questions.
Mr. Ballenger. As you can all tell by the buzzers and beepers, we have a vote on the Floor and if you all would sit here 10 or 15 minutes we will be right back. It turns out we have two votes and that means we have got to stay over there for 15 minutes until the second vote, so you can take a break until about 4:30.
Mr. Ballenger. Let me again, several of you didn't hear me, apologize for all the shenanigans that we have had this past couple of days or so. But you will notice my compatriot here on the Democrat side is much happier. He won big and I lost. But I am a good loser so I will continue to smile.
Let me, if I may, ask a few questions myself; a couple of things. One, our Chairman and a couple of other people went to New York and several other places and they found large numbers of people not being paid the minimum wage. In other words, this was a operation in New York City. How well enforced is the minimum wage? It doesn't matter how high it is if it is not enforced. Does anyone have any record of enforcement along those lines?
Dr. Hartmann. We know there is lack of enforcement. It is enforced by the Wage and Hour Division of the U.S. Department of Labor and they periodically make inspection visits to try to enforce it. One of the things that we also find besides not living up to the minimum wage is not meeting overtime requirements. A company will actually set up two companies and 5 o'clock comes, you go upstairs and you work for the other company to avoid the overtime premium. This is an area where we would certainly be happy to see more dollars going toward enforcement.
Mr. Ballenger. One of the questions I was thinking about was the fact that I don't specifically know where in New York City they found that occurring.
While I have got you...
Mr. Clay. Before you leave the subject, Mr. Chairman, will you yield?
Mr. Ballenger. Sure.
Mr. Clay. What he is talking about are the sweatshops that we see in L.A., all over Texas, and all over New York. When the inspectors catch up with the fly-by-nights, they move the next day, so it is hard to enforce them. That is what they went up to visit in New York City.
Mr. Ballenger. I wasn't quite sure of that. Dr. Hartmann, one of the things that you mentioned is it is bad to have competition between one area of the country and another and that the South is finally coming into its own. I think we lost our 500,000 textile jobs
down there because we are competing with the rest of the world. I didn't hear anybody in any of their statements mention the fact that our wage structure does have an effect on certain types of high labor content jobs in this country.
I wonder, being a good man on charts myself, I was looking at your charts and it seems like the ones that you used for your percentages are the lowest in population and the ones where you use the numbers are the largest in population. Is that a way of doctoring up your statistics a little bit?
Dr. Hartmann. I probably can lie with the statistics with the best of them, but that wasn't what was going on there. That was just stating the highest percentage of the affected workforce. So those are the states with the largest proportion of low-wage workers today, so they tend to be low-wage states. The fact that they happen to be smaller is not really a factor.
Mr. Ballenger. What I was thinking if you put numbers with the percentages, they would be very small.
Dr. Hartmann. They happen to be smaller states and the other states are the states with the highest number of affected workers. By design they do have to be the large states. But it is just accidental in the way that the states with the lowest wage labor markets happen to be relatively small population states.
To answer your other question about job loss in Texas and international competition...
Mr. Ballenger. I am talking about North Carolina, not Texas. Do I sound Texan?
Dr. Hartmann. No, I thought you were looking at Texas. I don't have North Carolina over there, anyway. But the international competition issue, first, there are two points on that.
One is that many of the lowest wage jobs are actually service and retail jobs that don't get competed away internationally. We care for the elderly here in our country. We buy goods in our country at the local Kmart or whatever. That is the first point. So a lot of these jobs really are not jobs that are affected by international competition. Some of them in manufacturing are, and there I would refer to, for example, Secretary Ray Marshall, former Secretary of Labor, who said that the United States is never going to be able to compete using the low wage route. We are never going to be able to compete with low wage countries. We have too high a standard of living. We have to compete with high wage countries.
Mr. Ballenger. I wrote a thesis back in college about how the textile industry really got automated in England and they lost the market to New England and New England lost it to the South.
Dr. Hartmann. Now the South is losing it to the rest of the world. As an economist some of that is inevitable. And it doesn't matter too much as long as your textile workers can find employment in another industry. That is what it is about.
Mr. Clay. I just wanted to say precisely what she said. It is payback time. When you were in college, the South enticed companies from New England to come there by offering them lower wages, tax write-offs for 25, 30 years. When those benefits expired, then people in the other countries say, well, we can do even a better job.
