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Should We Raise the Minimum Wage?

Congress raised the minimum wage to $4.75 per hour on October 1, 1996, and to $5.15 per hour on September 1, 1997. At that time, a youth subminimum wage of $4.25 per hour was also established for newly-hired employees under the age of 20 during their first 90 consecutive calendar days of employment. President Clinton argued that a boost, offered as a well-deserved raise for hardworking Americans, was the right thing to do because the minimum wage had been relatively stagnant during recent years. Indeed, after adjusting for inflation, the minimum wage has fallen sharply. In 1960, when the minimum wage was $1.60 per hour, it was equivalent to $7.92 per hour in current, or 2000, dollars.

When workers retain their jobs after the minimum wage has been boosted, it's mainly teenagers in part-time service occupations, like fast-food restaurants, who benefit. The potential benefits of an increase in the minimum wage, namely higher incomes for teenagers and the working poor, are obvious. What is less obvious is the cost in terms of lost employment opportunities. Whenever the decision to add or subtract workers is faced, an employer compares the marginal revenue product of the last worker hired to the marginal cost of employment. At the margin, each worker's job must be justified by bringing to the employer at least as much in added revenue as is necessary to pay the marginal cost of employment. When the minimum wage is increased from $5.15 to $6.50 or higher, low-skill workers unable to produce more than $5.15 per hour in employer benefits get laid off.

The bottom line is simple: Worker productivity must be enhanced if you want to increase incomes among the working poor. Raising the minimum wage while holding job skills constant will reduce not enhance income opportunities for minimum-wage workers.

See: A Wall Street Journal News Roundup, "Brazil Raises Minimum Wage 11.1%, Posts Trade Surplus of $594 Million," The Wall Street Journal Online, April 2, 2002 (http://online.wsj.com).

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