Minimum Wage: Does It Fight Poverty or Cut Workers?

WALL Street's great leap forward in the past month makes clear that the American economy will come to life during the spring and summer - well before the election in the fall. Stock prices regularly anticipate major changes in the economy with a lead of four to six months.

Nonetheless, jobs, or the lack of them, will continue to be a central issue in the presidential campaign. Lost in the hoopla is the fact that teenagers - many driven out of the job market by a sharp increase in the minimum wage - account for a disproportionate share of the drop in employment during the recession.

Debate about the minimum wage is usually framed in terms of social equity. Such issues play well to voters, but they are irrelevant. The facts are simple: the minimum wage is an inefficient and inequitable method to give a subsidy to low-income workers.

The minimum wage benefits people who don't need help (teenagers from upper-income families), and it cuts employment. Employers can't pay their workers more than they are worth. The increase in the minimum wage makes job prospects appear bleaker than they really are.

Workers aged 16 to 19 are typically hit hard during a downturn. They have few skills, little seniority, and weak labor force attachment. When business slows, they are among the first to be laid off. Because teenage jobs are far more volatile than those held by adults, a drop in teen employment is often a leading indicator of recession. That said, teenage jobs were especially weak during the 1990-91 downturn. Changes in teenage employment characteristically account for about one-third of the variance in e mployment. By contrast, from spring 1990 through summer 1991, the number of teen jobs fell 950,000, 66 percent of the decline in total employment. Most of the young people who lost their jobs simply dropped out of the labor force and did not look for work.

It is hard to separate the impact of the recession on teenage jobs from other factors. However, the 27 percent increase in the minimum wage from $3.35 an hour to $4.25 in 1990 and 1991 clearly played a big role in reducing jobs available to low-skilled, inexperienced workers. While the law provides for a subminimum "training wage," red tape in this program has discouraged employers from using it.

The Federal Reserve kicked off the stock market's great leap when it cut the discount rate to 3.5 percent, the lowest in 27 years. The Fed has provided the fuel for expansion, and will likely continue to do so. To force rates down, the central bank has had to flood the economy with high-powered money. Bank reserves, which are raw material for the money supply, are roaring up at an annual rate of more than 20 percent. Resurgent price pressure is likely to be the principal economic risk in 1992 and 1993. T he consumer price index rose 4.23 percent in 1991 (full year average basis) down from 5.4 percent in 1990. The slowdown was welcome, but disappointing. Not only was the economy weak last year, but oil prices were down. In contrast, the inflation rate was below 4.23 percent in '83, '85, '86, '87 and '88.

Moreover, devaluation of the dollar is now a key element in President Bush's reelection strategy. The trade-weighted value of the dollar dropped about 14 percent from early July through early January. More recently, the dollar bounced back as overseas investors moved into the currency to take advantage of the surge in US stock prices.

Exports are already the stand-out sector of the economy. The White House intends to do whatever necessary to push them higher. The nation needs to expand its existing nonoil trade surplus to pay dividends, interest, rents, and royalties to foreigners who have invested more than $1.6 trillion in the United States. However, devaluation carries a large risk of future inflation. Policymakers cannot reduce the external value of the currency and maintain its internal value.