SHOW ME THE MONEY: The Minimum Wage Debate

Friday, May 29, 1998

Thomas MaCurdy, Senior Fellow at the Hoover Institution and Professor at the Department of Economics, Stanford University, Shirley Burnell, Board Member of ACORN, Michael Hawkins, President of the California Restaurant Association and Eduardo Rosario, Executive Officer, San Francisco Labor Council, AFL-CIO, pose the question: Is another increase in the minimum wage good for the economy? Or is the real issue over whether there should be a minimum wage at all?

Recorded on Friday, May 29, 1998

ROBINSON Welcome to Uncommon Knowledge. I'm Peter Robinson.

Our show today, the minimum wage. Think of a typical minimum wage job and you're likely to picture just this; flipping burgers at a fast food joint. Think of the typical minimum wage earner, and you are likely to picture any number of things. Those who favor a high minimum wage tend to picture the minimum wage earner as somebody who needs every penny he is making. A burger flipper with a family at home to support. Those who oppose a high minimum wage tend to see a different kind of minimum wage earner. A teen-ager who is living at home with his parents while he flips burgers. I did just this job myself when I was 16 years old, for example. Or a retired person who is receiving his pension from his first job while he flips his burgers. In other words, somebody who is not poor, not really poor.

With us today are four guests.

Shirley Burnell is a Board Member of the Association of Community Organizations for Reform Now.

Ed Rosario is head of the San Francisco Labor Council.

Shirley and Ed favor President Clinton's proposal to hike the minimum wage, now at $5.15 an hour, by a dollar an hour or even more.

Michael Hawkins is President of the California Restaurant Association.

And Thomas MaCurdy is a Fellow at the Hoover Institution.

Michael and Tom oppose hiking the minimum wage. As a matter of fact, they are leery of even having a minimum wage. So the question is this: Does the minimum wage help poor people, or is it just political sizzle?

SHOW ME THE MONEY

There is a proposal pending to raise the minimum wage pretty substantially. Five dollars and change right now, the proposal by President Clinton. Others in Congress is to raise it to six dollars and change. Ed, are you in favor of it or against a hike in the minimum wage?

ROSARIO I am absolutely for it.

ROBINSON How come?

ROSARIO Because it helps the working people and does not hurt the economy.

ROBINSON Tom, you in favor or opposed?

MaCURDY I am opposed to an increase in the minimum wage, because it's a very inefficient mechanism for helping poor families.

ROBINSON Inefficient. We will return to that word.

Shirley, are you in favor or opposed?

BURNELL I am in favor but opposed at the same time because it is not enough money.

ROBINSON You're in favor of hiking the minimum wage but not by this sum which strikes you as paltry. You want more.

BURNELL Right.

ROBINSON Michael?

HAWKINS I am opposed. It costs jobs.

ROBINSON It costs jobs. Inefficient? Inefficient. So you're not opposed on principle. Explain yourself. That's just an interesting word to use.

MaCURDY Well, I am opposed on principle. Look, it's very important to distinguish two concepts. The first is the concept of how much a worker contributes to the overall output of the economy. The second one is the concept of how much society believes a worker's family should receive.

On the second concept, if you want to use a minimum wage as a mechanism for enhancing the incomes of low income families, what you have to ask yourself is where are minimum wages workers located. It is about one in four families in California have a minimum wage worker and you find that they're pretty evenly distributed across income distribution.

ROBINSON Wait a minute. That's a very arresting datum. Ordinary laymen such as myself tend to think of the minimum wage at least as intended to help working families at the lower end of the spectrum. And you're saying that's not the case? People who receive the minimum wage are... So who is the person who receives the minimum wage who is not at the lower end of the spectrum? A teen-age kid in a well-to-do family? That kind of thing?

MaCURDY Or a secondary worker in a well-to-do family.

ROBINSON You are shaking your head.

VOICE OVER What happened the last time we raised the minimum wage?

McCHICKEN LITTLE

Senator Kennedy is one of the proponents of this proposed increase in the minimum wage and I have here a quotation from a press release from his office. "The two most recent increases in the minimum wage did not cause the sky to fall." There was no measurable effect on jobs and no measurable effect on inflation. No measurable effect on jobs. That's true?

MaCURDY There is a dispute among our economists that has recently arisen as to what effect it has on jobs. But you have to understand it. That increases in the minimum wage tend to come about when economies are in booms, when you tend to be either coming out of recession or the economy tends be very strong. I don't think that's an accident that that sort of thing happened.

ROBINSON That's when the politicians chose to saddle the economy so to speak with the additional burden of paying minimum wage.

