Generating Jobs and Minimum Wage

Josh Franco

Professor Keenan

Economics 202

28 June 2004

“Where are the jobs” (Nussbaum)? In the United States and throughout the world, having a job means a great deal to all individuals. It allows a person to earn a living and affords a person a certain degree of freedom, whether it’s the freedom in securing the necessities or obtaining the luxuries. But, in the United States, it is harder and harder to find a job and even more difficult, if not impossible, for low-skilled workers. “Less-skilled [low-skilled] and low-paid workers – those in approximately the lowest thirty percentiles of the earnings distribution – are in trouble in the United States” (Freeman and Gottschalk 1).

I believe it is imperative to understand how jobs can be generated and how low-skilled workers can be helped because of an estimated “288 million people” living in the United States, “12.4 percent” (“USA…”) or 35 million people live at or below the poverty line.

Divided into four distinct parts and nine chapters, in Generating Jobs: How to Increase the Demand for Less-Skilled Workers, editors Richard B. Freeman’s and Peter Gottschalk’s ultimate goal is to answer the following question:

Which, if any, demand-side policies have succeeded in raising the employment or earnings of low-skill workers in the past, and which have not succeeded? Regardless of the past success of these policies, what lessons can we draw from them for the development of future programs? (Freeman and Gottschalk 3)

I will summarize Generating Jobs and the four different micro demand-side policies that it covers. Contained within the four policies, in order of chapter appearance, are eight specific policies: first is offering tax credits or subsidies, second is granting tax concessions to firms to relocate, third is government employment, forth is profit-sharing, fifth is mandating minimum wages or benefits, sixth is work-sharing, seventh is anti-discrimination laws, and the eighth and final is hiring on a contingent basis.

Due to a personal interest in the minimum wage, after summarizing the book, I will shift focus and conduct a close examination of minimum wage and the highlight the recent debate surrounding the controversial issue.

But before diving into a mass summarization, I want to provide a bit of background of Generating Jobs.

“The 1980s and 1990s was an epoch that witnessed a huge rise in earnings inequality in the United States, fueled by substantial falls in the real hourly pay of young and less educated workers, particularly men” (Freeman and Gottschalk 4). During this time period, wage distributions headed in opposite directions among the high- and low-skilled. Real earnings dropped resulting in a rise of inequality. Furthermore, the time worked and the amount paid decreased for low-skilled workers. All the preceding factors fanned the flames and contributed to an increase in poverty within the United States.

However, other important trends countered such dismal outcomes. More people had jobs than compared to other advanced nations, more women were participating in the work force and labor-management relations were improving due to increased cooperation.

What caused such lows and highs? First off, relative demand for low-skilled workers has decreased. Technological advances and the coming of the computer lead to increased production without labor. On the international level, trade and outsourcing shot upward meaning more goods and services were being exchanged between the United States and other nations. The exportation of jobs from “here” to “there” resulted in a decline in domestic jobs and the manufacturing sector was hit hard. The concept of the American Dream empowered peoples from all corners of the globe to immigrate into the United States, legal or not. The power and number of the unions declined. The collective bargaining rooms filled with cigar smoke and union bosses dissipated. And, to conclude the list of causes, a dollar just couldn’t afford the same amount of bubble gum as it once could; the real value of minimum wage decreased, leaving all wage earners scratching their heads and asking, “What happened to the flavor?”

Whew. Ok. Time to dive into Generating Jobs: How to Increase the Demand for Less-Skilled Workers.

Part One is titled Wage Subsidies and Public Employment and includes the first three chapters of the book.

In Chapter One, Wage Subsides for the Disadvantaged, Lawrence F. Katz defines wage subsidies as “programs that subsidize efforts to create jobs in the private sector” and “can be applied to all employment” (Katz 23). The purpose of wage subsidies would be to reduce the cost for a firm to hire a low-skilled worker. For example, a business would shell out ten dollars per hour to a worker, but the government would provide two of the ten dollars. Katz explains that “over the past three decades” the United States has tested “various forms” of wage subsidies. “The three major efforts have been the new jobs tax credit or NJTC, the targeted jobs tax credit or TJTC, and some aspects of Title II of the Job Training Partnership Act of 1983 or JTPA” (Katz 29).

