APRIL 29, 1996
Congress is debating proposals to raise the federal mimimum wage to $5.15/hour. Republicans have argued that raising the minimum wage would force businesses to reduce the number of entry-level jobs. Democrats -- including Senator Ted Kennedy(D-Mass), who has been the Democrats' main champion for the minimum wage -- have argued that raising the minimum wage is a fairness issue and few jobs would be lost. Margaret Warner interviews two business people and two economists for their views on the issue.
MARGARET WARNER: Now the substance of the minimum wage debate as seen by two economists and two business people. Barbara Bergmann is an economics professor at American University in Washington who specializes in labor economics. Finish Welch holds the same position at Texas A&M University in College Station, Texas. Eric Sklar is the owner of Burrito Brothers, a small restaurant chain in the Washington area which employs about 65 people, and Joni Paladino is the owner of Johns Garage and Parts, a repair and trucking service in Brockway, Pennsylvania. She has 11 employees. Barbara Bergmann, you support raising the minimum wage. Why?
BARBARA BERGMANN, American University: Well, I think the country can afford to pay people who work at hard, difficult jobs full time enough so that they can live decently. As things are now, you can't support -- a single mother cannot support even one child in, in -- on the minimum wage above the poverty line. So this change would do that. A lot has been, of course, predicted, that terrible things would happen, but, you know, back in the 70's, the minimum wage was the equivalent of $7 an hour in today's prices, and nothing very terrible happened.
MARGARET WARNER: And now, of course, it's $4.25.
PROF. BARBARA BERGMANN: That's right. And, you know, it's been allowed to just slip down as the rest of the country has, has had increases, and these people haven't really had any. So it really needs to be raised.
MARGARET WARNER: Prof. Welch, you have opposed raising the minimum wage. What is your argument?
FINISH WELCH, Texas A&M University: (College Station, Texas) Oh, excuse me, there are several arguments. One, way that increasing the minimum wage is usually justified is in terms of a poverty program, i.e., to enhance the well-being of poor people. And as such, it's amazingly poorly targeted and simply perverse. Most of the people who work at or near the minimum wage are simply not poor. Many of them are secondary earners in families that have higher wage earners. Many are simply teenagers in middle class families. Uh, the increase in the minimum wage has a very uneven impact across areas of the country. You don't see many people working at $4.25 an hour now in the East Coast. You see a lot of them in the South and Southwest. It also has an uneven impact across industries. Any time you raise the minimum in the fashion like one we're describing there are winners and losers. On the job site, the losers are people who in any case would earn the least, because you're doing absolutely nothing to increase a worker's productivity. You're simply saying to someone who has incentive to do the best they can anyway and find the best job that they can that unless you can find a better job, you simply cannot work, unless you can find a job that we think is adequate for you, we're not going to allow you to work. Uh, some will, indeed, get increased wages and retain their jobs. Others simply won't. The losers are the least able.
MARGARET WARNER: Well, how many let me interrupt you for a second and ask you this. How many jobs do you think will be lost if the minimum wage is raised 90 cents an hour over the next two years?
PROF. WELCH: The numbers are, are not incredibly high. What you're talking about is a 21 percent increase in the minimum, which would raise the average cost of employing teenagers, which is the group most concentrated in the minimum wage, by something under 5 percent, so you're not going to see massive job losses. This isn't a big program. It's not going to increase the income of poor people hugely. It's not going to increase the income of anyone hugely, except perhaps the minimum wage advocates.
MARGARET WARNER: Let me get Professor Bergmann to respond to that. How do you respond to his criticisms?
PROF. BARBARA BERGMANN: Well, there are people who do support themselves on the minimum wage.
MARGARET WARNER: Do you have any idea how many people are sole breadwinners for their family on that?
PROF. BARBARA BERGMANN: No, I can't tell you that.
MARGARET WARNER: I think Bob Reich, Robert Reich, the Labor Secretary, who we just saw in the taped piece, says it's something like 40 percent of those who would be affected. Do you think that's correct?
PROF. BARBARA BERGMANN: Well, that's probably-you know, it's hard to make an estimate like that, but I'd like to respond to the job loss point that most of the opponents, as well as Dr. Welch, make. And that is that some recent studies have really thrown that assertion into doubt. A study led by a Princeton economist looked at a rise in the minimum wage that occurred in the state of New Jersey, and they went to the fast food places, and they said, "how did this affect you," and what happened? They found out that they didn't decrease employment, and they didn't even raise the prices, so I think that in some cases people may lose jobs, but the general effect is not going to be very big. But, you know, even if there is a job loss, it is balanced by the fact that people who retain their jobs are going to do better.