MaCURDY The issue becomes not so much measuring what kind of job loss there was. But it is more an issue of trying to detect how much slower the growth in jobs arose as a consequence of the minimum wage. So there is a dispute. But one thing, one cause, that is very important to get across in a program like this in a debate is a minimum wage increase is a redistribution policy. It doesn't create income. No economist is in disagreement with that. What it does is it takes from one group and gives to another. So the issue you really have to get at when you talk about minimum wages: Who pays.

ROBINSON Who does pay?

MaCURDY There are one of three groups that pays. It's either low wage workers themselves because they lose jobs, so it's workers themselves, consumers through higher prices, and the third group is employers through their profits.

HAWKINS There is a kind of fourth or subset.

ROBINSON Right.

HAWKINS And that is when you look at what you give the employee you look at all the benefits. We used to give free meals. Now you have to pay for meals. We're looking at health insurance. We don't want to get rid of that. We're looking at paid vacations, we don't want to get rid of that. We give paid vacations, we give health insurance. There is all the charity that we do in the community. We're cutting back in hundreds and hundreds of different of ways. It's not just jobs. It's not just hours. There's a lot of different ways. The way we buy is different. We now buy with a purchasing group and we go into like a Cysco or a Rycoff and we say you know we're with this group. We want bottom price. And so they say, well instead of the vendor coming out and seeing you five days a week he's going to see you once a month. So the truck isn't coming five days a week, it will come twice a week. This is in fact happening.

ROBINSON You're being forced. So the service that you get from vendors has to...

HAWKINS It is changing.

ROBINSON Okay.

HAWKINS Now their jobs in the indirect part. So there used to be a truck driver coming five days. Now he's coming twice a week. So who lost their job? Somebody lost their job in that system.

ROBINSON Somebody in that system lost their job.

HAWKINS There's not just the direct. It's all the indirect thing.

ROBINSON Shirley, let me put a proposition to you. Tom began by saying that we need to separate two ideas. One is how productive workers are. And the other is how much income we want people at the bottom of the scale to receive. Suppose I said to you (and I'd like your comment on this as well, Ed), suppose I said to you, Shirley, the government gets out of the business of fixing a minimum wage. The free market handles that completely. People go to apply for jobs at Michael's Restaurant or they go to apply for jobs with the San Francisco Chronicle and it's between the employee and the employer. Maybe people in the market place are only worth less than the minimum wage. Maybe they are worth a little more but whatever it is, it's the government gets out of it. But the government also keeps an eye on poorer people and gives them money. Some sort of welfare system to help people who are not making enough to lead a decent life. Would you object to that? Why, why give money to poorer people in the form of wages?

BURNELL It's better than giving it to them in the form of welfare.

ROBINSON Why?

BURNELL Because that takes away a lot of dignity among poor people. They don't really want a handout. They would much rather work for what they get. So pay them a decent wage on their jobs and then you won't have to have that handout for welfare or it won't be as much if you have to subsidize.

ROBINSON Tom, you're talking about efficiency but Shirley makes a good point.

MaCURDY A very good point and that's precisely the reason why we have the earned income tax credit. The earned income tax credit is a program that operates the following way. If an employee is a member of a family that is a low-earning family and that will receive the earned income credit at the end of the year, they can go to their employer and have the employer instead of having the deduction on their paycheck they get a positive contribution from the government on their paycheck. So that each paycheck they receive their earnings and a part of tax revenues paid by the government to them. So the result is they are taking home a bigger paycheck.

ROBINSON Absolutely.

MaCURDY You object to that?

ROBINSON That program is already in place.

MaCURDY Absolutely.

ROBINSON And it affects how many millions of people?

MaCURDY I don't know how many millions but let me indicate the way it works. For anyone working at the minimum wage, for every dollar that the individual earns, the government transfers another forty cents to the individual. So in other words, for every dollar they earn they actually receive a dollar forty for it.

ROBINSON Okay. Now...

If we really want to help the poor why don't we just make more extensive use of the earned income tax credit.

A CAPITOL IDEA

Why not eliminate the minimum wage and simply beef up the earned income tax credit program?

ROSARIO Well, I am a working person and I...

ROBINSON What's your job, Ed, just so, you know...

ROSARIO I work for the San Francisco Newspaper Agency. I've worked for the Chronicle and the Examiner. And as a worker and all my friends are workers, when we hear things about production efficiency it really comes down to maximizing production which really means maximizing profits which really have nothing to do with the well-being of taking care of a living standard that workers can have and earn with dignity which Shirley was alluding to.