NJTC, “a non-categorical, incremental employment subsidy that provided a 50% tax credit for wages of up to $4,200 per employee for increases in employment of more than 2% over the previous year” (Katz 47) lasted around eighteen months starting in mid-1977, and generated a modest effect.

On the other hand, TJTC of 1979 to 1994 and JTPA of 1983 until present exhibited more positive impacts than NJTC. TJTC, “a categorical wage subsidy that provided a tax credit to employers hiring certified target-group individuals” and JTPA “provides a temporary wage subsidy of up to six months to encourage firms to hire and train JTPA participants” (Katz 47). In both cases, the subsidies are targeted to specific populations such as disadvantaged youth and AFDC or Aid to Families with Dependent Children recipients.

However, on August 18, 1994, the U.S. Department of Labor Office of Inspector General had this to report on TJTC:

The program largely subsidizes the wages of those who are hired irrespective of their eligibility and the availability of a tax credit. Consequently, for our audit period, we estimate the program cost three times the amount that it returned in economic benefits. For our audit period we estimate that the costs of the TJTC program exceeded its benefits by almost $234 million. That is, for each dollar in tax credits employers were allowed to claim and the Federal Government provided states to administer the program, only about 37 cents in economic benefits were returned. (“Targeted…”)

In Katz’s conclusion, he explains that subsidies “appear to be a potentially valuable tool as part of a broader strategy to improve the labor market earnings of less skilled workers” (Katz 49). Alone and without direction, wage subsidies have little to no impact on generating jobs or wages, however if supplemented with on-the-job training and focused on specific populations, subsidies can help.

Edward M. Gramlich and Colleen M. Heflin author Chapter Two, The Spatial Dimension: Should Worker Assistance be Given to Poor People or Poor Place? Gramlich and Heflin claim, “Programs that improve spatial mobility or reduce job mismatch could still mitigate or offset movements in wage distribution, at least for important subgroups of workers” (Gramlich and Heflin 54). Spatial dimension describes the relative location of a worker to a working location and vice versa, in other words, “moving workers to jobs” and “moving jobs to workers.”

For example, in a basic linear model, imagine a line being “1” in length and the firm located at the mid-point or “0.5.” Individuals located closer to the midpoint or center, ignoring education and other factors that affect the hiring process, have a greater likelihood of being hired at the firm. The nearer an individual is to the firm, the less distance he or she must travel in order to gain to access the firm.

The authors conclude that “place-based assistance for public services in poor urban areas” can be “effective without costing too much” (Gramlich and Heflin 68), however the costs of moving firms to specific locations are too much. The major deficiencies of moving jobs to people is that it generates geographical segregation and discrimination, so even if a firm relocates, it does not mean it will be accepted and hire the targeted individuals.

The final chapter of Part One is titled The Impact of Changes in Public Employment on Low-Wage Labor Markets. Peter Gottschalk, who is also an editor of Generating Jobs, opens with the following statement: “Government is simply too big an actor in the labor markets to be ignored” (Gottschalk 72).

Public Service Employment or PSE programs were prominent during the Great Depression, an era during 1930s and 40s in which President Franklin Delano Roosevelt implemented the “New Deal” in order to reverse the downward spiral the United States had entered. The New Deal attempted “to increase demand [of goods and services], pumping large amounts of money into the economy through public works programs and relief measures” (“Great Depression…”).

PSE has two different purposes. The first purpose would be to increase aggregate or total employment and the second would be to redistribute jobs to the disadvantaged. However, Gottschalk notes, “at least four different forms of displacement tend to reduce the initial impact of PSE” (Gottschalk 84). The two major forms of displacement include financing and replacement of local with central or federal jobs.

In order for a government to create a job, it must either increase taxes or sell bonds. Increases taxes will decrease output and lead to increased unemployment and selling bonds generates a crowding out effect because funds needed for firms to expand are not as available. The replacement of local with central jobs has to do with jurisdiction between local and federal governments. The government needs to be careful not to create a federal job at the expense of a local job. “A natural way to reduce the effects of fiscal substitution [the replacement of local with federal workers] is for the federal government to provide funds only for projects that local governments would not otherwise undertake” (Gottschalk 85). This would include massive public projects such as dam construction, i.e. the Hoover Dam or water redirection, i.e. the California Aqueduct.

