THE MINIMUM WAGE: IMPACTS ON JOB GROWTH,

HIRING PRACTICES, AND WAGE EARNERS

An Issue Paper for

Management Communications 320

By Ronald C. Schoedel, III

2 May 2005
 Ronald C. Schoedel, iii
rschoedel@gmail.com

2 May 2005

[This paper was originally submitted as an assignment for a Management Communications class.
My professor recommended it might be suitable for publication with some minor modifications.
I am placing this paper online as a contribution to the body of knowledge on the material
covered. This paper is copyrighted by Ronald Schoedel III and may not be reproduced for any
reason without express written consent.]

I am delighted to present to you my issue paper for Management Communications 320. This
report is the culmination of extensive research, which I found to be highly interesting and
thought provoking.

I have attempted to fairly portray the various positions held by persons and groups who have
something to say about the role of the minimum wage in the American economy. I am fortunate
that my selected topic seems to be the subject of a large body of research. Most of my
investigation dealt with periodical literature, as you indicate you prefer for this assignment.
However, several of my works cited are position statements of the parties involved in the
minimum wage debate. As with all issues with so many variables, this issue does not present
itself with an easy or obvious answer. I hope you will enjoy the viewpoints and information I
have researched.

Thank you for your time and consideration. I look forward to receiving your feedback on this
paper.

Respectfully,

Ronald C. Schoedel, III

ii
 TABLE OF CONTENTS

Page

LETTER OF TRANSMITTAL .......................................................................................................2

EXECUTIVE SUMMARY .............................................................................................................5

INTRODUCTION ...........................................................................................................................6

Purpose and Procedures .......................................................................................................8

Authorization for Report......................................................................................................8
Historical Background .........................................................................................................8

REASONS FOR EXISTENCE OF MINIMUM WAGE ..............................................................10

Part of FDR’s “New Deal” ................................................................................................10

Support of Organized Labor ..............................................................................................11
Support of Social Welfare Advocates................................................................................12

CURRENT STATE OF THE MINIMUM WAGE .......................................................................14

Federal Standards...............................................................................................................14
State Standards...................................................................................................................15
Local “Living Wage” Ordinances......................................................................................16

EFFECTS OF RAISING THE MINIMUM WAGE......................................................................18

Possible Reduced Job Growth ...........................................................................................18

Possible Layoffs.................................................................................................................19
Possible Artificial Inflation of Wages for Other Positions ................................................20

EFFECTIVENESS OF MINIMUM WAGE IN MEETING ECONOMIC POLICY GOALS .....21

Effects on Lowest-Paid Workers .......................................................................................22

Effects on Other Workers ..................................................................................................24
Effects on Business Growth...............................................................................................24

CONCLUSIONS ...........................................................................................................................26

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© Ronald C. Schoedel III
RECOMMENDATIONS...............................................................................................................28

WORKS CITED ............................................................................................................................30

APPENDIX....................................................................................................................................33

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© Ronald C. Schoedel III
 EXECUTIVE SUMMARY

The U.S. economy is in the midst of a major transition from being production-oriented to
being service-oriented. As high-paying manufacturing and technology jobs are being exported to
Asia and Latin America in growing numbers, many Americans are finding it difficult to make
ends meet with the low wages earned from service jobs. Many wage earners find it necessary to
work two or three minimum-wage jobs to be able to afford the bare necessities of life.

This paper examines the issue of the minimum wage in the economy and in the lives of
Americans today. It offers an historical perspective on the minimum wage and attempts to de-
termine whether minimum wage laws are effective in helping workers improve their lives.

The following questions are answered in this paper: (1) Why does the minimum wage ex-
ist today? (2) What is the current state of minimum-wage and living-wage laws and movements
in favor of them? (3) What are the effects of raising the minimum wage? and (4) Has the mini-
mum wage been effective in meeting public policy goals of helping those it has been intended to
help?

As a result of this issue paper’s investigation, the following recommendations are issued:

1. The United States Congress should pass and the President should sign a modest in-
crease to the federal minimum wage. The increase should include a third “tier” wage level that
would allow for a slightly lower wage as a way of encouraging large corporations with overseas
operations to bring jobs back to the United States.

2. Small business owners should consider the positive aspects of paying their employees
more than the minimum wage and then decide to do so. Decreased absenteeism, turnover, and
training costs are appealing reasons to pay lower-skilled workers more than the bare minimum.
Business owners may find that the increased loyalty of their employees causes them to work
harder, thus generating higher profits.

3. The American public should become more familiar with the economic system and
engage in serious debate about how it can be refined. Americans should consider replacing the
government’s free-trade policies with tariffs and trade restrictions, and they should also consider
reforming their consumer spending habits, which are largely responsible for the increased de-
mand of products made with cheap labor overseas.

4. Americans should attempt to experiment on a limited scale with economic systems

aside from the currently prevailing model of “global capitalism.” Successful experimental mi-
cro-economies may serve as models for wider reform in the future.

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© Ronald C. Schoedel III
 THE MINIMUM WAGE: IMPACTS ON JOB GROWTH,
HIRING PRACTICES, AND WAGE EARNERS

Introduction

Economists and observers generally agree that the United States economy is in the midst

of a major transition from being production oriented to being service-delivery oriented. Facto-

ries are closing down and relocating while Wal-Mart is building stores at record pace. The rea-

sons for the shift are many, but generally boil down to basic economics: the costs of producing

abroad are lower than the costs of producing in the U.S.

