TESTIMONY OF ED LAZERE
Senior Policy Analyst, Center on Budget and Policy Priorities
before the House Committee on Education and the Workforce
October 7, 1999
Thank you, Mr. Chairman, for inviting me here to testify today on the impact of the minimum wage on welfare-to-work efforts. I am Ed Lazere, a senior policy analyst with the Center on Budget and Policy Priorities. The Center is a non-profit organization that conducts research and analysis on an array of policy issues at both the federal and state levels. We receive no government funding.
One of the key elements in any minimum wage debate is identifying who will benefit from such an increase and whether any group will be harmed. I am here today to discuss research findings on the low earnings of one key group of working parents those who have left welfare and what the expected impact of raising the minimum wage would be on former welfare recipients.
A host of state-specific studies and one national study show that welfare recipients who find work tend to be employed in low-wage jobs, and that many remain in poverty despite working a substantial amount. A recent Urban Institute study based on a nationally representative sample of families that left welfare between 1995 and 1997 found that 29 percent of those who were working in 1997 had hourly wages below $5.75, or less than one dollar per hour above the federal minimum wage of $4.75 that was in place for most of that year.(1) Some 37 percent earned less than $6.15 an hour, or no more than one dollar above the current wage floor. Some of the state-specific studies show former welfare recipients have even lower earnings. An analysis in Tennessee found that the average wage of welfare "leavers" who found work was only $5.67.
In addition, the Urban Institute findings cast doubt on the notion that welfare leavers may start at very low wage levels but then move quickly up the pay scale. The study found that the hourly wages of low-income women who have been off welfare for some time are no higher than the wages of women who recently left welfare for work. This suggests that there is limited wage mobility over time among low-wage working women.
Taken together, these findings indicate that the relatively low level of the current minimum wage contributes to the low earnings of former welfare recipients and that raising the federal wage floor in the range of one dollar per hour, as legislation under discussion would do, would boost the earnings of a substantial share of parents who leave the welfare rolls for employment. These findings also indicate that raising the minimum wage would help many working women who have not been on welfare but remain mired in low-wage jobs.
Evidence from Oregon provides a useful case study of what happens to welfare recipients when the minimum wage goes above $5.15 an hour. A successful ballot initiative in 1996 raised the Oregon minimum wage to $5.50 an hour in 1997, $6.00 an hour in 1998, and $6.50 an hour in 1999. An analysis I conducted of Oregon welfare recipients who found work before and after the increases indicates that their earnings were lifted significantly. That analysis is attached as part of my testimony. The key findings are:
- In the three years prior to the state's 1997 minimum wage increase, average hourly wages for welfare recipients who found work fell five percent, after adjusting for inflation, even though Oregon's overall economy was growing at a faster rate than the national economy. The state's minimum wage was frozen at $4.75 an hour during that period.
- This trend reversed itself immediately after the state's minimum wage increase. Average earnings among adults leaving welfare rose 50 cents an hour in the first year, a five percent inflation-adjusted increase.
- Data that have become available since publication of my analysis indicate wages rose further following the 1998 increase in the Oregon minimum wage from $5.50 to $6.00, the second step in the phased-in increase. By the end of 1998, the average wage of welfare recipients was 94 cents an hour higher than in the last quarter before the increases began, a 12 percent rise after adjusting for inflation. The wages of Oregon's former welfare recipients rose much faster during this period than among women with low-wages in the nation as a whole.
