PI Original Adam Doster Tuesday July 6th, 2010, 1:52pm

Setting The Record Straight On The Minimum Wage (UPDATED)

With conservatives in Illinois lambasting our recently-increased minimum wage level, it's worth dispelling a few common myths about the wage's effect on the economy.

GOP gubernatorial candidate Bill Brady is apparently no fan of low-wage workers. As a state senator, he repeatedly voted against raising the minimum wage, arguing instead that lowering it would "create jobs." Brady reiterated that position last month before Gov. Pat Quinn jumped on him for having "the gall to go around Illinois and say we ought to cut the wages of a million people who make the minimum wage." He's since backtracked slightly as a result.

But Brady isn't the only Illinois conservative who thinks the state's minimum wage is too high.  And so long as the economy continues to sputter along, it's not a topic that will likely go away. As such, we want to dispel a few myths about the minimum wage.

First, a few basic facts about the issue:

Last Thursday, Illinois' minimum wage jumped by a quarter, from $8-per-hour to $8.25-per-hour. This is the last in a series of hikes laid out in a 2006 bill that gradually raised Illinois' wage floor from $6.50-per-hour.  An adult working 40 hours per week at minimum wage now takes home $17,160 before taxes, an annual increase of $520 from the 2007 rate.

Currently, the federal minimum wage sits at $7.25-per hour. (In 2007, Congress increased that rate for the first time in a decade.) Illinois is one of 14 states that peg their minimum wage above the national level, although only two states (Oregon and Washington) currently have higher rates than ours.

Not all workers earn at least $8.25, however. After the change last week, workers under the age of 18 now earn $7.75-per-hour, up from $7.50-per-hour. And employees that receive tips can be paid as little as 60 percent of Illinois' rate.

Now on to some of the common claims about the minimum wage:

Do minimum wage hikes lead to large-scale job loss?

The major criticism of the state's minimum wage is that our higher rate scares away potential businesses and forces current employers to shed low-wage jobs. But there's not much economic evidence to support this claim.

Illinois' job growth record between 2003 and 2005 is instructive here. After bumping up its minimum wage $.35 cents above the federal floor in 2003, Illinois experienced marginal employment growth in 2004, just shy of other Midwestern states. In 2005, after the wage rose by another $1, the state recorded the region's second biggest improvement in job growth, performing substantially better than two comparably large Midwestern states (Michigan and Ohio). "These patterns in job growth between 2003 and 2005," writes Michael F. Thompson of the Indiana Business Review, "indicate that Illinois' increasing minimum wage rates did not reduce overall employment growth for private employers."

This trend is reflected in other states, as well. According to the Center for American Progress, the number of small businesses increased by 5.5 percent in higher minimum wage states between 1998 and 2003. In states at the federal minimum wage level, it only grew by 4.2 percent. More generally, the Economic Policy Institute found no systemic or significant job cuts after the federal government raised the minimum wage in 1996.

Do minimum wage hikes lead to more teen unemployment?

Another common criticism is that "high" minimum wages stunt employment opportunities for teens. "It’s a proven fact that the minimum wage has hurt many young people -- college-age people, high school people -- when they go to get summer jobs," State Sen. Gary Dahl (R-Granville) told the Quad-City Times last week. "The minimum wage has done more harm than good."

But again, economic research appears to rebut such cliams. Teen employment, which has declined precipitously since the recession kicked in, is influenced by larger labor market employment trends -- not minimum wage changes. When times were good, teenage employment actually increased at a higher rate in states with minimum wages set above the national floor.

Do minimum wage hikes create a drag on the economy?

To the contrary, a 2008 paper penned by the Federal Reserve Board of Chicago estimates that the federal increase in 2009 spurred consumer spending by $5.5 billion.  Why?  Households with minimum wage workers were able to make more purchases using their new income.  More consumer activity improves the business climate for everyone.

Is the Illinois minimum wage overly generous?

Not in the slightest. If the minimum wage had been linked to the nation's inflation rate since 1968, the current level would be over $8.60 today. (See our update below.) If it had instead been indexed in 1978, it would be nearly $8.00 today, which is just shy of Illinois' new rate.

And shifting our minimum wage back to the federal level, as Bill Brady first advocated, would be a shock to the state's low-income community. Such a change would reduce minimum wage worker's annual pre-tax income by over 12 percent.  Keep in mind that this a population that is already struggling to keep up with rising housing, food, child care, health care, and transportation costs. Indeed, a study by the Social Impact Research Center shows that the average single parent with a pre-schooler and a school-age child in Illinois must earn $23.22 per hour ($14.47 more than the new minimum wage) to reach "self-sufficiency." On top of that, core employment laws are routinely ignored or exploited at job locations that employ low-wage workers, which means they have few options to fight for wages they aren't paid.

In short, considering that the working poor here in Illinois bear an inordinately-high tax burden, it makes economic sense to keep the minimum wage rate higher than the national average.

UPDATE (7/8): In the section where we tried to assess whether or not Illinois' current minimum wage was overly-generous, we cited figures from the Campaign for America's Future that showed today's federal minimum wage would be $8.60-per-hour (rather than $7.25) if it had been linked to inflation in 1968. It turns out that the think tank used a conservative inflation indicator to make that estimate. According to the Bureau of Labor Statistics' inflation calculator, the 1968 federal minimum wage, adjusted for inflation, has the same buying power as $10.03 in today's dollars. For those counting, $10.03 is almost $2-per-hour higher than Illinois' new rate of $8.25.


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