As a result of the free trade policies pursued by the administrations of the two Presidents

Bush and President Clinton over the last fifteen years (including NAFTA and an increasing trade

deficit with China), high-paying manufacturing and technology-development jobs continue to be

shipped overseas (773,000 American software and tech jobs were lost from 2001-2003), leaving

mostly lower-paying service-delivery jobs (sometimes humorously called “McJobs”) to be filled

by Americans. Most Americans are aware of the massive shift of manufacturing jobs to Asia

and Latin America, but may not know that the last several years have been particularly hard on

tech workers. Computer corporations and other tech firms have relocated their support and engi-

neering positions to India by the scores of thousands.1

As high-paying jobs become harder to find, various proposals have been considered and

enacted to try to help displaced workers. Income redistribution through schemes such as the

1
Brier Dudley, “High Technology from India is Just Down the Street,” Seattle Times, 22
April 2005, para. 29-30; available from http://seattletimes.nwsource.com/html/ businesstechnol-
ogy /2002001987_india11.html [accessed 24 April 2005].
6
© Ronald C. Schoedel III
earned income tax credit and entitlement programs such as cash assistance and food stamps are

being used to provide the basics of life for more Americans each year as the ranks of the unem-

ployed and underemployed grow. The increasing number of two-income families is seen by

some as an indicator that jobs paying enough to support a family are hard to come by for most

workers.

“More than 20 million of the 21.6 million new jobs projected to be created during the

first decade of the 21st century will be in the service sector,” with the occupations experiencing

the most growth being food preparation and serving workers, retail salespersons, cashiers, jani-

tors, groundskeepers, and other unskilled service jobs, according to Craig Becker, associate gen-

eral counsel to the AFL-CIO. Becker acknowledges that the growth of low-wage jobs is causing

a lot of Americans to “wax nostalgic for the heyday of American heavy industry.”2

With well-paying jobs sparse, the most obvious “fix” demanded by some is a higher

wage floor. Many today—including organized labor—petition for a higher minimum wage,

which is proposed as a solution to helping wage earners support their families and to decreasing

the reliance of the so-called “working poor” upon the welfare system. While in-depth discussion

about the issues of free trade and the welfare system are beyond the scope of this paper, they

(along with common concepts of social justice and concern for the poor) are directly related to

the economics of the minimum wage, and should therefore be considered in conjunction with the

research and findings presented herein on the minimum wage issue.

2
Craig Becker, “A Good Job for Everyone: Fair Labor Standards Act Must Protect Em-
ployees in Nation’s Growing Service Economy,” Legal Times, 6 September 2004, 1.
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© Ronald C. Schoedel III
Purpose and Procedures

Specifically, the purpose of this report is to examine the effects of a legally mandated

minimum wage on hiring practices, on the labor market, and for wage earners as a group. Spe-

cifically, the following questions will be answered:

1. How did the minimum wage come about and why does it continue to exist?

2. What is the current status of minimum wage laws in the United States?

3. How does the minimum wage—particularly, raising it periodically—affect job growth,

job stability, and wages for other employees?

4. Has the minimum wage been effective in meeting the economic policy goals of those

who advocate it?

To answer these questions, investigation of secondary source has been conducted. Re-

cent periodicals containing articles dealing with minimum wage issues constitute the bulk of

cited sources.

Authorization for Report

This research report was prepared under the direction and authorization of Dr. T. D.

Stoddard as detailed in the research proposal, which is included as Appendix 1 following the re-

port.

Historical Background

Some may be surprised to learn that a minimum wage law has not always existed in the

United States. Since the minimum wage is so often the starting wage for new entrants into the

job market, many take it for granted that simply by virtue of showing up for a job, a wage earner

is entitled to a minimum amount of pay. This has not always been so. For most of America’s

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© Ronald C. Schoedel III
history—those centuries during which the family farm and the family business dominated

American commerce—the labor market was decidedly much different than it is today.

Among the massive changes to the American economy brought on by the Industrial

Revolution of the late nineteenth century, concern with fair pay for workers quickly arose. Most

who have even briefly studied American history are aware that the factories, railroads, and mines

of the late 1800’s and early 1900’s were dangerous places that offered almost no job security or

benefits to workers. Many workers toiled 14 or more hours a day or more and received company

scrip as pay—scrip that held no value outside the company’s own overpriced general store, mess

hall, and grossly expensive, substandard company housing. Labor leaders fought hard for the

rights of workers to unionize and demand better pay and working conditions. Among the rights

demanded by the unions was a minimum standard of pay, sought as a means of protecting the

workers from the impersonal, aggressive tactics used by company bosses in their quest for higher

profit margins.

Socialist Party presidential candidate Eugene V. Debs was the first to campaign on the is-

sue of a minimum wage, declaring the liberation of 25 million Americans from “wage slavery”

the major theme of his 1904 campaign.3 He went on to win nearly one million votes in each of

his 1912 and 1920 runs for president, indicating a popular appeal of a minimum wage. In 1912,

Theodore Roosevelt, the Progressive presidential candidate, spoke critically of the “scrap heap

system of industrialism” that created so much “human wreckage.”4 However, more than two

3
Eugene V. Debs, “Opening Speech Delivered as Candidate of the Socialist Party for the
President at Indianapolis, Ind., September 1, 1904,” available from http://www.marxists.org/
archive/debs/works/1904/sp_wkingclss.htm [accessed 24 April 2005].
4
Becker, 1.

9
© Ronald C. Schoedel III
decades passed before President Franklin D. Roosevelt signed a federal minimum wage into law

as part of his “New Deal.”