Concluding the chapter, Gottschalk believes PSE is “a potentially important tool” however he explicitly states that the goal of the PSE must be clear before implementing a program. “If, on the other hand, PSE is evaluated on the same basis as a new job in the private sector – which only claims to provide employment, not future increases in wages – the case for PSE is much stronger” (Gottschalk 96). Generating a job is one thing but raising wages is another when it comes to PSE.

Part Two is called Changes in Modes of Pay and contains chapters four and five of Generating Jobs: How to Increase the Demand for Less-Skilled Workers.

In Chapter Four, Profit-Sharing and the Demand for Low-Skill Workers, Douglas L. Kruse explains “there have been more than forty studies in the past fifteen years on both the performance and employment effects of profit-sharing; none, however, has examined the extent and effects of profit-sharing among low-skilled workers” (Kruse 105). Kruse uses the following example to clarify what profit-sharing is:

A fixed-wage firm paying $10/hour, for example, would lay off workers if a decrease in demand for the firm’s products caused the marginal revenue product of labor to fall to $9.50/hour. A profit-sharing firm paying the same average compensation, but with a $9/hour base wage and an average $1/hour profit share, would hold onto workers in the short run since the lowered marginal revenue product of labor still exceeds the base wage paid to workers (therefore making it profitable to retain the worker, even if a portion of the those profits go to workers). In a sense, the profit-sharing firm retains a “cushion” of workers when product demand declines. (Kruse 106)

The preceding is an example of working together towards a common goal. Proponents of profit-sharing contend the costs have a positive correlation with revenues, meaning if revenues increase, then costs increase or vice versa. If profits fall and costs don’t, then firms have to either sink or swim, and in order to swim, the weight of labor will be jettisoned. Secondly, the concept of commitment to the firm and its goals are also strengthened with profit-sharing because if the firm succeeds, then the workers will reap the benefits.

From Kruse’s extensive assessment of data available, a number of conclusions can be noted. Even though profit-sharing is more prevalent amongst people with higher education and higher skill levels, the “layoff risk” is about “60 percent of the risk faced by non-profit-sharers, across all employees and for new employees” (Kruse 145). Nevertheless, there is no definite answer with regards to the whether or not profit-sharing can increase the demand for workers, let alone low-skilled workers.

The second and final chapter in Part Two, chapter five, The Effects of Employer Mandates, Susan N. Houseman zeros in on employer mandates. “Employer mandates are perhaps the simplest and most direct policy response to the problem of poor wages, benefits, and working conditions” (Houseman 154). Employer mandates include minimum wage and health insurance, among other things. The United States has taken several steps in providing comprehensive health coverage and wage assurances. The Fair Labor Standards Act of 1938, the Pregnancy Discrimination Act of 1978, and the Family and Medical Leave Act of 1993 sought to set a federal minimum wage, require employers to offer extensive health and maternity benefits, and mandate employers to grant employees up to twelve weeks of unpaid leave. However, when the United States is compared to other industrialized nations, employer mandates are “weak.”

In her conclusion, Houseman affirms “recent studies have reached no consensus on the employment effects of a minimum wage increase: some studies show negative effects, some show no effect, and others show positive effects” (Houseman 183).

Further, the lack of studies regarding the impact of maternal and unpaid leave generates an inconclusive answer; however since the book was published in 1998, more information regarding the impacts of leave from work exhibits a positive effect due to lower turnover rates and higher levels of worker satisfaction. I will return to the topic of minimum wage later on.

Part Three is titled Employment Regulations and contains chapters six through eight.

In Chapter Six, called Work-Sharing to Full Employment: Serious Option or Populist Fallacy? Richard B. Freeman, the other editor of Generating Jobs, begins with the following statement: “Work-sharing, the practice of reducing hours worked to increase employment, is controversial” (Freeman 195). The issue is controversial because the concept of reducing hours, will lead to a reduction in earnings of a single individual. In the United States, self-interest is prime and a large motivating factor causing people to seek the most benefit for their self, rather than do what is best for others. According to a 1985 report: “Just 8 percent of wage and salary workers said that they preferred fewer hours and less money; 65 percent wanted the same hours and money, and 28 percent more hours and more money” (Freeman 216).