Mr. Ballenger. There was a sympathetic thought. We lost the Civil War and so we needed some help.
Mr. Clay. I am just doubtful whether or not you lost the Civil War.
Mr. Ballenger. Mr. Scott.
Mr. Scott. Speaking of the Civil War, Mr. Chairman, we are still fighting in the City of Richmond. We had a great brouhaha over whose picture would be put up on a particular wall and Robert E. Lee's picture was up one day and was down the next day, and I am not sure where it is today, but we are still fighting that war.
Mr. Wood, you went to great lengths to talk about some of your employees and about how they were affected. It has been my feeling that a significant increase in the earned income tax credit could go a long way in helping your employees without disadvantaging your business. Could you say a word about how much better they would be off with the earned income tax credit?
Mr. Wood. I don't know if I am qualified enough to actually speak on that topic just for the reason that that is something the individual does and the company is not involved. I will tell you though that in my 15 years I do know of a number of employees that have taken advantage of that and it has been a benefit to them. I would agree that it addresses them individually.
Mr. Scott. Well, your Governor has spoken quite nicely of it. It seems to me that we have had a budget of $10,000 plus $4,000 earned tax credits plus food stamps. If there are children involved, you can get child support. The earned income tax credit really makes a difference between being able to get to a living wage and being in poverty.
If you are not going to give vigorous support to the earned income tax credit then you leave some of the rest of us wondering how people are going to get to a livable wage. Minimum wage out of your payroll is going to be where it comes from. I think just from a defensive, if nothing else, perspective it would be helpful to get strong and vigorous support for increases in the earned income tax credit.
Let me ask just one other question. We have had a question about loss of jobs and it seems to me that when you increase the minimum wage you put a lot more money into circulation. We have seen statistics that have suggested that every time you increase the minimum wage you in fact reduce general unemployment. Although I am sure you could look at one job here or there that you may lose, overall the unemployment rate goes down. Is that consistent with the findings? Mr. Lazere, do you want to comment on that?
Mr. Lazere. Well, I think the general research conclusion would be that, given the currently relatively low level of the minimum wage, raising it would not increase unemployment significantly. I don't think there is any research that would say that the unemployment rate would necessarily go down.
Although it is the case that some of the research from the most recent minimum wage increases in the 1990s did in fact see that there were employment increases following an increase in the minimum wage, I think those are considered somewhat anomalous. The larger question, if you raise the minimum wage, it is unlikely to see an increase in unemployment.
Mr. Wood. Congressman, could I address that question as well?
Mr. Scott. I was hoping that the record would not have any comment after that.
Mr. Wood. From someone that has been involved in running a business for 15 years both from a single unit and a multiunit level, as well as from a corporate standpoint, I can tell you that our employees have been affected by reductions in hours and reductions of people working in our units. I can tell you that.
Mr. Scott. Let me ask you a follow-up question. Do you see any increase in volume of revenues by virtue of people who have the minimum wage that can now dine at Luby's that couldn't because they made less wages?
Mr. Wood. Once we had established the national minimum wage increase, and in my testimony I stated we increased our prices roughly 4 to 6 percent, we actually saw a reduction in head count as well as sales. Frankly it ended up we were back where we started from. We lost that much in sales so it actually double hit us because not only did we make a reduction in the number of employees working in the specific unit, but in addition to that the level of business dropped. So there may have been a need to make further cuts, which is unfortunate.
Dr. Spetz. Can I make a brief comment on the research? As part of our study we did a review of all the literature that we could find on minimum wage levels and the results have been fairly controversial. There is a very recently published paper that I think addresses a lot of the problems in the research that has been done to date. That study suggests that in the short term if you look in the one or two-year time period, minimum wage increases probably don't have any effect at all. But if you look at the longer term, that is where you may see the changes.
For many industries, if you raise the minimum wage today it is unlikely people are going to get laid off next week, although Luby's may be one of the exceptions to that rule. What tends to happen is that in the longer run employers make decisions to change the way they operate their businesses. They decide to streamline their operations. They decide to invest in more capital equipment and have machinery do the job instead of people. And over the long run you may see fewer jobs than you would have otherwise.
That doesn't mean that you cannot have job growth because the economy is growing. It just means that you have fewer jobs than you would have otherwise.
Mr. Ballenger. Mr. DeMint.