Reasons for Existence of Minimum Wage

Part of FDR’S “New Deal”

Several of the labor-rights advocates’ desires were granted when the Fair Labor Stan-

dards Act (FLSA) was passed in June 1938 as one of 121 social welfare bills pushed through

Congress. The FLSA was passed as a reaction to mounting labor-union pressures and “atrocious

Depression-era workplace standards.” According to the U.S. Department of Labor, the federal

act required overtime pay for hours worked over 44 in a week, child labor standards, and a

minimum wage of $0.25 per hour. 5 The first minimum wage applied to about 50 percent of the

workforce; today, the minimum wage law covers about 90 percent of jobs.6 Congress passing

amendments to the FLSA has accomplished each subsequent increase of the minimum wage.7

Since the passage of the FLSA, Congress has supported “a policy that prevents market

forces from driving the wages of [the] lowest paid workers below a level deemed to be minimal

5
Victor D. Infante, “The Future of the Minimum Wage? Speculation Over Statement by
Secretary of Labor Elaine Chao,” Workforce, March 2001, para. 4; available from
http://www.findarticles.com/p/articles/mi_m0FXS/is_3_80/ai_71836858 [accessed 28 February
2005].
6
Economic Policy Institute, EPI Issue Guide: Minimum Wage (Washington, D.C.: Eco-
nomic Policy Institute, 2004), 12; available from http://www.epinet.org/content.
cfm/issueguides_minwage_minwage [accessed 11 February 2005].
7
Ibid.

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© Ronald C. Schoedel III
by Congress, and by [society’s] general sense of fairness and decency,”8 according to the Eco-

nomic Policy Institute, an organization that lobbies for a higher minimum wage. As today’s

economy is dominated by multinational corporations rather than the “mom and pop” corner

stores of the past, the minimum wage law is seen by some as a basic right of laborers—an im-

pediment to corporate abuse of workers similar to that experienced in the mines and sweatshops

of old.

Support of Organized Labor

Labor unions remain at the forefront on the matter, calling for an increased minimum

wage. The AFL-CIO currently advocates an increase to $7.25 an hour, noting that if the mini-

mum wage in 2005 were worth what it was worth in 1968, the minimum wage would be $8.88 an

hour. The labor group supports Democratic Senator Edward Kennedy’s minimum wage pro-

posal, which would raise the wage floor in three steps of 70 cents each.

An Economic Policy Institute study cited by the AFL-CIO reports that 7.3 million work-

ers would benefit from Kennedy’s wage-increase bill. But since most union workers make more

than minimum wage, why do the unions want a minimum wage hike? The AFL-CIO refers to a

“spillover effect” through which an additional 8 million workers’ wages would rise as a result of

the upward pressure on the entire wage structure that is caused by raising the minimum wage.9

8
Jared Bernstein, “Minimum Wage and Its Effect on Small Business,” testimony given
before U.S. House Subcommittee on Workforce Empowerment and Government Programs on 29
April 2004, para. 2; available from http://www.epinet.org/content.cfm/webfeatures_
viewpoints_raising_minimum_wage_2004 [accessed 9 February 2005].
9
AFL-CIO, Talking Points: Raising the Minimum Wage (Washington, D.C.: AFL-CIO,
2005) para. 5; available from http://www.aflcio.org/yourjobeconomy/minimum
wage/talkingpoints.cfm [accessed 28 April 2005].

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© Ronald C. Schoedel III
 While the union organization supports what appears to be the most realistic legislative

opportunity for an increase in the wage rate, their historic position calls for even stronger wage

controls:

Fairness to the working poor demands that the federal minimum wage should be
not less than 50 percent of average hourly earnings of non-supervisory workers
and production workers in non-farm private industry. If this adjustment were
automatic, then the minimum wage worker would get an increase when everyone
else got one, creating a steady relationship between wages of workers in general.
For this reason, the federal minimum wage should automatically be adjusted to
the private industry hourly earnings.10

The AFL-CIO counts a good number of Americans as supportive of its positions. A

January 2005 Pew Research Center report cited by the labor group found that 82 percent of

Americans believe a higher wage is “an important priority” and only 6 percent oppose an in-

crease. Three-fourths of respondents to a 2001 poll jointly conducted by Investor’s Business

Daily and Christian Science Monitor supported raising the wage as a way to stimulate the econ-

omy. Another nationwide poll in 2002 found that 77 percent of likely voters support a raise to

$8 an hour.11

Support of Social Welfare Advocates

Social welfare activists—such as some religious groups—also push for increased wage.

The religiously inspired supporters of a higher minimum wage are spurred on by their under-

standing of teaching of Christ, who advocated helping the helpless by equipping them to help

10
AFL-CIO, AFL-CIO, “Restore the Floor: It's Time to Raise the Minimum
Wage,” AFL-CIO Reviews the Issues, October 1995, 2; available from http://www.ilr.cornell.
edu/library/downloads/keyWorkplaceDocuments/AFL-CIOIssueBriefs/AFLIssuesRestorethe
Floor.pdf [accessed 20 April 2005].
11
AFL-CIO, Americans Support an Increase in the Minimum Wage (Washington, D.C.:
AFL-CIO, 2005) para. 1-4; available from http://www.aflcio.org/yourjobeconomy/minimum
wage/americanssupport.cfm [accessed 28 April 2005].

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© Ronald C. Schoedel III
themselves. A higher minimum wage—an amount workers can live off—encourages the poor to

make an effort to better themselves by working, they reason. Two of the largest churches in

America, the Roman Catholics and the leading Lutheran conference—both support “living

wages.”

According to the Catholic Voting Project’s 2004 issues guide, the Catholic conference of

bishops teaches that “because financial and economic factors have such an impact on the well-

being and stability of families, it is important that just wages be paid to those who work to sup-

port their families and that generous efforts be made to aid poor families.’12 Pope John Paul II

wrote in his 1981 treatise On Human Work: “The justice of social and economic systems is fi-

nally measured by the way in which a person’s work is rewarded…. A just wage is a concrete

measure, and in a sense the key one, of the justice of a system.”13

Peter J. Sammon, writing for a national Catholic journal, comments that the movement

for higher wages is a “fitting response to Catholic social teaching that insists on the right of

workers to a just living wage.” He further notes that “as far back as 1906, Monsignor John A.