Critics of minimum wage increases argue that while some families see higher wages, many workers suffer a job loss, presumably because employers trim payroll in response to the increase. A systematic study of the employment impacts of Oregon's minimum wage increase has not been conducted. Several available indicators, however, provide no evidence of job loss. First, the overall unemployment rate in Oregon fell in both 1997 and 1998. Second, the proportion of welfare recipients moving into employment actually rose from 1996 to 1997 following the initial stage of the state's minimum wage hike, and then rose again in 1998 after the second stage of the increase. Third, the Oregon Employment Department and the Oregon Center for Public Policy, a research organization, found that the employment trend in retail trade, the industry most likely to be affected by the increase, was similar to the state's overall employment trend following the minimum wage increase. The overall employment growth rate (i.e, the rate of growth among all workers) in Oregon has been lower since 1996, but the slowdown was no greater in retail trade than in other industries. If the minimum wage increases had been a significant factor, it would be expected that retail trade employment would have suffered more than employment in other industries.
These findings on job loss from Oregon are consistent with other research on recent increases in the minimum wage nationally and in other states, which show little or no job loss.(2)
Some critics have argued that welfare recipients are particularly disadvantaged in terms of job skills and employability and thus that welfare recipients would be particularly harmed by raising the minimum wage. I think it is worth noting that a tremendous number of women have recently left the welfare rolls for employment and that the shares of former welfare recipients and of single mothers generally that are working are at all-time highs and these increases occurred just as the federal minimum was rising from $4.25 to $5.15 in 1996 and 1997. While there is some research that suggests that increasing the minimum wage leads women to stay on welfare longer, there also is recent research which shows that minimum wage increases have led to reduced welfare caseloads, presumably because they have made work pay better.(3)
It also is worth noting that employers can receive financial assistance when they hire former welfare recipients, which means their costs for employing such individuals can be less than the minimum wage. The federal Work Opportunity Tax Credit (WOTC) provides employers up to $2,400 for every newly hired welfare recipient, while the Welfare-to-Work Tax credit provides up to $8,500 over two years. States have flexibility under federal law to divert a family's cash assistance payment to an employer and several states have done so or to use TANF or Welfare-to-Work funds for any form of wage subsidy on behalf of TANF recipients. These subsidies can help employers offset the costs associated with hiring welfare recipients who have fewer job skills than other workers.
Yet available evidence suggests that cost is not the primary concern in hiring welfare recipients. Research on the Targeted Jobs Tax Credit, the predecessor to WOTC, indicates that employer hiring decisions generally were not affected by the existence of the tax credit. (It is too early to assess the impact of WOTC and the Welfare-to-Work Tax credit, which were implemented in tax year 1997.) In addition, participation in the state employer subsidy programs has been very limited to date. These findings support evidence from surveys of employers that their concern with hiring welfare recipients is not primarily a matter of cost but instead a matter of getting an employee who can handle the relevant work. If an individual cannot show up to work on time or act professionally on the job, he or she is unlikely to be desirable at any price.
There are better ways to help address the problems of welfare recipients with serious employment barriers than letting the minimum wage for all workers remain at a level that makes it extremely difficult to achieve self-sufficiency. Because there are substantial amounts of unspent TANF and Welfare-to-Work block grant funds in many states and localities, it seems wiser for states to invest more in families facing the most serious barriers to employment and to prepare them for work than to hope such families will find work by keeping the minimum wage at $5.15 an hour.
Thank you again.
1. Pamela Loprest, "Families that Left Welfare: Who Are They and How Are they Doing?" Urban Institute, August 1999.
2. See, for example, Jared Bernstein and John Schmitt, Making Work Pay: The Impact of the 1996-97 Minimum Wage Increase, Economic Policy Institute, Washington, D.C., May 1998; and David Card and Alan Krueger, "Minimum Wages and Employment: a Case Study of the Fast Food Industry in New Jersey and Pennsylvania," American Economics Review, September 1984, and "A Reanalysis of the Effect of the New Jersey Minimum Wage Increase on the Fast-Food Industry with Representative Payroll Data," Princeton University, January 1998.
3. See Mark Turner, "The Effects of Minimum Wages on Welfare Dependency," Urban Institute and Johns Hopkins University, June 1999; and Council of Economic Advisers, "The Effects of Welfare Policy and the Economic Expansion on Welfare Caseloads: An Update," August 3, 1999.