MARGARET WARNER: And you said that under -- if the minimum wage were raised, what, a single mother with a child could be at -- then at the poverty level, is that right?
PROF. BARBARA BERGMANN: A little bit above the poverty level. As of now, she can't be.
MARGARET WARNER: Professor Welch, briefly, just respond to the points Professor Bergmann raised.
PROF. WELCH: Well, Professor Bergmann's right in the sense that the water has been muddied by a bevy of recent studies. And the principle one is, in fact, the New Jersey/Pennsylvania comparison that she described.
MARGARET WARNER: And you're saying there they raise the minimum wage on the New Jersey side but not in Pennsylvania?
PROF. WELCH: That's right. Back in 1992, they raised the minimum in New Jersey from $4.25 to $5.05. And there is a study out of Princeton University indicating that very little happened. There are two points worth making on that: One, many of us have followed that study. I am one. It's seriously flawed. I don't think professional economists take it seriously any longer. Secondly, it's an ad hoc example. There are many things that affect employment. The minimum wage is only one. And when you do these little subtle before and after comparisons here and there, it's not surprising if sometimes you find when something happens that you would have pointed to that would have led you to expect that employment would fall, you see it, in fact, increase, because there are other things going on. The point I'd like to make is that if a few ad hoc examples of seemingly contradictory changes in employment following a minimum wage increase can disprove the law of demand, then a few examples of old men and women who smoke can disprove the link between smoking and bad health. That's heart disease and cancer.
MARGARET WARNER: Let's get in two people now who are actually going to deal with this if it happens. Eric Sklar, are you in favor of raising the minimum wage?
ERIC SKLAR, Burrito Brothers: Yes, I am. It's a basic issue of fairness. The minimum wage, as Prof. Bergmann has said, is at a 40-year low in terms of real dollars, and minimum wage doesn't decrease employment. It guarantees people who are hard working members of our society but who don't have the skills to move up to higher-paying jobs, it ensures that they can support their families, and there's this idea out there, and I think it's pretty common, that minimum wage workers are teenagers or college students, but a lot of minimum wage workers are not. Over a third, as you said, are sole breadwinners in their family, and two-thirds are adults.
MARGARET WARNER: All right. What about those who work for you who receive the minimum wage or anywhere in this range between the minimum wage and to what it might be raised, are they sole breadwinners? Who are they? Why don't you raise their wages now if you think they should be raised?
MR. SKLAR: Well, there's two parts to your question. One is I would love to raise their wages myself, but as long as my competitors are paying lower than I am, I can't compete and pay my workers more. But my, my minimum wage workers range from high school students to sole breadwinners in their family. That's the reality, and my employee base represents very much the statistics that I said. And these are people who are working very hard. And we're talking about rewarding work in this society. We're spending a lot of time talking about reforming welfare. Well, if we're going to do that, shouldn't we reward people who are willing to work hard and make sure that their living is enough to support themselves and their family?
MARGARET WARNER: Joni Paladino, what impact, what is your position on raising the minimum wage? What impact would it have on your business?
JONI PALADINO, Johns Garage and Parts: (University Park, Pennsylvania) I'm against raising the minimum wage; as far as my business is concerned we would lose an employee. We would choose not to hire what we call the "clean-up boy" position.
MARGARET WARNER: And why is that?
MS. PALADINO: Uh, we can't afford to pay someone who we consider a marginal employee that kind of a labor rate. It focuses also on my mechanic, my truck drivers when they come into the shop to work, they're going to look at that raise, and they're going to expect the same raise, and none of this on merit. It is simply an artificial -- an arbitrary raise that doesn't reflect my business conditions whether I am increasing customers or losing customers, providing more services, so I can gain more customers, it simply says you must pay these people, whether they're being productive for your business or not, more money.
MARGARET WARNER: So you're saying that if you had to raise this lowest-level job in your shop that then everybody else making what, $6 or $7 now, would also expect a raise?
MS. PALADINO: Correct. Umm, my mechanic would expect to keep the wage gap between himself and the clean-up position. We have a clean-up boy now who is not at the minimum wage. We hired him in November. He has proven himself to be responsible. He has gained more skills and proven his reliability. Umm, he has already gotten a raise. When he graduates, we will offer him a full-time position and another increase. Of course, he'll want someone to do the clean-up job, but that doesn't mean that'll happen if we have to hire someone who might not prove to us his productivity for six months or a year.