Ryan, the well-known proponent of Catholic principles of social justice, wrote a book titled A

Living Wage: Its Ethical and Economic Aspects.”14 Sammon states several reasons he supports

living-wage movements, especially those working to get at least government agencies and con-

tractors on board with a higher minimum:

12
Catholic Voting Project, 2004 Catholic Voter Guide, http://www.voting
catholic.org [accessed 20 April 2005].
13
Peter J. Sammon, “The Living Wage Campaign,” America: The National Catholic
Weekly, 26 August 2000, para. 19; available from http://www.americamagazine.org/get-
text.cfm?articleTypeID=1&textID=2120&issueID=378 [accessed 20 April 2005].

14
Ibid.

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© Ronald C. Schoedel III
 In the cities that have passed a living-wage ordinance, studies thus far show that
these ordinances have added slightly more than 1 percent to the total production
cost for most contractors. Jobs have not been lost. Fear of job relocation is less-
ened by the fact that basic city service jobs cannot readily be moved to another
city. Also, better-paid workers are more productive. Higher wages improve mo-
rale and this lessens absenteeism and turnover—all of which are costly business
factors.15

The Evangelical Lutheran Church in America, which counts over 5 million Americans as

members, is extensively involved in social welfare and advocacy projects. The ELCA urges

Christian support for higher wage standards in an issue paper released by the Churchwide As-

sembly in 2003. Quoting a 1999 position statement adopted by the Assembly, the Lutherans ad-

vocate for a minimum wage level that is balanced with the delicate economic reality of raising

labor costs. They call for “a minimum wage level that balances employees’ need for sufficient

income with what would be significant negative effects on overall employment.”16

Current State of the Minimum Wage

Federal Standards

All this support for a higher federal minimum wage has not convinced Washington, D.C.,

however. Even though Congress has traditionally supported periodic raises in the wage floor, the

wage has not been raised since the 1997 increase from $4.75 to $5.15. Washington is presently

“on track to tie the longest period over which Congress has failed to enact an increase in the

minimum wage,” which was the nine years before President George H. W. Bush signed an in-

15
Ibid., para. 15.
16
ELCA Churchwide Assembly, ELCA Background Paper: Increase the Minimum Wage,
2003, para. 4; available from http://www.elca.org/advocacy/issues/economiclife/minimum
wage.html [accessed 27 April 2005].

14
© Ronald C. Schoedel III
crease in 1990.17 The current President Bush has gone on the record as supporting a wage hike

to $6.15—but only if states have the right to “opt out” of an increase.18 So, even if Congress

were to pass a wage increase, in order to get Bush’s signature, the amended federal minimum

wage law would have to be crafted such that it might become practically meaningless.

State Standards

So far, fourteen states plus the District of Columbia have their own minimum wage laws,

which mandate wages higher than the federal minimum.19 These laws vary from statutes that fix

the minimum wage at a predetermined dollar amount, a percentage above the federal rate, or an

amount determined yearly by factors such as the increase in the consumer price index. The low-

est state rate more than the federal wage is $6.00, in New York; the highest minimum wage is

$7.35, mandated by law in the state of Washington. Oregon follows at $7.25, with Alaska at

$7.15.20 Kansas and Ohio have state minimum wages lower than the federal rate and six states

have no minimum wage.21 Even though the federal rate applies to most jobs, about 10 percent of

jobs do not fall under the federal law.22 Workers in some states are thus at the mercy of their

employers, who have no law at all to regulate how little they can pay their employees.

17
Bernstein, 1.
18
Infante, para. 1.
19
Angela Cara Pancrazio, “Minimum Wage a Hard Way to Live,” The Arizona Republic,
17 February 2005, para. 9; available from http://www.azcentral.com/specials/special12/articles/
0217MinimumWage.html [accessed 22 February 2005].
20
Wikipedia, “List of U.S. State Minimum Wages;” available from http://en.wikipedia.org
/wiki/List_of_U.S._state_minimum_wages [accessed 15 April 2005].
21
Pancrazio, para. 9.
22
Economic Policy Institute, 12.
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© Ronald C. Schoedel III
Local “Living Wage” Ordinances

According to the Economic Policy Institute, “a full-time worker (working 2,080 hours a

year) earning $5.15 an hour would earn $10,712 a year, well below the 2003 federal poverty line

of $14,824 for a family of three.”23 With the lofty goal of bringing certain workers up to a bare

minimum standard of living, at least 62 communities and counties have adopted a new form of

minimum wage requirement called a living-wage ordinance.24

Living-wage ordinances go beyond the mere minimum by requiring employers to pay

employees an amount that has been determined sufficient to support a family. The living wage

amount is determined by factors such as the federal poverty level and the cost of living for the

area. In 2000, Santa Cruz, California, adopted the highest hourly living wage so far: $11 for em-

ployees with health care coverage and $12 for employees without health insurance.25 The first

living-wage ordinances—such as that passed in 1994 by Baltimore—generally applied only to

companies that held municipal contracts,26 but over the past several years the trend has been for

living-wage laws to apply to most major business enterprises in a given city.27

23
Economic Policy Institute, 10.
24
Chris Pentilla, “Who’s Paying? Staff Smarts: Should You Choose to Pay Your Employ-
ees a ‘Living Wage’ Today? Tomorrow, the Decision May Not Be Yours to Make,” Entrepre-
neur, December 2001, para. 3; available from http://www.findarticles.com/p/articles/mi_m0DTI/
is_12_29/ai_83678111 [accessed 28 February 2005].
25
Ibid.
26
Los Angeles Business Journal, “Living Wage Laws Hurt Poor the Most,” 26 March
2001, para. 3; available from http://www.findarticles.com/p/articles/mi_m5072/ is_13_23/
ai_72809104 [accessed 28 February 2005].
27
Pentilla, para. 5.