ROBINSON When you hear the word efficiency, as a matter of practice in your life and a life of the guys, the men and women, you hear the word efficiency you know somebody is about to get it in the neck.

ROSARIO That's a fact.

ROBINSON Okay. Tom?

MaCURDY I appreciate that. That's one reason I hesitated using the word efficiency in the first the place. I mean I know exactly how you feel about the issue.

ROBINSON But this is part of what is going on with this whole argument is that we have economists, trained economists, who look at the problem in one way, employers who look at the problem in another way, and employees, working people, who look at the problem in yet another way. And one of the things that interests me about this discussion is trying to tease out if there is a way we can all get to speak the same the language. He hears as an economist, he says the word efficiency is a good word. You hear the word efficiency and the show goes down here.

MaCURDY Let me know what the issue of productive efficiency is. It really has to do with maximizing the size of the pie, the amount of total income that's generated in the economy. And that has to be sharply distinguished about how you divide that income among working people or businesses or whoever government. So the productive efficiency issue is a way you worry about productive efficiency because it's a way to maximize the amount of income that the economy has available to it. Then you want to sharply distinguish that from how you then divide up the entire amount of income. And there is various mechanisms that can do that. One issue you can impose is the minimum wage or price regulations. We tend not to impose price regulations because one thing we know is governments cannot affect the value of a product. They can affect the way things get redistributed but they can't affect values. So consequently we tend not to have governments that regulate either wages or prices as redistributive mechanisms because we have other approaches for doing that, and one of the main ones we use is the tax system.

ROBINSON Shirley, you talked about dignity and Tom said the earned income tax credit is a way of increasing workers' income. They take home bigger paychecks so their dignity is ensured. Don't you like that? Doesn't that sound better than the minimum wage?

BURNELL No, it doesn't.

ROBINSON You don't buy it. All right, tell me why?

BURNELL I mean, why hand me over a dollar fifty cents when you can raise my salary in the first place without doing that? I mean, the whole thing is that people are not making enough money. The government themselves said it takes at least fifteen thousand dollars to bring a family of four out of poverty.

ROBINSON That's the poverty line for a family of four.

BURNELL That's the poverty line. But with this raise in the minimum wage you're still going to bring people up to twelve, so they're still not even up to what the government says that they need to even barely make it. And this is not saying that they're going to make it. This is saying that they are barely going to make it. So what is a dollar forty cents going to do on five dollars again? There you go again. They sure are not making any money.

ROBINSON Michael.

HAWKINS So what you'd rather do is you'd rather take the three people here and all of you are minimum wage and I'm the employer and so you'd rather have an increase and I'm going to cut Tom out of the thing and I'm going to cut your hours in half , or I'll say I'm going to keep all of you in jobs. But you work forty hours and now you're going to work thirty-seven, thirty-seven, thirty-seven and you know I had health benefits for you. I'm going to cut those or I'm going to change the health benefits. And you used to have paid vacations so you got time with your family. I have to cut that out because I can't afford to do it.

ROBINSON Shirley, how do you respond to that?

BURNELL I don't think, I really don't think that they have to be nailed. And even if he...

HAWKINS How do I go on? How do I continue in business? That's the question is how do I continue in business?

ROBINSON Let her finish. I know you are making good points, but I just want give to Shirley a chance to respond.

BURNELL I don't know but I feel that you can. Your profit margin might not be as much as it has been before.

HAWKINS The State of California is three and a half percent.

BURNELL I really don't think it will run small businesses out of business.

HAWKINS I'm telling you exactly. Oh, I'm sorry.

ROBINSON To pay people more, I have to have fewer people or I have them working fewer hours. Isn't that plausible?

ROSARIO Well, the situation at the newspaper where I've worked and part of contract negotiations, we have a collective bargaining process where we talk about wages and conditions and those things are worked out collectively. And we work together, not undermine each other. What for the betterment for the company is we reap the benefits as well and what's good for us is good for the company. So we have a meeting of the minds.

ROBINSON But you don't recognize that some workers are going to get squeezed out of the picture altogether?

ROSARIO There is no way the paper has not been my experience at the paper but also it's a different industry. The California Restaurant Association and National Restaurant Association are recording profits. I know this is...

HAWKINS Is that a bad thing? Average profit for the restaurant industry in the State of California is three and a half percent, and where does that profit go for? It goes for debt service. It goes for reinvestment in the capital expenditures, and aren't I entitled because I took all the risk? My home is on the line, my mortgage is on the line, my family is on the line. Yours isn't. Aren't I entitled to a little bit of profit? Aren't I entitled to a little bit of profit?