Mr. DeMint. As you have heard, I have some specific interest in a variable minimum wage. And again I believe that we would all like to get wages as high as we can. As we look at federal policy today, we have seen that federal salaries have adjustments as you go across the country. TANF payments vary within states, and states are allowed to opt out of compulsory unionization. So there are variances. There is some precedent. I would be interested in some of your opinions that while some states like Oregon may be in a good economic position to raise wages, in my state of South Carolina there are still about 5 counties with unemployment of over 10 percent. Most of that is welfare population that is very difficult to get in the workforce, and it would seem that we should allow some variations between states as we continue to raise rates.
And let me be clear, I am not talking about eliminating the federal minimum wage. My interest is in the future, allowing states to play a role in how they establish any future increases. So I would like any opinions that you might have on that.
Mr. Lazere. If I may respond, I don't think there is any evidence that states with lower wage economies have had any more trouble in reducing their welfare caseloads than other states. The caseloads have gone down pretty dramatically across the country. The issue is often what wages the recipients get when they find a job. Certainly in states with lower wages, Tennessee for example, the average wage of former welfare recipients is $5.67 an hour. As I mentioned in my testimony, to the extent that families who are off the welfare rolls are having trouble finding jobs given that states like South Carolina have unspent TANF funds to invest, I think the appropriate answer is to invest in those people so they can become more equipped.
In the body of research on the impact on the minimum wage, some researchers have specifically looked at the question of when the federal minimum wage goes up have states with lower wage levels been more adversely affected in terms of job loss? In fact for the last two minimum wage increases in1991-1992 and 1996-1997, they found no disproportionate effect on the low wage states.
Mr. DeMint. When I talk to employers like Mr. Wood there are states now where the wage is about a dollar above another state and you raise the wage the same, one state is not affected, the other has a higher labor cost than it did before. I just cannot imagine with the differences in the cost of living, the economies, the unemployment level, and the welfare situation, that you would not agree that there should be some variation in what we mandate as a federal rate.
Mr. Lazere. The current system allows some variation. There is a federal wage floor and states can go above it. And there is something on the order of 10 or 11 states that do have minimum wages above, and in fact those states tend to be higher wage states; Connecticut and Massachusetts, for example. But if you say to states you only have to maintain a $5.15 minimum wage, before there is a federal increase in the future, you run the risk that those states for reasons other than their ability to handle those wage increases won't in fact enact increases. So the federal minimum wage is a floor upon which any state can build and many states currently do. I think it makes more sense to keep a uniform wage across the country.
Mr. DeMint. Which is a little hard for me to swallow, but the folks sitting here might care a little more about South Carolina than people sitting anywhere else. Dr. Spetz?
Dr. Spetz. As was noted, there is a large amount of variation in minimum wages. There are many states where the minimum wage is over the federal minimum wage. I think that does reflect differences in costs of living in different states. Typically higher wage, higher cost of living states like California and Alaska, Hawaii, tend to go over the federal minimum.
I think that is the state's prerogative to make its decision about that. In terms of the effects of minimum wage increases on the local welfare programs, each state is likely to have a different experience based on how they have structured their own welfare programs and what their local economies are doing at the time. So $1.00 minimum wage increase in California might have a completely different effect than a $1.00 minimum wage increase in South Carolina.
Mr. Ballenger. Mr. Payne.
Mr. Payne. Thank you, Mr. Chairman. There has been talk about the fact that raising the minimum wage may harm welfare recipients because it would also bring other people into the job market and take jobs away from welfare recipients. I guess we are deducting, therefore, that by keeping the minimum wage lower we don't encourage more people to come into the job market. I am trying to synthesize that.
But just on the question of different minimum wages for different states, in New Jersey there was a report on the minimum wage. In New Jersey, the minimum wage has always been above the national level. During the '80s they did a study with Pennsylvania where Chairman Goodling, who is not here, is from.
Chairman Goodling. Yes, I am.
Mr. Payne. Oh, he is back. The minimum wage in New Jersey is $1.05 higher than the minimum wage in Pennsylvania and they did a study on the lowest jobs, the fast food jobs, et cetera. The job growth in New Jersey was greater than that in Pennsylvania in the same level of jobs, therefore refuting the whole notion that by virtue of having a higher minimum wage, you reduce low-income jobs. I wonder if you are familiar with that and is it just an anomaly?
