Minimum wage a poor weapon against poverty, employment required first

Minimum wage? What's that? / Photo: Denis Bocquet, Flickr Creative Commons license
Minimum wage? What's that? / Photo: Denis Bocquet, Flickr Creative Commons license

WASHINGTON, June 1, 2014 – The fight to raise the federal minimum wage is unlikely to go anywhere before the midterm elections in November. That’s unfortunate; not because it needs to be won, but because this is one fight that should simply go away.

The battle is being waged on faulty assumptions and faulty logic. Among the flawed assumptions are: Minimum wage is not an effective tool to fight poverty; an increase in minimum wage to $9/hour is unlikely to have much impact on inflation; the true minimum wage is not the federal minimum wage, but zero.

The minimum wage is viewed by political liberals as a solution to a real problem: Real wages in the United States have been stagnant or declining for years, and life has become ever more difficult for people at the bottom of America’s economic ladder. They see minimum wage as a weapon to fight poverty and to reduce income disparity.

Only 3 percent of workers older than 25 earn minimum wage or less; half of all minimum wage earners are younger than 25. Liberals often argue that without a minimum wage, employers will drive wages down to almost nothing, and yet 97 percent of the workforce makes above minimum wage. It is certainly true that many employers would like to pay workers as little as they can, but as little as they can is more than minimum wage.

(Note: Most of the data used here come from the Bureau of Labor Statistics and the Congressional Budget office. For a good summary of BLS data, click hereFor a summary of CBO results, click here.)

Minimum wage was raised by about 40 percent between 2007 and 2009. Most of those who benefitted from the increase weren’t poor. They lived in households that earned between two and three-times the poverty level. Minimum wage clearly benefits some workers, but the workers it benefits aren’t in families that are impoverished according to federal standards.

It is estimated that an increase in the minimum wage to $9.50/hour would help only 11 percent of workers in poor households. It wouldn’t help most of the others for a simple reason: You have to earn a wage to get minimum wage, and 55 percent of poor and uneducated individuals between the ages of 16 and 64 don’t work.

If minimum wage won’t help the poor – that is, if it is not useful to fight poverty – isn’t it still worth raising to help increasingly squeezed families who are at two to three-times the poverty level? That depends on whether helping those families is worth further impoverishing the poorest, least educated workers in America.

That group is predominantly black. Black youth have an unemployment rate almost four times the national average – about 36 percent. They aren’t going to be helped by minimum waged; they’ll be helped by having a job. The most important factor in getting out of poverty is not wage rate, but a job. Especially for the unskilled and uneducated, the only way to get job skills is to have a job.

The Congressional Budget Office estimates that the increase in minimum wage proposed by President Obama, to $9 per hour, will result in 100,000 people losing their jobs; an increase to $10.10 per hour would cost about 500,000 jobs. Those people will almost certainly not be middle-class white kids working a summer job before they go back to school. It will be the people who are perceived as having even fewer skills and less value to the bottom line: uneducated minorities.

The CBO likewise estimates that an increase in minimum wage to $9 will raise real income by about $9 billion, with 22 percent of that going to the poor, and 33 percent going to families who earn more than three-times the minimum wage.

The overall impact would be negligible, both for good and ill. The impact on inflation would also be negligible.

So why not do it? Aside from the fact that it will do almost nothing to fight poverty, it will cause other problems, and distract from measures that might actually be effective.

The minimum wage is effectively a tax on employers and people who consume goods that are provided with large amounts of unskilled labor. It’s a tax on a narrow segment of the economy, hence it creates distortions in the economy.

If the goal is to fight poverty, and if that requires raising taxes, a more rational tax would be more wide based and transparent. The program would be focused at low-income households. And such a program exists: the Earned Income Tax Credit.

The EITC is essentially a negative income tax. It is based not on wage, but on family income. It therefore goes primarily to impoverished families, not to families earning three or more times the poverty level of income.

The costs of the EITC aren’t born directly by employers, hence it has no bearing on the employment decision. That is in direct contrast to the minimum wage, which might not produce much unemployment now, but has strong negative impact on future hiring decisions. The unemployed black youths weren’t fired from minimum wage jobs; the jobs simply never materialized for them.

The EITC has one huge political disadvantage: Like minimum wage, it involves a tax, but unlike minimum wage, that tax is paid to government. The minimum wage tax is invisible, essentially “free” to the government. A rational approach to ending the minimum wage debate would be to raise the EITC, freeze the minimum wage, and then index both to inflation. But if the EITC tax is politically unpalatable, there are options other than EITC.

Allowing employers more flexibility in deciding the mix of benefits and wages would be one; that is, rather than providing federally mandated benefits, they might simply offer employees cash. Greater flexibility usually translates into greater willingness to hire. Another option would be to encourage fewer people to go to university and to go instead to vocational schools and community colleges. Higher wages go to people with better skills that can add more to a firm’s bottom line. Degrees in art history don’t do that; vocational courses do.

Reducing poverty is an important endeavor. Minimum wage is an idiotic way to do it. The fight over minimum wage is a political fight, not a fight that rests on a clear-eyed analysis and a pure desire to do good. It’s a fight that should go away, so that the parties involved can discuss what’s really important: eliminating poverty.

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  • taxedmore

    EITC is nothing more that a bonus payment to people who had more kids than they can afford. Irresponsibility financed by the taxpayers.

    • JWPicht

      Whatever EITC’s problems, it’s better than minimum wage, and by a long shot.

    • JWPicht

      I think I was too flippant in my last answer. I do think that EITC is rife with fraud and abuse. Clearly if we’re going to go that route, we can’t keep the program as is. Economists have a habit of assuming what’s not real (an economist trapped in a well will first assume a ladder), and I’m assuming a level of ideal here that doesn’t exist. But since my main point is that MW is a bad, even stupid idea, I don’t feel too bad about assuming a ladder when looking at alternatives. Actually implementing them is a different story.

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