Freeman concludes that firms are able to accommodate for changes in hours. But efforts of the European governments to generate jobs had little success. Another issue is the attitudinal barrier of workers unwilling to sacrifice hours or income to share work.

Harry J. Holzer writes Chapter Seven, Employer Hiring Decisions and Antidiscrimination Policy, and presents an important question: “Have these policies [anti-discrimination policies such as the Civil Rights Act of 194] been successful in reducing labor market discrimination against minorities and women, thereby increasing their employment and earnings” (Holzer 224). Anti-discrimination policies hope to prevent the “unfair treatment of a person or group on the basis of prejudice” (Word Net).

To be more specific, affirmative action programs, which are a form of anti-discrimination, are “designed to redress past discrimination against women and minority groups through measures to improve their economic and educational opportunities” (Word Net).

After examining government policies, Holzer concludes affirmative action programs have caused “significant improvements in the relative earnings of blacks and females during the 1960s and 1970s.” However, recent evidence suggest, that minorities, women in particular, still earn less than men.

The Equal Pay Act of 1963 “requires employers to pay the same wages to men and women who do substantially equal work, involving equal skill, effort, and responsibility, and performed under similar conditions in the same establishment” (Blau, Ferber and Winkler 237) is a great concept. However, it has had “little impact” due to the fact that “men and women rarely do exactly the same kind of works in the same firm” (Blau, Ferber and Winkler 237).

Furthermore, the Council of Economic Advisers reported, “although the gender gap has narrowed since the late 1970s, at 25 percent it is still substantial” (“Explaining…”). And the narrowing of the gap is not just because of anti-discrimination policies, but increasing education and experience attainment. Holzer seems to walk along similar lines, noting that “other factors” complement such policies.

The eighth and final chapter that I will summarize is called Contingent Work in a Changing Labor Market. Rebecca M. Blank defines contingent work as “all jobs that involve nonstandard employer-employee contracts where a standard contract is assumed to be full-time, permanent employment relationship” (Blank 258). Common examples, according to Blank’s definition, of contingent workers are “part-time” and “on-call” workers.

The major issues with contingent work include the fact that it is not permanent and the lack of benefits provided to such workers. “The biggest cross-national difference between the United States and many other nations is the level of social protection available to workers on nonstandard labor contracts” (Blank 279). Blank concludes that in order for contingent work to be effective it must be accompanied with additional policies, such as greater health benefits.

Some 20 million part-time workers, or 16% of the work force, are employed part time, and most are ineligible for unemployment benefits, which are targeted at full-time workers. Making matters worse, the plight of unemployed part-time workers is virtually invisible–they aren’t counted in the statistics, which showed an unemployment rate of 4.9% in September. (Stodghill)

The lack of coverage for part-time workers marginalizes the benefits of contingent work: increased leisure time that can be allocated to children or loved ones. Part-timers are forced to seek additional jobs since one is not enough. According to the National Compensation Survey at the Bureau of Labor Statistics “economy-wide earnings for full-time workers averaged $15.77 versus $8.89 per hour for part-time workers” (Yang). The difference could be due to the number of hours worked; nonetheless a part-time worker earns about 56 percent of what a full-time does.

It is clear that low-skilled workers are in a bind. The examinations from various authors into eight different micro-demand side policies presented in Generating Jobs are based on solid statistical evidence and sound investigation. However, the book was published in 1998, over a half a decade ago, so the data has aged a considerable amount.

Yet, reading and summarizing Generating Jobs proved quite influential. Since it delivers such a board picture of demand-side policies, I can get a good look at what is available and then decide on which of the eight policies to focus on. From all of the policies, the one that attracted me the most is number five: mandating minimum wages.

In 1938, the United States Congress enacted the Fair Labor Standards Act or FLSA. The Act:

Establishes minimum wage, overtime pay, record keeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. Covered nonexempt workers are entitled to a minimum wage of not less than $5.15 an hour. Overtime pay at a rate of not less than one and one-half times their regular rates of pay is required after 40 hours of work in a workweek. (“Synopsis…”)

The United States Federal Government has established a minimum wage of $5.15. However, states are able to set higher minimum wages. Below is an image that depicts the minimum wage levels of states and protectorates compared to the Federal wage.

