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Manhattan Institute

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Wage-Hike Hooey


Wage-Hike Hooey

July 19, 2004
Urban PolicyOther
Public SectorOther

Union bosses and liberal politicians like to argue that raising the minimum wage will help lift people out of poverty. But the facts, as numerous studies have amply demonstrated, utterly contradict this notion. That's why a broad range of economists and policy makers have long ago rejected it.

But the weight of evidence against minimum-wage hikes apparently isn't enough for New York's leading business group, the increasingly left-leaning New York City Partnership—which has bizarrely joined labor leaders in calling for a 38 percent increase in the state's minimum wage.

It's distressing when the business leaders of one of the world's most important capitals of finance don't seem to grasp Econ 101.

To understand what's wrong with the Partnership's position—and what we should do instead—consider some facts about minimum-wage earners.

In the Empire State, 64 percent of minimum-wage employees are not the primary breadwinners in their families; they are the second or third or fourth wage earner—teens, retirees or spouses working part-time.

In fact, the average family income of a minimum-wage earner in New York state is about $48,400, according to research by the Employment Policies Institute, a business-backed organization in Washington, D.C. Only 16 percent of all minimum-wage workers in the state are supporting a spouse and/or children.

One thing these statistics tell us is that raising the minimum wage would primarily affect those who aren't poor. It would mostly put more money into the pockets of teens working part-time, or spouses of dual-income families whose yearly wages are already two and three times above the poverty level.

Still, is that such a bad thing? Why not give all those hard-working, industrious part-timers a boost in salary?

Well, chiefly because mountains of research show that when we raise the minimum wage, we destroy low-wage jobs and increase poverty.

This should not be surprising. If we boost the price of anything, including labor, buyers will buy less of it. Increase the minimum wage in New York state, and employers, especially small businesses who are already struggling with high health-care costs and steep taxes, will hire fewer low-end workers—unless government can somehow figure out how to increase a business' revenues at the same time.

Even worse, the biggest losers will be those who can least afford it. A recent study by three university economists found that a 10 percent rise in the minimum wage produces a 5.7 percent decline in overall teenage employment and an 8.5 percent decline in employment among African-Americans aged 16 to 24.

It is because studies have consistently found such results that most economists and policy makers long ago stopped pushing for minimum-wage hikes and instead advocate increasing the Earned Income Tax Credit (EITC)—a federal program, supplemented by some states, that puts cash right into the hands of the working poor.

A single mother raising two children and working at the minimum wage is eligible for a $4,204 EITC check from the federal government, and another $1,260 from New York. That already raises her actual hourly wage in New York state above $7.70. (Moreover, in New York these workers are eligible for a whole range of other assistance, including Medicaid and subsidized child care.)

Unlike the minimum wage, the benefits of these programs go straight to the poor. A 2000 study by David Neumark of the University of Michigan, a leading researcher on the minimum wage, and William Wascher of the Federal Reserve concluded that "the EITC is more beneficial for poor families than is the minimum wage."

If state leaders really wanted to help the poor, then they'd boost New York's EITC, already the highest among the states. But minimum-wage discussions are not about helping the poor; they're about electoral politics.

Unions love minimum-wage hikes because they give labor negotiators leverage to demand higher contracts for their workers—especially in service industries where unionized workers make under $10 an hour.

Raise the minimum wage and that will surely increase unions' wage demands for their workers. As a consequence, however, low-wage workers who aren't unionized will lose their jobs.

Politicians sign onto this agenda when they are cynically seeking union endorsements. But it's mystifying why business leaders would also.

One explanation is that the Partnership is composed of executives of big New York City businesses who don't have many minimum-wage workers and so aren't affected by this proposal. That it might prove a huge burden on small businesses, especially ones outside Manhattan, doesn't matter much to the Partnership.

Widespread speculation also has it that the Partnership's leaders are responding to a request for support from Senate Majority Leader Joe Bruno—doubtless in hope of a quid pro quo.

The losers will be low-wage workers, but in the increasingly cynical world of Albany politics, who cares about them?

From, the Web site of the Manhattan Institute's City Journal. Steve Malanga is a CJ contributing editor.