Raise The Minimum Wage

February 18, 1986|By Juliet B. Schor, co-author of ``The Economic Report of the People`` (South End Press, 1986) and an assistant professor of economics at Harvard University.

By now many Americans have heard what six million of their fellow citizens know every payday--that at $6,968 a year, a full-time minimum wage is below poverty level. This would seem reason enough to raise the minimum wage. But what would that mean for our economy?

Export-led economic growth is built on low wages, lots of available workers and relatively low productivity. Since low wages and high unemployment inhibit domestic demand, this route requires rapidly growing world markets for exports. What`s more, it tends to create a two-tier economy, with a more prosperous export-oriented sector.

By contrast, wage-led growth has been the secret to U.S. economic and technological success. A small labor pool--and workers` ability to migrate to the frontier--kept wages unusually high here. This led firms to shift from low- to high-productivity activities, forced companies to adopt highly productive techniques and made well-paid American workers a lucrative domestic market. Wage-led growth produces high living standards, low unemployment and less reliance on an unpredictable world market.

These days, though, conservative economics beckons us to choose the low-wage road. It calls for lower minimum wages, worker concessions, regressive redistribution through tax and income-transfer systems and policies to keep unemployment high. The payoff, in theory, is more investment and

international competitiveness. But over the long term, the low road is irrational. Why destroy a well-developed domestic market--and a highly developed capital stock? Why choose policies that will reduce living standards?

Instead, we could follow a high-productivity, high-wage route to reproduce the conditions that have fueled our extraordinary economic performance all these years. The crucial next step for wage-led growth is to raise the minimum wage. At $3.35 an hour, where it`s been since 1981, the minimum wage is long overdue for a significant increase. Not only will this simple step boost productivity and demand, it will lift millions of Americans out of poverty and reduce inequality.

How? Many U.S. businesses survive only because of cheap labor. Raising the minimum wage would give them an incentive to improve productivity by leading them into more productive sectors, to add capital equipment and to reorganize inefficient production methods. Firms that did not would face bankruptcy.

Businesses that cannot provide a living wage are a dubious blessing. When workers are paid more, effort on the job improves. Absenteeism and turnover drop and productivity rises.

But won`t raising the minimum wage cause unemployment? After all, according to standard supply-and-demand economics, raising the price of something lowers the demand for it. When wages rise, however, the demand for goods and services--and hence the demand for labor to produce them--increases, too. In fact, unemployment levels are determined not by the price of labor but by the total demand for goods and services.

Likewise, assuming high minimum wages will price the U.S. out of the world market is too pessimistic. Competitiveness depends on productivity as well as wages. Besides, many low-wage firms are in services, which are not traded internationally.

Raising the minimum wage also will provide more productive, higher-paying jobs for youth. Contrary to what many conservatives assert, the major cause of youth unemployment is not high wages but scarce jobs, especially in inner-city neighborhoods. This line of reasoning suggests that a proposed subminimum wage for teens is a poor idea.

We should also be skeptical of the claim that a subminimum wage would increase employment. Some businesses would merely substitute lower-paid teens for adults. Furthermore, evidence from wage-subsidy programs for low-income youth, such as the targeted jobs tax credit, indicates that this approach has done little to create jobs.

As it is, the government`s Minimum Wage Study Commission found that half of all minimum wage workers, including youth, already worked below minimum wage. We could expect similar results from a subminimum wage, which might backfire by reducing labor force participation. At less than $2.50 per hour, the costs of employment--such as transportation and child care--would make a job a commodity that few teens could afford.

Raising the minimum wage, by contrast, will promote gender and racial equality by increasing the income of women and minorities, who

disproportionately work in low-productivity firms and industries. It will also lift full-time minimum wage workers, many of whom are women, out of poverty. Indeed, it would put millions of hard-working Americans--and our economy--on more solid ground.