From the image above, 12 of the 50 states, including California, have minimum wage rates higher than $5.15. Washington, Connecticut, and Oregon have the highest three minimum wage rates: $7.16, $7.10 and $7.05, respectively. Further, Washington “became the first state to index minimum wage to inflation” (“Policy…”). Indexing to inflation means that the minimum wage will not be negatively impacted from an increase in the average price of goods and services. In other words, if a dollar can purchase ten potatoes now, then it should be able to purchase ten potatoes later.

“Increasing the minimum wage is often proposed as a way to solve poverty” (Bartik). Minimum wage, I believe, is the most powerful economic policy available to state governments. States are restricted on their economic policies because “The Fed [Federal Reserve] is the gatekeeper of the U.S. economy” (Obringer). States do not have the option of setting interest rates, a tool The Fed uses to combat inflation or an average increase in the price of goods and services. Further, state governments are able to be more responsive to the needs of its constituents, compared to Federal agencies because of the United States’ decentralized structure of power.

Here is a brief taste of the national debate on minimum wage.

On the national level, minimum wage is gaining ground and looks to become an important issue during the 2004 Presidential Race. “On June 18 Mr. Kerry proposed a 36 percent increase in the federal minimum wage, from the present $5.15 an hour to $7 an hour by 2007” (Tella). Alfred Tella, a former Georgetown University research professor of economics, goes onto explain in the same article that such an increase could lead to an estimate 300,000 to 800,000 lost jobs. “The Massachusetts senator has long advocated a higher minimum wage, a Democratic Party staple” (Finnegan). Kerry, while campaigning in Virginia explained that such an increase in wages would help minorities climb out of the poor hole.

In all realities, if Kerry does happen to win the White House in November, then he cannot just raise the minimum wage. Congress, which is Republican-dominated at the moment, poses the single largest hurdle besides labor groups, businesses and economists who are in opposition, from passing a minimum wage increase.

Shifting focus from the national to the state level, I would like to explore the following question: Will raising the minimum wage in California lead to an increase in the employment or earnings of “low-skilled” workers?

California is the most populous state in the Union. Housing over “35 million people”, with “14 percent” (“California…”) of the population below or at the poverty line, meaning about 5 million people are considered low-skilled or “working poor.”

“Most evidence suggests that minimum wage laws with near-universal coverage are successful at providing better wages to the working poor” (Luce and Pollin 30).

According to a Center for Labor Research and Education report published in the Los Angeles Times “taxpayers are subsidizing California’s growing low-wage economy to the tune of $10 billion a year through public health services, tax credits, child-care programs and other assistance for the working poor” and “if paid more, the workers would be self-sufficient and would not qualify for the programs, the report states” (Cleeland).

However, the Employment Policies Institute quotes Federal Reserve Chairman Alan Greenspan as stating “The reason I object to the minimum wage is I think it destroys jobs, and I think the evidence on that, in my judgment, is overwhelming” (“Minimum Wage Misconceptions”). Attempting to disprove Greenspan seems a bit daunting, but unlike the organization he leads, no single person is the “gatekeeper” to economics.

Due to its enormous size, geographical and population wise, along with its “border” and “gateway to the Pacific” status, California is the most diverse state in the Union. From these roots, sprouts hundreds of thousands of small businesses that tailor to the specific needs of specific communities.

“Small businesses are an important part of California’s economy. They generate jobs, provide economic opportunity and flexibility, and boost economic output. California is home to more than 2.6 million small businesses, including the self-employed” (“Business…”).

“Increasing the minimum wage to $7 “is the equivalent of a pink slip for the small business men and women who are leading the way in America’s job creation and economic growth,” said Dan Danner, senior vice president for the National Federation of Independent Business [NFIB]. He said it would reduce employment for those with the least skills and do little to spark economic growth” (Finnegan). But NFIB, which Danner represents released a report declaring “Minimum Wage/‘Living’ Wage” issues have slipped 10 positions since 2000, ranking as the 46th most-important problem in 2000, but 56th in 2004” (Phillips).

In addition, when Jared Bernstein, who holds a Ph.D. in Social Welfare from Columbia University and is a Senior Economist with the Economic Policy Institute, presents the question “Does the Minimum Wage Hurt Small Businesses” (Bernstein)? He responds with two studies supporting a “no” answer while in front of the U.S. Subcommittee on Workforce Empowerment and Government Programs.