ROSARIO That is true, but the workers lives are so...

HAWKINS So three and a half percent

ROSARIO The homes of the workers, their livelihood, the children that they have to feed, their lives are on the line as well.

ROBINSON Let me ask Thomas a slightly different question.

It's an emotional debate and it's one that we keep on having. Why do we put ourselves through this?

THE PAY THAT WILL LIVE IN INFAMY

The minimum wage since introduced by Franklin Delano Roosevelt lo these many years ago at twenty-five cents an hour has gotten raised again and again and again and again over some six decades. So as a political matter, this is not a new debate. It happens every few years in this country. Why does it always get raised? That is to say, why don't your arguments have more of an effect on public opinion? Ed and Shirley, you two may disagree with them but Ed and Shirley speak for more people than do the two of you and the political system responds accordingly.

MaCURDY Supporters of the minimum wage view it as manna from heaven. They view it as extra income that then can get spent. And maybe they think it comes mostly from profits but there is absolutely no evidence to support that. I mean maybe part of it come from profits but the majority either comes through higher prices or through the earnings of low wage workers, through lower benefits, or lower jobs. Now, one thing we haven't talked about here is the price effect. Now it's a very small amount on each good. For example, it's been argued that the increase in a McDonald's Big Mac hamburger was about five cents, and five cents doesn't seem like very much. And the consumers of Big Macs don't realize they're paying five cents more. So it looks like there's this money going to low wage workers that kind of comes from nowhere. But it is coming from somewhere and what you have to ask then, the question is who are the families that are paying the extra five cents for a Big Mac? You find that the majority of low income families are hurt by the minimum wage. Why? Because they don't have a minimum wage worker in their family and they tend to disproportionately purchase goods that are produced by low wage labor. For example, restaurants. Outside food purchases by low income families is a larger fraction of their income than it is for high income families. So, consequently, when you have a price increase in that sort of area due to an increase in the minimum wage, these families through higher prices are paying for minimum wage but don't realize it.

ROBINSON So the problem... I'm returning now to the question of politics. As a political matter, it sounds good. This is what you'd argue. The minimum wage sounds good. It sounds as though you're helping workers. The arguments against the minimum wage are in fact quite complicated. You need to have the public's attention for some time. You have to explain it over some space of several hundred words in a newspaper article. Or over three minutes on television instead of a thirty second sound byte. Right?

MaCURDY The beneficiaries of an increase in the minimum wage are very easy to identify because you can go to those firms where you have low wage workers who are still employed and you can document that in fact they have higher earnings. The people paying for the minimum wage, that's much more difficult to document and measure.

ROBINSON Well, in fact they don't even know it themselves.

MaCURDY Absolutely. They don't even know it themselves. See one thing that is very important to understand on the debates over the minimum wage. This is not a debate of whether we should help low income families or the level of which we should help low income families. This is a debate over how we can best help low income families

ROBINSON Not whether, but how.

MaCURDY If you want to help low income families, you change the tax system or the income transfer system that we already have in place in the government and make it more generous.

Do it directly. Now politicians don't like this.

ROBINSON Why not?

MaCURDY Because they have to raise taxes to do it. Or they have to cut spending in some other area. And that's in fact what they're doing implicitly when they increase the minimum wage but the people being taxed don't know it.

ROBINSON Let me ask you this question. Are we simply stuck with the 60 year tradition of the minimum wage, and if that's the case, what's the best option? Just raise it as slowly as possible? Fight it like this same battle every three or four or five years and just try to keep the minimum wage?

MaCURDY I'm more optimistic than you are, Peter. I'm hoping...

ROBINSON Give me your ideal outcome and how we get there.

MaCURDY Ideal or what I think is going to happen? What I think is going to happen is we'll raise the minimum wage slowly over time but rather...

ROBINSON Expand the earned income tax credit? What's the good news in this picture from your point of view? What is most likely to happen?

HAWKINS Well, we have expanded the earned income tax credit substantially since the early 1990's.

ROBINSON And that's a good idea.

MaCURDY As a device for supporting low income families, it's by far the best policy we have because you can do it very effectively. You can target resources. I mean you can define exactly which families get the income and which families do not.

YOU DESERVE A RAISE TODAY

VOICE OVER The earned income tax credit may make sense to economists but the term "tax credit" doesn't sound nearly as good as the term "pay raise."

ROBINSON What does the restaurant association do? What is your political way out of the box you're in?

HAWKINS We would like to stop a minimum wage increase because it...

ROBINSON You're fighting it.