It certainly goes against the argument of having a higher minimum wage and as a matter of fact, it even went further. They took the lowest paying jobs on the border of New Jersey and New York where you could go 15 minutes and buy this thing for a cheaper price. Ostensibly you assume because you paid a lower wage you would have a lower price for a Big Mac or maybe a "Minimum Mac." But we found just the converse to what all of the philosophical and economic theories indicated.
How do most of the panelists feel? Is increasing minimum wage going to really eliminate or reduce low-wage jobs?
Dr. Spetz. I am very familiar with that study and now we actually claim that one of those economists is a Californian because he is now at U.C. Berkeley. David Card moved to Berkeley recently. That study is a very interesting study and I think there are two issues that leave that study unresolved. One is that the study that was originally published was short term. As I said, you might see in the short term a completely different effect. So I think the jury is out for that reason if nothing else.
I also think the jury appears to be out because there is a long-standing dispute in the research literature between these two economists from Berkeley and Princeton, and a couple of other economists, one of whom I believe this committee knows, David Neumark and his co-author William Wascher. They have done numerous studies that have found that minimum wage increases reduce employment. And they went back to
the same fast food restaurants and collected more follow-up data and more thorough data and they published a study that refuted the other findings and showed minimum wage increases reduce the employment slightly or at least it didn't increase.
There is now a manuscript where Card and Krueger have gone back and collected even more data and I think substantiated their original result. I have not seen that revised manuscript, so I am not sure where that debate is. The point of bringing this up is that I think the jury is still out on that issue. In fact, I know that most economists when surveyed say they believe that minimum wage reduces employment. There was a study produced in a major journal and most agreed that employment does decline but any such decline is probably quite small. And so I would not hang my hat too much on the argument that raising the minimum wage will reduce jobs. But there could be an effect there.
You raised the issue that you were puzzled about the labor supply issue that I raised regarding the possibility that as the minimum wage goes up you might have more people entering the labor market to seek those minimum wage jobs and therefore pushing potential welfare recipients out of jobs. If the minimum wage goes up it may make it more attractive for someone who is a high school student who is debating whether or not to get a job or participate in school activities, or a college student who is debating whether to earn a little extra money or study harder to seek those jobs in the same way that an increase might make it more attractive for the welfare recipient.
Who gets the jobs in the end? That is the question. Is a restaurant or a retail store going to select the high school student or the college student or the welfare recipient? Unfortunately I don't think there is a lot of research on that issue. I know that Kevin Lang and Shulamit Kahn published a paper that found some evidence that teenagers pushed welfare recipients out of jobs when minimum wage increases, but I think that is only one study and there needs to be more research on that particular issue.
Mr. Payne. Let me conclude and maybe in a second round you want to respond, Dr. Hartmann. When I hear about how increasing the minimum wage has an impact on the potential costs of these low cost jobs, I never hear a corresponding argument about the increase in wages at the top. It is always that if you are increasing minimum wage, it has this very negative impact.
Within the pharmaceutical industry in our state, for example, the average CEO salary is about $12.5 million. We have the high end at $32 million. One guy only makes $9.5 million, and I am sure he is complaining because the average is $10 to $14 million. That is the actual compensation for 15 CEOs of pharmaceutical companies in New Jersey. Now, I am not against pharmaceutical companies, but compensation goes up
correspondingly, you know, with all the directors. When J&J, Warner Lamberth, and all of those go up we don't talk about the corresponding impact on employment with these raises in the high levels. But we always hear about how tremendous an impact it is when you push someone's wage up from $4.50 to $5. It just blows everything out and creates chaos and will create unemployment, where we have seen income going through the roof but that argument is never used conversely. It doesn't have an impact on the top, only the guy from $4.50 to $5 to $5.50.
But thank you, Mr. Chairman. You have been kind about your time.
Mr. Ballenger. Mr. Schaffer.
Mr. Schaffer. Thank you, Mr. Chairman. I would like to start with Ms. Rowe. You mentioned in your testimony this ripple effect that an increase in minimum wage can have across the board. I would like to know how your company responded to the last minimum wage increase in '96 and '97.