In closing, a recent June 2004 report from the California Budget Project comes to three specific conclusions:

First, California’s current minimum wage is inadequate to support a single adult, much less a family. Second, moderately increasing in the minimum wage has been an effective tool for raising the earnings of the state’s low-wage workers. Third, moderate minimum wage increases do not appear to be associated with job loss in industries that employ large numbers of low-wage workers. (“Minimum Wage Increases…”)

The studies in support and against raising the minimum wage are fascinating. However, from the evidence presented, I feel increasing the minimum wage will have a positive effect on increasing wages. The nail in the coffin is the fact that the real value of wages has declined for at least the past five years.

If the real value of wages is going to increase, then the minimum wage should be increased or at the very least be indexed to inflation. This would maintain the purchasing the power of today’s dollar tomorrow.

It is well within the means of the California State Government to raise the minimum wage. Democrats dominate the legislature; however a Republican governor can wield the veto. I do not expect, at least in the immediate future, an increase in California’s minimum wage. Even though most of the information explored supports the notion, the United States’ economic muscle needs a bit more time to grow so as to silence the fears of crushing what little growth the nation and California is experiencing.

Works Cited

Bartik, Timothy J. Jobs for the Poor: Can Labor Demand Policies Help? New York: Russell Sage Foundation, 2001.

Bernstein, Jared. “Minimum Wage and Its Effects on Small Business.” Economic Policy Institute 29 Apr 2004.

Blau, Francine D., Ferber, Marianne A., & Winkler, Anne E. The Economics of Women, Men, and Work. 4th Ed. Upper Saddle River: Prentice Hall, 2002.

“Business & Community Resources: Small Businesses.” State of California. < http://www.commerce.ca.gov/state///ttca/ttca_navigation.jsp?path=Business+%26+Community+Resources&childPath=Small+Businesses&BV_SessionID=@@@@0877928397.1088502758@@@@&BV_EngineID=ccccadcllhfjdhjcfngcfkmdffidfof.0>

“California QuickFacts.” U.S. Census Bureau. < http://quickfacts.census.gov/qfd/states/06000.html>

Cleeland, Nancy. “Study Details Public Cost of Low Wages.” Los Angeles Times 20 May 2004. < http://infoweb.newsbank.com/iw-search/we/InfoWeb?p_action=doc&p_theme=newcat&p_topdoc=1&p_docnum=1&p_sort=YMD_date:D&p_product=NFCC&p_text_direct-0=document_id=(%20102CB56BDE3EDCA9%20)&p_nbid=R61R50TJMTA4Nzk2OTc1My4xMTkyMjA6MTo4OmNlcnJpdG9z&>

“Explaining Trends in the Gender Wage Gap.” Council of Economic Advisers Jun 1998. < http://clinton4.nara.gov/WH/EOP/CEA/html/gendergap.html>

Finnegan, Michael. “Kerry Calls for Raising Minimum Wage.” Los Angeles Times 19 June 2004. < http://www.latimes.com/news/politics/2004/la-na-kerry19jun19,1,5268476,print.story?coll=la-politics-pointers>

Freeman, Richard and Gottschalk, Peter. Generating Jobs: How to Increase Demand for Less-Skilled Workers. New York: Russell Sage Foundation, 1998.

“Great Depression in the United States.” Microsoft Encarta Online Encyclopedia 2004. < http://encarta.msn.com/encyclopedia_761584403/Great_Depression_in_the_United_States.html>

Luce, Stephanie and Pollin, Robert. The Living Wage: Building a Fair Economy. New York: The New Press, 1998.

“Minimum Wage Increases Boost the Earnings of Low-Wage California Workers.” California Budget Project Jun 2004. < http://www.cbp.org/2004/0406bbminwage.pdf>

“Minimum Wage Laws in the States.” U.S. Department of Labor. < http://www.dol.gov/esa/minwage/america.htm>

“Minimum Wage Misconceptions.” Employment Policies Institute. < http://www.epionline.org/mw_cards.cfm>

Nussbaum, Bruce. “Where Are The Jobs?” Business Week 22 Mar 2004. < http://www.businessweek.com:/print/magazine/content/04_12/b3875601.htm?mz>

Obringer, Lee Ann. “How the Fed Works.” HowStuffWorks 2004. < http://money.howstuffworks.com/fed.htm>