HAWKINS We are fighting it. Because it doesn't help the employee. It really doesn't do. I think all of us are coming at it a little bit differently but all of us want exactly what Tom said.

ROBINSON Shirley, do you want a living... let me ask you this. If there is no cost in the economy and no cost to workers in raising the living wage, why don't you want to just triple it?

BURNELL We... I would love for that to happen.

ROBINSON You'd love to?

BURNELL Yes, I really would. In Oakland we just fought for a living wage. Not a minimum wage but a living wage. And the amount for that was eight dollars because that's what the government was spending.

ROBINSON And you won. It's the City Council that imposed a higher wage in Oakland than in the rest of California.

BURNELL Right.

MaCURDY Is this for government work or for all businesses? It's government, right?

BURNELL No, right now it's for businesses that are receiving subsidies from...

ROBINSON That have government contracts?

BURNELL From the city.

ROBINSON Ed, don't you accept that there are any costs to raising the minimum wage at all?

ROSARIO I do disagree that it's going to hurt the economy. In fact, when people make more money, they are able to contribute more when they buy products which contributes to the tax base of the community. As far as raising taxes of the people which he alluded to with his proposal, I think working people pay their fair share of taxes above and beyond the call of duty. I think corporations are the ones who have the accountants, to be able to work tax loopholes, who are not paying their fair share, who are not contributing to the tax base. That's where the tax dollar should be coming from. If we were able to get those tax dollars, many of these discussions, we probably wouldn't even be here having this discussion right here and now. The fact of the matter is it works towards evening the playing field. Where people can have a decent life for themselves.

ROBINSON Tom, your response to that?

MaCURDY Yeah. Ed, you and I may have different views over exactly how much we should tax corporations and how much we should tax workers. But one thing that I would have thought we could agree on without much difficulty is if what you want to do is raise the taxes of business then you do it through government tax code. Because there is no ambiguity as to who is paying for that. So if you want to tax businesses of a particular characteristic, raise their taxes. We have taxes on corporations. The difficulty with the minimum wage proposal is it 's very indirect and who pays and who doesn't pay is so unclear.

VOICE OVER Tom doesn't seem to be making much headway at convincing Shirley and Ed. Let's give him one more chance.

PLAY IT AGAIN, TOM

We're in the sixteenth year of an economic expansion that was marred by a relatively brief downturn in the early `90's, but for sixteen years, roughly speaking, the economy has been expanding. The share of income that goes to the lowest twenty percent has remained constant or grown very slightly. Correct?

MaCURDY Correct.

ROBINSON Okay.

MaCURDY Well it's remained constant, it has actually fallen.

ROBINSON Has actually fallen

MaCURDY Correct.

ROBINSON Therefore, we have entirely understandable frustration on the part of people in that bottom twenty percent who see the economy growing here in Silicon Valley. They see BMWs, Mercedes Benzs, the odd Rolls Royce driving around and they are not getting much more. How as a political matter do you redress their understandable grievance?

MaCURDY Through the tax code. You basically.... If what you want to accomplish is to redistribute income from high income families or workers, however you want to put it, to lower income families you do it through the tax code.

ROBINSON You'd agree? You'd rather do it through the tax code.

HAWKINS Yes.

ROBINSON You disagree, Shirley?

BURNELL Yes.

ROBINSON He doesn't change your opinion at all since the beginning of this show?

BURNELL I have to go along with what Ed said. I mean it's the lower twenty percent of the people that I feel who are actually paying most of the taxes. I mean large corporations and businesses are not paying their fair share. We all know that.

ROBINSON Okay, we could talk much longer, but it's television. I've got to close it out.

The year is 2001. President Clinton is about to leave office. His successor is about to be sworn in. Will the minimum wage in January of 2001 be at six bucks and something or will the people who want to raise the minimum wage, President Clinton, Senator Kennedy, so on so forth, have been defeated? Minimum wage will be up. I'm not asking whether you want it up or down. I'm asking your prediction. Up or down in 2001?

HAWKINS Up.

BURNELL Up.

MaCURDY Up.

ROSARIO Absolutely up.

ROBINSON And there we have it. Ed, Tom, Shirley and Michael, thank you very much.

BURNELL Thank you for having us.

ROBINSON All four guests agree whether they like it or not the minimum wage is going up. If Shirley and Ed are right, that's good news for the burger flippers of America. But if Michael and Tom are right, employers will have no choice but to cut back. Cut back on pay, cut back on benefits, even cut back on the goods they provide to consumers.

I'm Peter Robinson. Thanks for joining us.