MARGARET WARNER: Prof. Bergmann, what about that point that Ms. Paladino just made, this idea of the ripple effect it could have?
PROF. BARBARA BERGMANN: Well, I think she's right. There is an effect of that sort. Not everybody's going to get a dollar for dollar increase. There will be some compression in the wage range, but that is true. But that's not so bad. That means that more people will gain. Now, as to getting rid of employees, uh, she's going to be knee-deep in whatever it is that this person cleans out. Now, you know, I think the most important thing is that if you have a business that's running well, that, that's satisfying its customers, it's not going to take a big drop in its employment. It's not going to fire people because it can't take care of its customers. If there's going to be any effect at all, I believe it will be in prices. And, uh, it's not so bad that people should pay a little more for the kinds of goods and services that these really low-level workers make.
MARGARET WARNER: Eric Sklar, how would you respond if the minimum wage were raised? Would you have to lay people off, or not hire, or would you raise your prices or what?
MR. SKLAR: In concert with my competitors I'll raise my prices a little bit. For example, an average customer spends about $5 on a meal in my store. I'll have to raise my prices about 6 or 7 cents over time to compensate the additional costs of the minimum wage going up. It's a minimal addition to costs. I don't think any of my customers are going to stop coming into my stores because of that additional cost, especially since my competitors will raise their prices as well. As far as the job side of it, I just don't see that happening. I opened my business in early 1989 and the minimum wage went up a few months later, and it just -- it was negligible. It has a very small effect, because only a small number of workers in it -- my work force and in the work force in general are minimum wage workers. In a multi-trillion dollar economy, it just don't amount to a huge difference economically.
MARGARET WARNER: Prof. Welch, how do you explain the difference in what we just heard from Ms. Palamino [Paladino] and Mr. Sklar in terms of how they would respond in this situation?
PROF. WELCH: Well, I'd like to make two comments, one to Mr. Sklar. Competition must be hell in your industry. You're saying an increase in the minimum wage would drive up the cost of the product by a tad over 1 percent and yet, you'd lose business if, uh, if your competitors didn't have to also increase the wage. Ms. Paladino I think is, is right on. You're exactly on the mark. The crucial point that she made is that these are transitional jobs, that the act of working at the minimum in and of itself through the accumulation of job experience and learning by doing tends to raise productivity and, therefore, the wage. Your entry jobs are transitional. People do not spend a career working at the minimum wages. The few who do are the very rare exception. Uh, the other thing is it's perfectly clear that any time we raise the cost of anything people consume, without increasing their incomes or their budgets, belts tighten. And they have to make adjustments. In her case, she would make an adjustment as to a floor sweep. Presumably some of that stuff would be picked up by others. Things would be a little dirtier. That's the way it happens. That's the way we adjust our lives.
MARGARET WARNER: Ms. Paladino, how do you explain the difference in the way you think you'd have to respond and the way Eric Sklar would? Is it the difference in the nature of your business? What is it?
MS. PALADINO: Well, I think -- excuse me -- I think it is the nature of the business, and also the area from where we are. I'm in rural, Northwestern Pennsylvania. It is definitely not the Washington, D.C., area. I, I can't explain how that kind of an impact is. I have competitors too. Um, some of them are self-employed. They don't have to deal with any kind of labor at all, and they still are out there, have their own little shops, and I just can't willy nilly raise my prices just because I have an increase in labor. And as I said, it's my other employees. It's a 7.65 percent I have to match in Social Security and Medicare. It's increased workers' compensation premiums which are based on payroll, and the biggest thing is the wage gap. I hired a mechanic a year ago. He's already gotten a dollar and a half raise so far after just one year. I, like I said, this clean-up boy, he'll be getting another raise, and I've already had my raises, and they've been based on merit. These people have proven themselves to me. I won't be wanting to hire someone new to take that chance when someone who I have to teach perhaps basic work ethic, coming to work every day, being on time, completing a task or assignment that's, that's sweep all the floors, pick up all the tools, uh, sometimes the investment in some of these people is six months or a year and something I believe Prof. Berg [Bergmann] said, well, if some of these people lose their jobs, or they can't get employed, well, that's all right because other people will be making more money. I mean, that's sort of leaving some of our society out, I think.
MARGARET WARNER: All right. Well, thank you very much. Thank you, all of you. We'll have to leave it there.