The shrinking minimum - earned income tax credit increase approach to helping the poor rather than raising the minimum wage - Editorial

WE CAN increase the earned income tax credit by a couple of billion dollars a year and, far more efficiently than raising the minimum wage, lift the working poor out of poverty." President Clinton is right. The EITC increases the take-home pay of low-skilled workers without reducing the demand for such workers. But despite passage of a more generous EITC in August, President Clinton still wants to raise the minimum wage.

Approximately 5.7 million Americans---about one out of every twenty workers paid by the hour--make the minimum wage or less. Although the minimum wage is touted as an anti-poverty device, the CBO reports that more than 80 per cent of minimum-wage earners are not poor. Almost onefifth live in multi-worker households with combined annual incomes greater than $50,000. More than half are between 16 and 24 years of age.

The free-market argument--that higher wages reduce employment unless offset by higher labor productivity--has traditionally blunted demands for a higher minimum. But in recent years two things have changed. First, with the minimum wage frozen between 1981 and 1990, it has declined both in real terms and relative to average manufacturing wages. With the average manufacturing wages expected to be $11.50 per hour in 1994, the AFL-CIO is pushing for a $5.75 minimum--35 per cent above the current level.

The problem, of course, is that minimum-wage coverage now extends far beyond manufacturing, to low-skilled jobs in retail stores, hotels, small businesses, and fast-food restaurants. The productivity of manufacturing workers increased 22 per cent over the past twenty years. In contrast, service-sector productivity has been fiat or, as in the case of restaurants and the retail sector, declining. The decline in the constant-dollar value of the minimum wage has prompted Robert Reich and others to call for indexation. But when you add in the employer's share of Social Security taxes and unemployment insurance, it cost $4.78 to hire a minimum-wage worker in 1992, or only slightly below the $4.96 (1992 dollars) cost of 1960. From the employer's viewpoint, labor costs are already indexed.

Secondly, research by liberal economists suggests that a higher minimum wage may actually stimulate employment, by drawing more teenagers into the labor force and reducing employee turnover. A chief proponent of this "new view," Harvard Professor Lawrence Katz, has been appointed chief economist at the Department of Labor. Yet the studies conducted by Mr. Katz and his colleagues are seriously flawed, focusing on a single rise in the minimum wage (1990-91), a single demographic group (teenagers), a single industry (fast food), and even a single state (Texas). The "new view" economists never ask whether employment might have increased still faster had the minimum wage not been raised, or whether the harmful effects might occur over a period of years. Although estimates vary, the consensus of non-political studies is that every 10 per cent rise in the minimum wage reduces teenage employment by 1.5 per cent. Applying this result to the two-step rise between 1981 and 1991 (27 per cent) implies a 4 per cent reduction in employment---or 240,000 teenagers. Presumably Messrs. Reich and Katz think they will put the time to good use.

--ED RUBENSTEIN