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© Ronald C. Schoedel III
 Some “living wage” requirements appear high at first glance, but a recent study in Wyo-

ming indicates that the true cost of living is significantly higher than the federal minimum wage

and the federal poverty rate. Wyoming has no living wage requirement at present, but the study

was commissioned as a tool to guide public and private sector policies on wage issues. It meas-

ures how much a family needs to earn to pay for the basic necessities of life without any public

assistance or help from friends and family. The findings: a single parent with an infant and a

preschool-aged child needs to make a minimum of $12-14 an hour to just scrape by in most

counties in Wyoming. In Teton County, the aforementioned family of three needs its wage

earner to make $21.62 an hour. Diane Pearce, researcher and author of the “Wyoming Self-

Sufficiency Report,” is quick to note that families making the recommended living wages must

adhere to a strict “bare bones budget that allows no take-out foods or restaurant meals—not a

pizza, Happy Meal, or latte.”28

Living-wage supporters claim that living wages make happier, more loyal, and more pro-

ductive employees. But laws alone are not driving the living-wage trend. In the Northeast, a

number of business owners have decided that a law is not necessary to encourage them to pay

their workers what they consider fair wages.

In Boston, a group called Responsible Wealth has given business owners and investors

the opportunity to sign “covenants” stating they will pay “fair” wages. The coordinator of Re-

sponsible Wealth, Karen Kraut, acknowledges that paying living wages may indeed reduce prof-

its and require additional costs to be passed on to customers, but she also notes that costs related

to absenteeism, turnover, and training can be significantly reduced for a company. The owner of

28
Joan Barron, “Making a Living,” The Casper Star-Tribune, 17 February 2005, para. 12;
available from www.casperstartribune.net/articles/2005/02/19/news/wyoming/
3d6d6bec93db2d6187256faa007212c6.txt [accessed 22 February 2005].
17
© Ronald C. Schoedel III
a Maine bakery is one such businessman. Jim Amaral took it upon himself to raise the wages of

each of his minimum-wage workers to $8 an hour, almost $3 an hour more than the minimum

wage requirement. He reports that his early-morning drivers and bakers—positions that histori-

cally have very high turnover—are remaining with his company longer and that it is now easier

to recruit for those positions. When asked if the higher wages have hurt his business, Amaral

states that paying a living wage is a great marketing tool: customers actually appreciate the op-

portunity to purchase from a socially-responsible company.29

Effects of Raising the Minimum Wage

Possible Reduced Job Growth

Not all business owners or economists are quite so keen on living-wage or minimum-

wage laws, however. Quite the contrary, in fact. A survey published in the Winter 2005 Journal

of Economic Perspectives and cited by Heritage Foundation economist and researcher Tim Kane,

Ph.D., reports “71 percent of economists at America’s top universities agree with the statement

‘a minimum wage increases unemployment among the young and unskilled.’ About one-third of

the economists agree outright, and another third agree with reservations.”30 The reasons for this

sort of overwhelming agreement are straight out of any Economics 101 textbook: somebody has

to bear the cost of the increased wages, and that “somebody” usually ends up being the workers

on the “bottom rung” of the employment ladder, who are the first to be laid off when labor costs

29
Pentilla, para. 7.
30
Tim Kane, “Minimizing Economic Opportunity by Raising the Minimum Wage,” Heri-
tage Foundation, 4 March 2005, para. 4; available from http://www.heritage.org/Research/
Economy/wm676.cfm [accessed 28 April 2005].

18
© Ronald C. Schoedel III
are raised by external forces such as legislation, and those for whom jobs will not be created by

businesses that are scaling back on labor expenses.

Ron Bird, chief economist for the Employment Policy Foundation states that his “concern

is that if…the minimum wage [is raised] too high, you'll be excluding some people from the la-

bor market, the folks that don't have experience or skills.” He adds that the minimum wage “cre-

ates a barrier to entrepreneurship because it adds to what you have to do to justify expanding

your business. So it has a negative effect on job creation and the creation of new businesses.”31

A 1987 report—prepared at a time when Congress was considering raising the federal minimum

wage from $3.35 to $4.65, with an additional provision for automatic raises to 50 percent of a

national average hourly wage—declared that such a law would “have the same effect as a gov-

ernment regulation banning the hiring of low-skilled workers.”32

Possible Layoffs

Craig Garthwaite, an economist with the Employment Policies Institute—a pro-business

organization that lobbies against the minimum wage—writes in a guest newspaper editorial:

…[L]ow-skilled employees are [the] most likely to lose their jobs following a
wage hike. Duke University researchers have found that after an increase in the
minimum wage, the lowest skilled adults are crowded out of their jobs as better-
educated teenagers (frequently from wealthier families) are drawn into the work-
force. Their ‘need’? Simply to earn money for video games and iPods. But be-

31
C. J. Prince, “Dollar Signs: When the Minimum Wage Rises, Will Small Businesses
Get the Downside?” Entrepreneur, October 2001, para. 2; available from
http://www.findarticles.com/p/articles/mi_m0DTI/is_10_29/ai_79756154 [accessed 28 February
2005].
32
Amie Snider, “Minimum Wage Increase Hurts Unskilled Workers,” Discount Store
News, 24 August 1987, para. 1; available from http://www.findarticles.com/p/articles/
mi_m3092/ is_v26/ai_5123730 [accessed 28 February 2005].
19
© Ronald C. Schoedel III
 because they require less training, employers eagerly hire these teenagers to get
the most from their higher payroll costs.33

