The minimum wage debate is back, thanks to President Barack Obama. In his State of the Union address this week, he noted that a full-time worker earning the federal minimum wage of $7.25 an hour would earn $14,500 a year. This is an amount that would be very low for a single adult living alone, let alone the parent with two children whom the president invoked in his speech. And so he called for a sharp increase in the federal minimum wage from $7.25 an hour to $9 an hour, an amount that would be indexed to inflation, as a way to fight poverty and to give the economy a boost.
What the president didn’t mention is that the share of full-time workers who earn the federal minimum wage is very low. Mark Perry, an economist affiliated with the right-of-center American Enterprise Institute, observes that as of 2011, only 1.7 percent of full-time hourly employees were earning the minimum wage or less. Minimum-wage earners were more common among those aged 16 to 19 – 22.8 percent of these workers were earning the minimum wage or less. Of course, many of these workers live with their parents and are generally not the sole source of support for themselves or their families.
Another reason why so few workers earn the federal minimum wage is that as the value of the federal minimum wage has eroded, dozens of states have established or raised their own minimum wages. Thus far, only the state of Washington has a minimum wage, at $9.19 an hour and indexed to inflation, higher than the president’s proposal.
One study, by economists Joseph Sabia and Richard Burkhauser, estimates that only 11.3 percent of the workers who would gain from an increase in the federal minimum wage to $9.50 are in low-income households, assuming no job losses result from the increase. The rest tend to be the aforementioned teenagers, spouses working part-time and semi-retired older workers. Interestingly, that was less true of the last federal minimum wage increase from $5.15 to $7.25. Sabia and Burkhauser find that 15.8 percent of the individuals who gained from that increase lived in low-income households. Conservative opponents of the minimum wage often argue that if a $9 minimum wage is a good thing, a $90 minimum wage must be a good thing as well, and of course a $90 minimum wage strikes most people as absurd. Sabia and Burkhauser’s work reminds us that there really is a difference between raising the minimum wage to $9 and raising it to $90, as a $9 minimum wage prices far fewer less-skilled workers out of the labor market.
While increases in the federal minimum wage are popular with the public, they aren’t the most efficient approach to alleviating poverty. The Earned Income Tax Credit, established in 1975 and expanded several times over the course of the intervening decades, is a highly efficient tool for raising household incomes. It is targeted at exactly the kind of low-wage workers President Obama has in mind, and it is higher for the parents of two or more children than it is for the parents of one child or childless adults.