Ms. Rowe. Unfortunately, I can't really respond about my company because I was not there at that time. But in regards to your question about the ripple effect, our CNAs are making $8.15, but when they increase the minimum wage, we will have to increase housekeeping and all the other service areas' wages. You can't increase one service area without increasing everyone else. They are going to say where is my adjustment and my longevity and so forth? So that is the comment related to that.
Mr. Schaffer. A few months ago I went to one of our insular possessions, one of the U.S. territories where the federal government actually set a lower minimum wage for this island than the rest of the country. I guess there is a panel of federal bureaucrats who do the economic analysis and they decided that on both Guam and the Northern Mariana Islands, the minimum wage was going to be different. The reasons are different. The Northern Marianas has a covenant with the United States. Guam, however, is completely set by this federal board. In both cases, I think the minimum wage in Guam is $2.00
and $2.50 an hour in certain industries and on Northern Marianas it is $3.05.
The discussion about minimum wage came up and many public officials there, almost tongue in cheek, said we think it would be a great thing if the other 50 states increased their minimum wage. The reason is they believe that it will bring more jobs to them. I am curious. I would suspect there are countries all around the world that are looking for increased business opportunities. If the price of labor increases in the United States then we will continue to see more jobs shipped overseas. When you hear people concerned about economic development on other islands and from other countries encouraging me, as a Member of Congress, to increase the minimum wage because it will help them move business and industry to their countries and help stimulate their economy, should we not be concerned about some inverse impact on the rest of the country?
Dr. Hartmann. I would like to respond to that. I think that as you know, we are an advanced industrial nation. We actually have to compete with countries like France and England and Sweden where people have high education and high wages and that is the market in which we can best compete. We will never be able to compete with low wage countries. We simply have too high a standard of living here. And we will never be able to compete with those countries at $1 or $2 an hour or $.10 an hour. That is not our role.
Our role is to bring everybody up to a high level of productivity. One of the things it does in the long run when you raise minimum wages, as Dr. Spetz said, is that you encourage employers to figure out how to use workers more productively and you make them more productive by making the investment in the job. And those who might happen to get displaced move on to other places in the economy where they can be productive.
So we are never going to compete in low wages and that is not a reason why we should not raise our minimum wage. We have to have a living wage standard in this country and it has to be sort of commensurate with what we believe people deserve for working full-time year round. I think with a strong economy in which we have very low unemployment rates, and average wages rising again, there is no way we can justify $10,000 a year for full-time year round work.
Mr. Schaffer. When you say "we," who is "we"?
Dr. Hartmann. I think we as a country. I would hope you as a Congress.
Mr. Schaffer. Do we as a country pay those kinds of minimum wages to federal employees?
Dr. Hartmann. Well, when we allow employers to pay less we are paying as taxpayers. We are paying EITC.
Mr. Schaffer. We being the country, I assume the federal government and its employees?
Dr. Hartmann. The federal government and its employees. I don't know if you are subject to the minimum wage, but you have federal employees that are that low and the average wages in the federal sector are fairly high because you have so many college educated workers in the federal sector.
Mr. Schaffer. Well, therein lies the controversy with respect to minimum wage I suppose. When we say "we" do we mean some private individual in a private contract between employer-employee or the federal government talking about them as though we are all one and the same?
Dr. Hartmann. I think we do have a role.
Mr. Schaffer. I think it is important to make a distinction.
Dr. Hartmann. I would like to respond because I am a taxpayer and pay for people who earn very low wages. I am paying through the earned income tax credit. I am paying through food stamps, and we are allowing employers to pay very low wages as a government. We can make a case as taxpayers that the government should be intervening to encourage employers to pay a higher wage.
Mr. Ballenger. I think the red light is on, but one more.
Ms. Rowe. I just want to mention that I understand what you are saying as a taxpayer, but on the other hand I look at my industry in terms of the nursing home industry where I am totally dependent on Medicaid and only 3 percent of our residents are actually private pay. So it is more or less if I don't get the monies that are channeled into my industry, I mean, I would love to go ahead and have the opportunity for Genesis to offer high wages because we have caregivers that are doing such important jobs. But on the other hand it is like a cycle. If we did not get the monies in, more or less, we are under scrutiny in terms of standards to the level that we have to be perfect. We are increasing our labor costs if minimum wage goes up, so more or less we don't want to compromise our quality. So if you give me opportunities then I can reciprocate too and, I wanted to add, as a taxpayer.