Countering the idea that higher labor costs are easy for businesses to absorb, Garthwaite

points out that one need only observe the adoption of automation technologies such as ATMs

and grocery self-checkout lanes. But with increasing pressure to raise wages, even McDonald’s,

“one of the most reliable sources of entry-level job opportunities” is experimenting with auto-

mated self-service kiosks instead of cashiers. “These new technologies, designed to reduce labor

costs, eliminate jobs in the process.”34

Possible Artificial Inflation of Wages for Other Positions

When the wage floor is raised, some employees, who today earn more than the minimum,

will find that their hourly wage is either at or only slightly higher than the new minimum wage.

Economist Ron Bird of the Employment Policy Foundation believes that (not surprisingly) those

who are presently earning what would become the minimum wage would want an increase in

their wage as well. He urges prudence in the minimum wage debate and careful consideration of

this particular reality.35

Restaurant workers provide an excellent example of what happens when the minimum

wage is raised. The federal law allows tipped employees to be paid at a lower minimum wage—

just $2.13 an hour—as long as they receive sufficient tips to make their gross pay equal the

minimum rate. Like the general standard, some states mandate a higher tipped-employee mini-

33
Craig Garthwaite, “Increasing Minimum Wage Won’t Help Jobless,” Duluth News-
Tribune, 19 February 2005, para. 4; available from http://www.epionline.org/oped_detail.
cfm?oid= 40# [accessed 21 February 2005].
34
Ibid., para. 5.
35
Prince, para. 5.
20
© Ronald C. Schoedel III
mum rate: $3.13 in Maine, $3.65 in Vermont, and $3.85 in New York, for example. When tips

are added to this rock-bottom remuneration, many tipped employees gross $15-17 an hour or

more, according to restaurant owners. Raising the minimum wage across the board for tipped

and non-tipped employees results in the “tragedy” of restaurateurs being required to raise hourly

pay for tipped employees—who are their highest-paid workers—while “struggling to pay a fair

wage to non-tipped employees.”

As a result of trying to ensure more fair wages for all, the lower-paid, back-of-the-house

employees are actually treated less fairly. Owners struggling to meet the need for higher wages

for all are left with few choices. Paul Douglas, a small-restaurant owner in New York state, em-

ploys 35 people and opposes raising the minimum wage. He says he “doesn’t see the justice of

his dishwashers earning only the new minimum wage, while most of his servers will get most of

that amount and make a total of $31 an hour.” Illinois pizza franchisee Mike Monseur says that

if labor costs continue to rise he will have his salaried “managers pick up more hours.” Thus,

while paying some employees a higher hourly rate, his managers will gross the same weekly sal-

ary while working more hours, resulting in a lower hourly wage for their labors.36

Effectiveness of Minimum Wage in Meeting Economic Policy Goals

The effectiveness of minimum wage laws is easier to theorize about than to actually

quantify. Studies have been conducted “proving” opposite positions. Economic assumptions are

not foolproof; textbook models are always presented ceteris paribus—all else being equal—

because too many variables exist to consider every possible market reaction or result, not to men-

36
Carolyn Walkup, “Operators: States’ Minimum-wage Hikes Pose Job Cuts, Price
Spikes,” The Nation’s Restaurant News, 24 January 2005, para. 7; available from
http://www.findarticles.com/p/articles/mi_m3190/is_4_39/ai_n9487332 [accessed 28 February
2005].

21
© Ronald C. Schoedel III
tion the great difficulty in trying to determine if a given result is merely a short-term anomaly or

a long-term outcome.

Supporters of the minimum wage generally agree that a wage floor ought to help reduce

poverty, ensure a decent standard of living, and stimulate economic growth as wage earners have

more money to spend. Detractors believe minimum wages lead to business closures and reduced

employment levels, and thus higher poverty levels.

Effects on Lowest-Paid Workers

Federal Reserve chairman Alan Greenspan consistently speaks against a minimum wage.

He states that a wage set by legislation “increases unemployment and, indeed, prevents people

who are at the early stages of their careers…from getting a foothold in the ladder of promo-

tions.”37

In Alaska, where the minimum wage rose from $5.65 to $7.15 an hour in 2003, the owner

of a popular Anchorage restaurant closed its doors after 30 years in business because she could

not afford to continue paying the $200,000 increase in labor costs over the previous year. Trina

Johnson says she “feels bad” but that the only hope for keeping her two other locations open was

to cut her “highest cost items,” which meant laying off 26 of her 35 employees.38 Johnson added

that her workers’ compensation insurance premiums, which are tied to a company’s payroll

amount, multiplied nearly four-fold from $22,000 to $80,000 per year.

37
Craig Garthwaite, “Raising Minimum Wage Stands to Hurt Low-Income Workers,” The
Detroit Free Press, 18 February 2005, para. 4; available from http://www.freep.com/voices/
columnists/egarth18e_20050218.htm [accessed 18 February 2005].
38
Sarana Schell, “Labor Costs Kill Downtown La Mex,” Anchorage Daily News, 9 Feb-
ruary 2005, 1; available from http://www.adn.com/front/story/6137674p-6019567c.html [ac-
cessed 9 February 2005].

