Making Work Pay: The Benefits of the 1996-97 Minimum Wage Increase for Low-Wage Workers in the U.S. and Pennsylvania

By
Howard Wial

On October 1, 1996, the federal minimum wage rose from $4.25 to $4.75. It increased to $5.15 on September 1, 1997. In a recent national study, Making Work Pay: The Impact of the 1996-97 Minimum Wage Increase, Jared Bernstein and John Schmitt of the Economic Policy Institute (EPI) in Washington, D.C., examined how these increases affected low-wage workers.

Building on the EPI analysis, the Keystone Research Center (KRC) here examines the impacts of the minimum-wage increases on low-wage workers in Pennsylvania.

The Impact Across the U.S.

With respect to income gains among low-wage workers, EPI found that:

• Almost 10 million workers benefited from the minimum wage increases. About 71 percent of these were adults and 58 percent were women.
• The two-stage increase disproportionately benefited low-income working households. The poorest 20 percent of working households in the United States together receive only 5 percent of all household income. However, they received 35 percent of the gains from the minimum wage increase. Further, the average minimum-wage worker contributes more than half (54 percent) of his or her household’s weekly earnings.
• Contradicting the predictions of many economists, no widespread or significant job loss resulted from the 1996-97 minimum wage increases. The EPI study used four different methods to estimate the employment impact of the increases. Those job losses that were detected were small and statistically insignificant.

The Impact on Pennsylvania

Slightly more than 437,000 Pennsylvania workers, 8.9 percent of the state’s total, benefited directly from the minimum wage increases. This compares to (the same) 8.9 percent of workers who benefited nationally and to 7.3 percent of workers in the six states surrounding Pennsylvania.

In 1997, following the second of the two minimum wage increases, the inflation-adjusted wages of Pennsylvania low-wage workers increased by 2.5 percent, from $6.76 to $6.93 an hour. 2 This was the first meaningful increase in the earnings of low-wage Pennsylvania workers since 1990, not coincidentally the beginning of the last two-stage federal minimum wage increase.

The increase in earnings for lower-wage workers did not come at the expense of low-wage job opportunities. In 21 months following the 1996 minimum wage hike (a period that included the 1997 increase), job growth at the aggregate level and in two wage-sensitive industry divisions (retail trade and a group of services that includes business and personal services) was similar to or higher than in the previous 21 months.

Conclusion

In sum, the minimum wage is an effective tool for raising the earnings of low-wage workers without lowering their employment opportunities.

An added benefit of minimum wage increases is their ability to spur lower-wage employers to focus more attention on improving productivity and quality.

In light of the benefits, Pennsylvania should follow the lead of six other states and raise its minimum wage above the federal level.

This document is an on-line summary of a Keystone Research Center report. The entire report is available for download as a PDF file at the KRC Web site www.keystoneresearch.org © 2001 Keystone Research Center