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Minimum Wage Boost: Better Politics Than Economics?

By James Pethokoukis

Posted 12/13/06

With the Democrats taking over Congress next month, it seems more than likely that the federal minimum wage will be raised. Doing so would fulfill one of House Democrats' "Six for '06" campaign promises. Political analyst Greg Valliere of Stanford Policy Research says that President Bush is "likely to deal" on the issue with House Speaker Nancy Pelosi and friends.

But is raising the minimum wage really the best way to help lower-wage workers? As Nobel Prize-winning economist Gary Becker of the University of Chicago put it in a recent blog entry: "Many of those who receive higher wages are not poor but are teenagers and other secondary workers in middle-class and rather rich families. Poor families are also disproportionately hurt by the rise in the cost of fast foods and other goods produced with the higher-priced, low-skilled labor since these families spend a relatively large fraction of their incomes on such goods."

But while Becker seems to have myriad doubts about the minimum wage, the economics profession overall isn't quite so sure that raising the minimum is such a horrible idea. Robert Whaples, an economics professor at Wake Forest University, recently polled 210 economists on the issue, finding that 38 percent want the minimum increased, while 47 percent want it eliminated. "Economists tend to have the most influence over what we disagree on and the least influence over what we do agree on," he jokes. Indeed, economists are pretty split in their views. As an analysis by investment firm Goldman Sachs put it recently, "Debate rages in the academic community over the degree to which a higher minimum wage reduces employment, if at all. In our view, the preponderance of the evidence suggests that it does, but the nature of the industries affected makes the impact relatively modest."

Which is why Wall Street isn't the least bit freaked out by the prospect of a higher minimum wage. If the effect of the hikes is often modest, so are the numbers of workers affected. Some 6.6 million workers, only about 5 percent of the workforce, earn less than $7.25 hour, the level congressional Democrats want to increase the wage to. (The liberal Economic Policy Institute[/] contends that an additional 8.3 million workers–6 percent of the workforce–earning slightly above the minimum would also be likely to benefit through "spillover effects.")

The current minimum wage is $5.15, though workers in 18 states make more than that because of state minimum-wage laws. And last November, voters in six states approved increases in their statewide minimum wage. In Missouri, for instance, voters backed a higher minimum, boosting the wage from $5.15 an hour to $6.50 an hour–or up to the federal minimum-wage level if it's increased beyond the state level.

Still, it's worth noting that a recent review of research on the topic by University of California–Irvine economics Prof. David Neumark and Federal Reserve economist William Wascher found that "the overwhelming majority of the studies ... give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects."

An alternative to raising the minimum wage can be found in another possible Democratic proposal–expanding the earned-income tax credit. The credit offers as much as $4,536 to a family with two or more kids to offset payroll taxes or a cash bonus if the credit exceeds taxes paid. Although a hike in the EITC would require higher taxes, spending cuts, or borrowing to pay for it, the plan has the advantage of directly targeting lower-wage workers–as opposed to teenage lifeguards and interns–without reducing the number of jobs out there.

"It was day nine of my cycle trip. I’d cleared Moscow the day before. It then rained all night and at 5am, in the dark, in the wet, I rolled over what I thought was just a bit of sitting water on the road but in fact was a hole in the tarmac. I hit the road with the left-hand side of my face and my left hand. The first thing I sensed was broken tooth in my mouth and blood. So my worry was round the trauma to my face.

We thought I’d initially just staved the elbow, but when I got home we found out I’d put a hairline crack in the elbow. I was pretty shaken after the crash and it was just a case of cleaning out the shards from my mouth, making sure I could still safely hold on to the handlebars, taking painkillers and getting back on the bike.

Meanwhile, my doctor Laura Penhaul was trying to get hold of the medical kit to rebuild my broken teeth. Three days later, she did the dental work and she had to really step up because it is not her expertise. There I was on the roadside in Russia, in the van, getting my teeth rebuilt. They used a file to literally file down the broken edges of the shard left in my tooth, then used a fast-setting resin to mould a new tooth. I was back on the bike 20 minutes later. It didn’t affect my time to get round the world."

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Venezuela launched a program Saturday to hand out medicine to 35,651 patients, blaming US sanctions for a shortage, even as doctors say 95 percent of all drugs are missing.

A government electronic card is required to participate, leading critics to charge the government is favoring its supporters.

Speaking on VTV state television, Health Minister Luis Lopez said the handouts were taking place in 10 of 24 states, and in the rest of the country this coming week.

Francisco Valencia, who leads the health care rights group Codevida, says much more is needed, with an estimated 300,000 patients with chronic illnesses like kidney disease and cancer who are not getting the medications they need.

On Wednesday, patients and their families marched outside the embassies of Canada, the Netherlands, Peru and the United States to press them to urge President Nicolas Maduro to distribute medicine for humanitarian purposes.

The government denies any humanitarian crisis exists, and says US sanctions have complicated medicine imports and distribution.

Lower oil prices on world markets have dramatically reduced the government's main source of hard currency.

Millions of Venezuelans face food and medicine shortages. The South American country has the largest proven crude oil reserves in the world.

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