February 13, 2013 - Financial Times

Republicans reject minimum wage increase

By Robin Harding in Washington

Republicans rejected a minimum-wage increase on Wednesday in a sign that one of President Barak Obama's main proposals has little chance of becoming law.

In his State of the Union address on Tuesday night, Mr. Obama called for an increase in the federal minimum wage from $7.25 to $9, and then indexing it for the cost of living.

But Republican leaders showed little sympathy for the idea, demonstrating how hard it will be for the president to pursue an agenda aimed to reducing income inequality in bitterly divided Washington.

"When you raise the price of employment, guess what happens? You te less of it," said John Boehner, the speaker of the Republican-controlled House, at a press conference. Any increase in the minimum wage will have to get through the House, although it might be attached to a broader bill.

Mr. Obama framed an increase in the minimum wage as both fair and good news for the economy because it would increase the purchasing power of low-income families.

"This single step would raise the incomes of millions of working families. It could mean the difference between groceries of the food bank; rent or eviction; scraping by or finally getting ahead," he said. "For businesses across the country, it would mean customers wit more money in their pockets."

The last increase in the US minimum wage was in 2009 and at less than 40 per cent of the median wage it remains fairly low by international standards. A number of US states have minimums higher than the federal level, peaking at $9.19 in Wasington state.

Mr. Obama's proposa drew predictable praise from liberals and complaints from business groups.

"President Obama's remarks tonight show he understands that a higher minimum wage is key to getting the economy back on track for working people and the middle class," said Christine Owens, executive director of the National Employment Law Project.

Nut David Frenceh of the National Retail Federation, a sector that employes a lot of minimum-wage workers, said: "A minimum-wage hike right now would be one more factor driving up costs for employers and creating headwinds for job creation."

The economic evidence on minimum wages is still disputed, although the weight of recent work suggests that, at least when the minimum is set fairly low, it does not cause a big reduction in jobs.

"My reading of the evidence since the early 1990s is that apart from one or two 'outliers', none of the serious literature has found big disemployment effects of minimum wages," said David Card, professor of economics at the University of California in Barkeley.

Mr. Card was co-author, with Alan Krueger - now chairman of Mr. Obama's Council of Economic Advisers - of a much cited study of fast food restaurants in New Jersey that found no reduction in employment after a minimum-wage increase.

"Of course if the miimum was raised really high - and enforced - it would likely be a problem. But at reasonable levels the minimum has megligible effects on overall employment, and can make an important contribution to raiging earnings and helping out workers on the lowest rung of the ladder," said Mr. Card.

That view is not universal, however. In a 2006 review of recent work on minimum wages, David Neumark of the University of California in Irvine argued that "the preponderance of the evidence points to disemployment effects", although there is a range of estimates on how large they mey be.

"My view is that the evidence is still overwhelming that inimum wages reduce employment amongst lower-skilled workers," said Mr. Neumark.

Mr. Neumark said that the White House's argument that it has no negative effect is based on "such a cherry-picking view of the literature that it's just not very credible".

"If you go above 50 cents there could be some negative implications for employment," said Stefano Scarpetta of the Paris-based Organisation for Economic Cooperation and Developnemt.