Mr. Ballenger. Mr. Hinojosa.
Mr. Hinojosa. It has been very interesting to listen to each of your presentations, and I want to ask some questions and see if some time in the near future this Committee could look at some more charts that would give us a complete picture.
Mr. Wood, I want to say that I come from Texas and I am a very frequent visitor to your restaurants and I love your food. I always tell people how good Luby's is. But I also know that you spoke about Rosa, and it seems that here in the 2 to 3 years that I have been on this Committee, any time we talk about the disadvantaged it is usually Jose, Maria, Rosa, and they are Hispanics. These individuals we are asking should be making much higher hourly wages so that they can help their families.
So what I am very curious about is how you could show us, Mr. Wood, and hopefully the folks who do the statistics here, the increases in Rosa's hourly wages compare with a side by side on Luby's salaried administrators plus bonus incentives. I need to see how over the last 5 or 10 years those salaried individuals have been paid with bonus, their regular salary plus the bonus incentives based on the performance of those hourly employees.
I would like to see the same thing in those who give so many jobs, like McDonald's, and those entrepreneurs who now own 5, 10, or 15 McDonald units and they in many cases pay minimum or slightly higher. How have their profits shown the increases? All of us here know that the Dow Jones industrials have hit an all time high of 11,000 compared to 6, 8, or 10 years ago when they were at 4,000, and that shows that the profits and the gains on stock are at record highs. Thus the stockholders are getting wonderful stock gains, and the stockholders and investors also are getting wonderful stock dividends.
So I need to see side by side how those hourly workers, those salaried administrators and how those stockholders are all benefiting from this wonderful economy that we have. In the end, I think that the record will show that those on the bottom rung of that ladder are the ones who are not getting a fair increase. Even we as Congressmen making $136,000 just got an increase of about I think 3 percent which is another $3,600. So again, when we see the charts that you bring back to this Committee, I would be very, very interested in seeing both Luby's, McDonald's, Heidi's and Ed's charts and graphs that will tell us the whole picture.
Mr. Wood. If I might briefly respond, I don't have all that information with me, but I will be more than happy to obtain it. I can tell you that over the last 2 years, our employees should not have received any profit sharing placed in their retirement accounts because of our costs associated with running our business both from labor and operating costs. They should not have received any portion placed in their retirement accounts. Our board of directors voted to make a discretionary payment into their accounts because they felt like it was not their fault that the company did not do as well as we had planned on.
So in having said that as well from a stockholder standpoint as far as our company is concerned, our stock is at a 52-week low. So we are suffering dramatically from the
'96 to '97 minimum wage increases. We are trying, as Joanne said, to be more streamlined in our operations and trying to make improvements to do things that will maintain our profitability.
So just having said that, and in regard to Rosa and your comment about Miguel, in my testimony I also have a Keith and a Les. So I think we represent a broad base of a diversified company with a number of different nationalities that work for us.
Mr. Hinojosa. I am happy that a lot of Hispanics get jobs at your place and I commend you for that. But I also want to let the record show that in our great State of Texas we have made a reversal and that is in property taxes. Luby's pays a heck of a lot more on property taxes than it did 5 or 10 years ago. The reversal that has occurred in our great state is that local property owners are now paying 60 percent of the taxes to keep our services and our schools and municipalities in operation where it used to be 40 percent. So our taxes have skyrocketed on business, on homes and on properties. That is part of the reason that all entrepreneurs and businesses, including nursing homes, have lower profits. Is that correct?
Mr. Wood. No, sir. The largest increase in our operating expenses has been our increase in labor. We have seen our labor costs jump higher. We classify our costs in three groups: food costs, labor costs, and operating costs. The most dramatic increase over the last couple of years in our costs as a company has been labor. I know the red light is on. I can wrap this up quickly.
Part of this new prototype restaurant that we designed and opened up in Seguin, Texas, was the first one. We also have brought in consultants to help us with time and motion to become more efficient at a time when our earnings are down and we are not doing as well as we have historically done. We are still reinvesting in our company to try to provide more jobs in the future and to continue to grow.
As you know, being from Texas, not that many Luby's opened up in '97 and '98. We were on a pace of growing at a 10 percent clip, which represented somewhere between 15 and 20 units per year, which is a tremendous amount of jobs generated not only in Texas but the other states that we are in.
