A higher minimum wage: Why would you want to hurt any poor people?
After the November elections—with the return of a Democratic majority in the U.S. Congress and the Indiana State House—the minimum wage is receiving maximum attention. Applauded as everything from an effective poverty-fighting tool to the epitome of economic justice, a higher minimum wage is popular with politicians and the general public. But economists point to the demographics of the lowest-paid workers and note that small business owners may be unwilling to pay higher wages for the same productivity.
Under HR2, the House passed an increase in the federal minimum wage from $5.15 to $7.25 over the next few years. (The Indiana state minimum would rise to $7.50 under HB1027.) A 40% increase provokes concern about unemployment for those whose wages have been artificially increased. Although only 0.38% of all workers earn the minimum today, many workers earn wages between the current $5.15 and the proposed $7.25. About two-thirds of the states have 10% of hourly workers paid less than $7.25, so the unemployment effects would not be trivial.
Of course, there are significant differences in the cost of living between various states. Thus, a $7.25 minimum will be felt differently in Massachusetts than in Mississippi. Consider also the case of the American territories. Congress may hold American Samoa to the minimum wage standard for the first time. The average hourly wage in American Samoan canneries like StarKist was $3.60 in 2004. What would happen to those jobs if workers are forced to demand that their wages be doubled? Puerto Rico was originally excluded from the minimum wage—when its average wage was below the minimum wage. Today, about one-third of its workers are paid below $7.25. Clearly, a federal “one-size-fits-all” minimum can cause a lot more damage than a state-determined minimum based on cost-of-living.
In any case, the punchline is that some poor people would be helped at the expense of other poor people—a curious attempt at economic justice and a less than impressive poverty-fighting tool. Those who keep their jobs would be better off while others would lose their jobs. Sadly, the latter would lose what they most need—an earned income and an opportunity to build job experience and skills. Ironically, the minimum wage steps on some of the most vulnerable in trying to help others.
The larger issue is that the minimum wage is poorly targeted as a mechanism for helping poor households. Of workers currently earning the minimum, about 40% are at least 25 years old; two-thirds have never been married; and only 17% work 40 or more hours per week. Thus, many minimum-wage workers are young, part-time, or single. It is said that the minimum wage helps the poor, but it mostly hits middle-class teenagers and part-time workers.
Fortunately, much better ideas exist. Kentucky has decreased its taxation of the working poor in recent years. But the Bluegrass State still remains #1 in the nation at taxing two-parent families with two children and incomes 125% of the poverty line—$24,951 in 2005. (It’s good to see Kentucky #1 in something!) If both parents worked 46 hours per week in minimum wage jobs, Kentucky took $858 from them that year. (Indiana is further down the list at $455.)
Likewise, and far more painful, federal “payroll taxes” (for Social Security and Medicare)—15.3% of every dollar earned—result in the same family losing $318 every month to Uncle Sam. One obvious way to help the working poor would be to quit taking their money!
Beyond doing no harm, if the government is going to try to help, then an expansion of the Earned Income Tax Credit and directed subsidies (e.g., for child care) would be far better targeted and would not result in damaging those you want to help.
The minimum wage is popular. Unfortunately, it doesn’t work well. Do politicians know this? If so, they need to summon their courage and embrace more helpful policies. If not, they need to sign up for Econ 101.
Under HR2, the House passed an increase in the federal minimum wage from $5.15 to $7.25 over the next few years. (The Indiana state minimum would rise to $7.50 under HB1027.) A 40% increase provokes concern about unemployment for those whose wages have been artificially increased. Although only 0.38% of all workers earn the minimum today, many workers earn wages between the current $5.15 and the proposed $7.25. About two-thirds of the states have 10% of hourly workers paid less than $7.25, so the unemployment effects would not be trivial.
Of course, there are significant differences in the cost of living between various states. Thus, a $7.25 minimum will be felt differently in Massachusetts than in Mississippi. Consider also the case of the American territories. Congress may hold American Samoa to the minimum wage standard for the first time. The average hourly wage in American Samoan canneries like StarKist was $3.60 in 2004. What would happen to those jobs if workers are forced to demand that their wages be doubled? Puerto Rico was originally excluded from the minimum wage—when its average wage was below the minimum wage. Today, about one-third of its workers are paid below $7.25. Clearly, a federal “one-size-fits-all” minimum can cause a lot more damage than a state-determined minimum based on cost-of-living.
In any case, the punchline is that some poor people would be helped at the expense of other poor people—a curious attempt at economic justice and a less than impressive poverty-fighting tool. Those who keep their jobs would be better off while others would lose their jobs. Sadly, the latter would lose what they most need—an earned income and an opportunity to build job experience and skills. Ironically, the minimum wage steps on some of the most vulnerable in trying to help others.
The larger issue is that the minimum wage is poorly targeted as a mechanism for helping poor households. Of workers currently earning the minimum, about 40% are at least 25 years old; two-thirds have never been married; and only 17% work 40 or more hours per week. Thus, many minimum-wage workers are young, part-time, or single. It is said that the minimum wage helps the poor, but it mostly hits middle-class teenagers and part-time workers.
Fortunately, much better ideas exist. Kentucky has decreased its taxation of the working poor in recent years. But the Bluegrass State still remains #1 in the nation at taxing two-parent families with two children and incomes 125% of the poverty line—$24,951 in 2005. (It’s good to see Kentucky #1 in something!) If both parents worked 46 hours per week in minimum wage jobs, Kentucky took $858 from them that year. (Indiana is further down the list at $455.)
Likewise, and far more painful, federal “payroll taxes” (for Social Security and Medicare)—15.3% of every dollar earned—result in the same family losing $318 every month to Uncle Sam. One obvious way to help the working poor would be to quit taking their money!
Beyond doing no harm, if the government is going to try to help, then an expansion of the Earned Income Tax Credit and directed subsidies (e.g., for child care) would be far better targeted and would not result in damaging those you want to help.
The minimum wage is popular. Unfortunately, it doesn’t work well. Do politicians know this? If so, they need to summon their courage and embrace more helpful policies. If not, they need to sign up for Econ 101.
posted by Eric Schansberg at 12:45 PM
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