22
© Ronald C. Schoedel III
 Researchers at Michigan State University found that:

…[I]ncreases in the minimum wage encourage more teenagers to leave school

and enter the workplace, displacing lower-skilled workers from their jobs….
Those most affected will be single parents, developmentally disabled persons,
school dropouts, and recent immigrants with poor language and reading skills. If
you price entry-level labor higher than its real value, jobs will not be available for
people whose skills are limited.39

The Los Angeles Business Journal states that higher wages hurt the poor the most. In

1998, when California’s minimum wage increased from $5.15 to $5.75, “annual labor costs in-

creased $790 million, and “$230 million in workers’ annual income and more than 25,000 jobs

were lost.” The result is that “low-skilled workers are squeezed out of work by mandated wage

hikes, they collect welfare, leaving them locked out of jobs and worse off than before.” The

Journal notes that raising wages has the “perverse effect” of forcing companies to eliminate jobs,

“especially those of low-wage and low-skilled workers.”40

Chris Koetzle, a vice president of the New York-based Support Service Alliances, Inc.,

writes about the likely wage inflation that would follow a minimum-wage increase in a recent

business-weekly editorial:

Worse yet, the wage inflation will lead to price inflation eating away at the tem-
porary gains in higher wages. In relative terms, those making the lowest wages
won't be better off because prices will rise to meet the higher wages. In the end,
this artificially mandated increase to businesses across New York will place our

39
Mark Alesse and Matthew Guilbault, “A Minimum Wage Increase Will Hurt Small
Business and the Working Poor,” Gotham Gazette, 16 February 2004, para. 6-7; available from
http://www.gothamgazette.com/print/871 [accessed 9 February 2005].
40
“Living Wage Laws Hurt Poor the Most,” Los Angeles Business Journal, 26 March
2001, para. 3; available from http://www.findarticles.com/p/articles/ mi_m5072/is_13_23/
ai_72809104 [accessed 28 February 2005].

23
© Ronald C. Schoedel III
 fragile job growth in jeopardy, placing our most vulnerable workers in greatest
harm.41

Effects on Other Workers

While it seems conclusive that the “lowest of the low-paid” are negatively impacted by

minimum wage increases, workers higher on the pay scale who keep their jobs seem to benefit.

The non-partisan Center on Budget and Policy Priorities reports that a 1997 increase in Oregon’s

minimum wage “corresponded with a drop in participants in the state’s welfare program.”42

Also, as cited in numerous examples earlier, ample evidence exists to indicate that

higher-paid employees benefit from the upward pressure on their wages that results from an in-

creased minimum wage. Union members, tipped employees, and workers making the current

minimum are among those who seem to benefit more from the increase than do those actually

making the minimum wage.

Effects on Business Growth

The effects of a minimum wage on business growth are difficult to conclusively deter-

mine. As stated in the example of the Anchorage restaurant, raising the minimum wage carries

associated costs to business owners such as higher workers’ compensation premiums and in-

creased Social Security and Medicare taxes. According to an opinion column in the business

journal Business First of Buffalo, small business owners in New York are concerned that an im-

pending raise of the state minimum wage to $7 an hour will “leave small businesses struggling to

41
Chris Koetzle, “Minimum Wage Override Hurts Small Businesses,” Buffalo Business
First, 10 January 2005, para. 4; available from http://buffalo.bizjournals.com/buffalo/stories/
2005/ 01/10/editorial2.html [accessed 9 February 2005].
42
Mark Poloncarz, “Higher Minimum Wage Won’t Hurt Economy,” Buffalo Business
First, 24 January 2005, para. 5; available from http://buffalo.bizjournals.com/buffalo/stories/
2005/ 01/24/editorial2.html [accessed 9 February 2005].
24
© Ronald C. Schoedel III
simply survive. Jobs would be cut [and] costs would rise.” Editorialist Chris Koetzle argues fur-

ther, “all workers would begin looking for their…increase just to keep up with the market,”

which would “artificially increase the market wage, leaving small businesses at risk and more

workers unemployed.” He also states that businesses in border areas near states with lower

minimum wages will be adversely affected.43

However, a 2004 study released by the Fiscal Policy Institute indicates that an increase in

the minimum wage would improve New York’s economy. The Institute reports, “in the 12 states

that had a higher minimum wage than the federal base, from 1998 to 2004 job growth was

greater than the level seen in states with the federal minimum (6.1 percent to 4.8 percent).” The

report also notes that the “twelve higher wage states were not in the burgeoning economies of the

south or southwest, but in the allegedly faltering economies of the northeast and west.”44

Labor economist Jared Bernstein, of the Economic Policy Institute and former deputy

chief economist with the U.S. Department of Labor, supports the study’s findings. He states:

“Of course, minimum wage increases do raise labor costs for employers… [and] there’s always

the potential to throw a monkey wrench into the economy, but that’s only if the minimum wage

is raised too high.”

Bernstein also believes that many firms that have dealt with minimum wage increases

have found that higher labor costs “are ameliorated with less turnover, fewer vacancies, and

more expensive yet more efficient workers.” He adds that it “seem[s] that one of the reasons we

43
Koetzle, para. 3, 4.
44
Poloncarz, para. 3.

25
© Ronald C. Schoedel III
haven’t seen job loss yet is that these costs are absorbed through the higher productivity of the

workers.”45

Yet another study, conducted in 1998 by the Jerome Levy Economic Institute at Bard

College, found that the 1997 minimum wage hike from $4.75 to $5.15 “affected hiring decisions

at only 6.2 percent of the small businesses surveyed.” A follow-up study conducted the follow-

ing year asked whether small businesses would be impacted by a further increase to $6 an hour.