Mr. Ballenger. You are doing a good job explaining, but Mr. Tancredo has been waiting a long time.
Mr. Lazere. If it is possible I would like to answer Mr. Hinojosa's question as well.
Mr. Tancredo. That is quite all right. Thank you, Mr. Chairman.
Mr. Wood, I have been waiting mostly because I wanted you to feel somewhat secure in the knowledge that at least there are a few of us on the Committee who actually believe in free markets, capital and the free enterprise system, and recognize the lunacy of having government established wage rates for anyone essentially. Of course we haven't the slightest idea what you should be paying anybody in your business. We haven't the slightest idea what you should be paying your workers in Texas or Colorado or anywhere else for that matter. Only you know that and only you can determine the extent to which a living wage is your responsibility.
As a shareholder, although I am not a shareholder in Luby's unless some mutual fund that I own has it and I certainly don't know about that, I would not expect you to do anything but to make sure that the enterprise ran in its most efficient fashion, supplied jobs, the product that keeps you afloat and in business, keeps those people employed and shareholders getting a return on their investment. That is what I expect of you and of any other corporation in America.
I think some of the things we heard early today would have sounded better in the Duma than in America, or certainly more understandable. But we are here in a country in which we at least still give some lip service to free enterprise and to the benefits of capitalism. I think I actually heard something about the idea that no business should be allowed to exist that didn't pay their people a minimum wage. By whose definition I guess I would say?
One question I had about one of the enterprises that you run, perhaps the one in Texas that you had to remodel and scale down in terms of the number of people. Are they all paid minimum wage there? Is the lowest paid worker paid minimum wage?
Mr. Wood. No sir, I do not have all that data. I do have our average pay rate for the State of Texas and it is $5.60 and there is a dollar difference and that is in the written testimony. But I would not have exact pay rates for each individual person, but that is our average for the State of Texas.
Mr. Tancredo. Okay. Thank you. The next question I have and I am sorry I can't see the cards in front of you and I don't want to mispronounce your name. Dr. Hartmann? Thank you.
I had to go back and forth so I may have missed part of the testimony, but I understood you to determine what you believe to be the correct increase in the minimum wage, the one we are debating or would be debating in this Congress soon. You referenced the original minimum wage and you talked about what would be the difference if we were to have increased it by the inflation rates and that sort of thing. Do you have any idea what was used, what economic model or what basis the original minimum wage was set on? How did they determine that that was the right amount?
Dr. Hartmann. I actually don't know but I know it was $.25 cents an hour.
Mr. Tancredo. We had testimony in here before actually, and we asked everybody on the panel. If I remember it was Department of Labor officials and some other folks who had done work on it. No one knew because to the best of anyone's knowledge there was no basis upon which that decision was made except that somebody said it should be $.25 cents an hour. That is the interesting point here. Every single increase has been based on where we were originally and how much we should increase it by. It is just odd, don't you think, that if there was no economic basis that anyone knew, nobody could come to us and say here is an economic model that shows you that the wage rate should be $.25 cents an hour, whenever that was. It is very difficult to accept any sort of increase, the viability of or the correctness of any sort of increase, based on that arbitrary figure.
Dr. Hartmann. If I could respond to that, in some ways I would have to agree with you. I think it is a societal value judgment where the society wants to set the minimum wage, and I think we balance many things. We balance the potential for job loss with the need for families to have a living wage, and it is definitely a political value judgment. I would simply argue that in this time of economic growth where all the increases in growth, very much of it, have been at the top it is time to bring up the bottom.
Mr. Tancredo. Thank you very much.
Mr. Ballenger. If you don't mind let's just cut it off, let me thank you all here and let me pose you a question to take home with you. Those of us that somehow are educated in the stock market heard Mr. Greenspan over and over again say the one thing that really worries him about whether he should raise interest rates or not is wage inflation. I am not saying that minimum wage increases or anything like that would knock the stock market completely down but isn't it a wonderful thought that something like that could be affected by the federal government. Instead of it being at 11,000, now we are at 10,400. Anybody want to try for 7,000? As you may gather, there is a great deal of difference.
I would like to thank the witnesses for their valuable testimony. We again apologize for the delay in starting the hearing and appreciate your patience and time. The Committee stands adjourned.
Whereupon, at 5:20 p.m., the Committee was adjourned.