Business Week Nov 27, 2006 i4011 p38

MORE AMMO FOR A HIGHER MINIMUM; New research says a ripple effect would hike the pay of a lot of family bread winners. Coy, Peter

Full Text: COPYRIGHT 2006 The McGraw-Hill Companies, Inc.

Byline: Peter Coy

If you want to pick a fight with a free-market economist, say something nice about the minimum wage. Democrats in Congress want to raise it next year. As they gear up, economists in the opposition are arguing that it will make unskilled workers too expensive to hire. They also say it's an inefficient way to help the working poor, since a lot of the people who make the minimum wage, now $5.15 an hour, are teenagers living at home.

But the economics profession is far less united against the minimum wage than it was a generation ago. Since the early 1990s an influential group of economists has poked holes in the once strongly held belief that the minimum wage is a major job killer. And now there's economic research disputing the rest of the conventional wisdom. Some economists are saying that minimum-wage increases have a ripple effect, bumping up the pay of a large portion of the working poor. If they are right, that would strengthen the political appeal of a minimum wage hike by increasing the number of potential voters who are helped.

If the minimum wage is raised to $7.25 an hour over the next two years,

6.6 million workers, or 5% of the workforce, would be directly affected.

By itself that's not a very big number. But an additional 8.3 million will get "ripple effect raises," according to the Economic Policy Institute, a labor-supported Washington think tank. The ripple effect means employers tend to raise wages for workers who make above the new minimum, even though they have no legal obligation to do so. As a result, the Economic Policy Institute estimates that such a minimum wage increase would raise pay for 11% of the workforce. The impact might be even broader: Jeannette Wicks-Lim, a research fellow at the Political Economy Research Institute at the University of Massachusetts calculates that 16% of workers could get raises if the hike is passed and goes into effect immediately.

The ripple effect tends to make a minimum wage boost a better deal for the working poor. That's because the workers who are likely to get those ripple effect raises, many of whom now earn $8 or $9 an hour, are often the primary breadwinners in their families. The Economic Policy Institute estimates that while teenagers account for 29% of those who would directly benefit from a substantial increase in the minimum wage, teens account for only 14% of the higher-paid workers who would get ripple effect raises.


There's no free lunch, of course: The existence of a ripple effect from the minimum wage hike also raises the total cost of the increase to employers.

Indeed, opponents of a higher minimum wage, such as economist David Neumark of the University of California at Irvine, are willing to concede that ripple effects exist--they just view them as a potential negative rather than simply a positive. If government intervention in the labor market lifts the pay scale for more workers, they say, that increases the odds of job losses.

But other economists, including Alan B. Krueger of Princeton University, say it would take a minimum wage substantially higher than what's being contemplated to wipe out jobs. They say there's scant real-world evidence for harmful effects of the minimum wage hikes that have occurred to date.


Out in the low-wage working world, certainly, it's hard to find much support for the free-market arguments against a higher minimum wage. Concepcion Landeros, a 38-year-old Mexican immigrant, has spent five years cleaning bathrooms in a Houston office building for $5.25 an hour. Sometimes she can't afford her $100-a-month diabetes medicine. Now she's on strike for higher pay, more hours, and medical benefits. If Congress passes a minimum wage hike, she'll get a raise whether the strike succeeds or not. And so will workers earning a good bit more. A Broader Boost Than Expected Assuming the federal minimum wage rises to $7.25 an hour by early 2008, 14.9 million workers could benefit INDIRECTLY*: 8.3 MILLION DIRECTLY: 6.6 MILLION *NONMANDATED PAY INCREASES TO WORKERS EARNING ABOVE THE NEW MINIMUM WAGE Data: Economic Policy Institute