Over 84 percent of the businesses surveyed said such an increase would not affect them. About

15 percent said it would affect their hiring of new employees but would not be enough to cause

them to lay off workers. Oren M. Levin-Waldman, who headed up the studies, believes this is

significant since “most people who claim that the minimum wage is going to have a detrimental

effect usually say it’s going to lead to layoffs.”46

Conclusions

1. The United States federal government and most states have minimum wage laws,

which primarily came about in response to the demands of laborers in the early twentieth cen-

tury. Public support for a minimum wage has endured decades of changes in our society and

markets. A wage floor is regarded by the public as the primary means of keeping employers

from exploiting workers, especially workers that are young, less educated, and inexperienced.

The general consensus of Americans is that these folks “deserve a break.”

Therefore, minimum-wage laws and the drive for even higher “living wages” persist,

backed by powerful labor forces. On the surface, giving workers higher wages seems perfectly

45
“Will a Minimum Wage Hike Hurt Productivity?” Workforce, April 2000, para. 5;
available from http://www.findarticles.com/p/articles/mi_m0FXS/is_4_79/ ai_62324221 [ac-
cessed 28 February 2005].
46
Prince, para. 3.
26
© Ronald C. Schoedel III
reasonable to most people. Americans—many of whom are descended from immigrants that

“had it rough” upon their arrival in the new world—have an innate desire to see justice done for

the poor and downtrodden of society. Americans also tend to feel that helping poor people work

for a living is preferable to increasing government welfare benefits.

2. Unfortunately, research indicates that those who ought to benefit most from higher

minimum wages end up with “the short end of the stick.” Economic theory states that as the

price of a good increases, demand for the good decreases. Enough studies have been done that

indicate that the demand for labor is decreased when labor becomes more expensive. At the very

least, the added labor costs are passed on to the end customer. This in turn decreases the buying

power of the money earned by a wider circle of participants in the economy, who then desire

higher wages that they may be able to keep up with the rising price of goods and services. As

more wages go up, more prices go up, and more workers demand higher wages.

The effect of a minimum wage increase is similar to the effect a small pebble has when

dropped into a pond: it causes a ripple effect that extends far beyond the initial reach of the peb-

ble’s gravitational force—outward, ever outward. For the economy, what is described here is a

classic inflationary cycle. That higher wages contribute to inflation practically goes without say-

ing.

3. Some workers are indeed helped by higher minimum wages; some are hurt, as well.

Evidence that public policy goals are actually being met by increasing minimum wages is sparse.

But so is evidence that slight increases in the minimum wage are having the dreadful impact en-

visioned by some economists. The evidence suggests that a “tipping point” exists, at which

business owners begin to be more concerned about the adverse effect of a higher minimum wage.

Levin-Waldman, who also authored The Case of the Minimum Wage, says that the tipping point

27
© Ronald C. Schoedel III
seems to be some level under $7.25, but that the current national standard of $5.15 is “clearly

not” the limit to how high the wage can be raised.47

Recommendations

When considering the minimum wage, one must consider the overall context in which the

U.S. economy exists. Certain truths are mostly invariable. For example, that a free-market

economy will continue is likely a safe assumption. America is unlikely to become a true welfare

state after the manner of some European nations. Americans cherish a certain amount of free-

dom and risk that are associated with a free market economy. With these considerations in mind,

the following recommendations are issued:

1. The United States Congress should pass and the President should sign a modest in-

crease to the federal minimum wage. This increase should include a third “tier” in addition to

the tipped and non-tipped tiers of the present law. The third tier should allow for a slightly lower

wage as a way of encouraging large corporations with overseas operations to bring jobs back to

the United States. As additional jobs are added to the economy and corporations are given the

opportunity to pay reasonable but slightly lower minimum wages, economies of scale will be re-

alized throughout the marketplace, which will have the effect of tightening the reins on inflation.

2. Small business owners should consider the positive aspects of paying their employees

more than the minimum wage and then decide to do so. Decreased absenteeism, turnover, and

training costs are appealing reasons to pay lower-skilled workers more than the bare minimum.

Business owners may find that the increased loyalty of their employees causes them to work

harder, thus generating higher profits.

47
Prince, para. 4.
28
© Ronald C. Schoedel III
 The old notion of the “career ladder” has largely disappeared, as very few people today

work for the same company for the entire duration of their working lives. But if business owners

are willing to pay a little more and make the effort to respect and “cultivate” their workers, own-

ers should see them develop more skills that may benefit the employer by encouraging capable

employees to move into positions of greater responsibility, further reinforcing employee loyalty.

Business owners should move away from the trend of viewing labor as just another “input” and

should instead consider the value of “human capital” and invest in creating mutually beneficial

relationships with their employees.

3. The American public in general should become more familiar with the economic sys-

tem and engage in serious debate about how it can be refined. Misconceptions abound and the

public does not have a good grasp of economic principles. It should be understood that America

has never had a 100 percent “free” market and that the recent take-off of free trade policies is not

just another development of “the American way.” Restraints such as tariffs and foreign trade

restrictions have always existed, but have varied widely according to the needs of the nation at a

given time. Americans should reconsider their government’s free-trade policies and their own

consumer spending habits, both of which promote sending jobs overseas.

4. In the so-called perfect world, a minimum wage would not be needed since anyone

who wants to work would have a job and each job would pay according to the needs of the em-

ployee. Though discussion of other economic models is beyond the scope of this paper, Ameri-

cans should attempt to experiment on a limited scale with economic systems aside from the cur-

rently prevailing model of “global capitalism.” Microeconomies such as the theosocialistic sys-

tems advocated by nineteenth-century Mormon leaders might hold promise for those committed

to their success and may serve as models for wider reform in the future.

29
© Ronald C. Schoedel III
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© Ronald C. Schoedel III

 APPENDIX

(not included in online version of paper)

33
© Ronald C. Schoedel III