A poor solution

February 15, 2013

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. 

To the president’s credit, he has backed a more targeted approach to poverty alleviation. The 2009 federal stimulus law, for example, created a Making Work Pay (MWP) tax credit that was extremely well-targeted. According to the left-of-center think tank Citizens for Tax Justice, 50.3 percent of the benefits of MWP went to households in the bottom three-fifths of the income distribution while only 22.2 percent went to households in the top fifth. The Social Security payroll tax cut that replaced MWP as part of the bipartisan 2010 Tax Hike Prevention Act delivered 46.8 percent of its benefits to households in the top fifth and only 26.8 percent of its benefits to households in the bottom three-fifths. Now both the Making Work Pay tax credit and the Social Security payroll tax cut are history, in part because of Republican opposition to redistribution in the tax code. 

Some of the president’s defenders claim that while a minimum-wage increase isn’t well-targeted, Republican opposition to measures like the Making Work Pay tax credit and increases in the Earned Income Tax Credit leave the Obama administration with relatively few options for boosting the incomes of poor households, and a minimum wage increase is better than nothing. This is a good point. If the congressional GOP blocks well-targeted anti-poverty policies, it is hardly surprising that congressional Democrats will pursue blunt, poorly targeted regulations instead – particularly when they’re as politically popular as a minimum-wage hike. 

But is it true that a minimum wage increase is better than nothing? The classic critique of a minimum-wage increase is that it will decrease demand for less-skilled labor. Indeed, at least one advocate of a minimum-wage increase, Ron Unz of The American Conservative, has argued that eliminating low-end jobs would actually be a good thing, as these jobs serve as a magnet for less-skilled immigrants. 

Others, drawing on state-level studies conducted by economists such as David Card and Alan Krueger and, more recently, Arindrajit Dube, T. William Lester, and Michael Reich, argue that the employment effects of the kind of minimum-wage increases the president and his allies have in mind are likely to be minimal.

As Arpit Gupta suggests, however, it is possible that while the effect of a minimum-wage increase on aggregate employment might be minimal, it could change the composition of the workforce. For example, some spouses who might otherwise have devoted themselves to household production might be drawn into the workforce by a higher minimum wage, while less-skilled ex-offenders might find themselves priced out of the labor market. It might also encourage employers to reduce the number of work hours, shifting at least some workers from full-time to part-time status.

This matters because at the heart of America’s poverty problem is a labor force participation problem. While President Obama spoke of the challenges facing a full-time worker earning the minimum wage, the poverty rate for individuals in families with no working adults is eight times higher than that of individuals in families in which at least one adult works full-time. 

The number of working poor individuals has increased since the start of the Great Recession ‑ as of 2010, 7.2 percent of individuals who work at least 27 weeks a year fall below the poverty level, up from 5.1 percent in 2007. Yet the poverty rate was much lower for full-time workers (4.2 percent) than for part-time workers (15.1 percent). A minimum-wage increase that reduces the number of full-time jobs while increasing the number of part-time jobs would undermine its poverty-fighting purpose.

What we need are poverty-fighting policies that expand rather than shrink labor force participation. To get there, at least two things need to happen: First, Republicans need to recognize that if they are going to oppose minimum-wage increases, they ought to be more open to measures, such as the Making Work Pay tax credit, that raise incomes for working poor families without pricing marginal workers out of the labor force.

Second, Democrats and Republicans alike need to pay careful attention to the work disincentives embedded in many anti-poverty programs. Scholars such as Eugene Steuerle and Edward Glaeser have made the case that because different anti-poverty programs taper off at different levels of earned income, poor workers often face high effective marginal tax rates as they climb the economic ladder. Simplifying and consolidating anti-poverty programs can go a long way toward reducing this burden and increasing labor force participation, a cause that ought to be bipartisan.

Apart from the good these policies would do, there is a political opportunity as well. As presidential hopefuls jockey for position in the run-up to 2016, being seen as a champion of hard-working families struggling to climb the ladder of opportunity can only be a plus.

PHOTO: U.S. President Barack Obama delivers his State of the Union speech on Capitol Hill in Washington, February 12, 2013.  Picture taken with a tilt-shift lens.   REUTERS/Jason Reed 


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“…different anti-poverty programs taper off at different levels of earned income [so] poor workers often face high effective marginal tax rates as they climb the economic ladder.” “…reducing this burden and increasing labor force participation, a cause that ought to be bipartisan.”

OK, so “we, the (producing) people” prop up those that can’t stand on their own feet, but as their efforts become more economically productive and better compensated, we’re not supposed to reduce our subsidy? Since when is “bipartizan” a code word for liberal stupidity?

Posted by OneOfTheSheep | Report as abusive

Why should middle class people continue to get punished by the gov? Since most middle class people haven’t seen much of anything (let alone COLA) pay increases since the Obama depression began in 2008, why should the govt just reward the poor.

Posted by mn-man | Report as abusive

Good catch @OOTS.
Watching politicians play with the federal minimum wage is like watching a dog chase its tail.

Posted by tmc | Report as abusive

This article has been closed by Reuters, but deserves to be part of this discussion.

“Populists, plutocrats and the GOP sales tax”

http://blogs.reuters.com/great-debate/20 13/02/14/populists-plutocrats-and-gop-sa les-tax/#comment-70834

Posted by PseudoTurtle | Report as abusive

If the minimum wage primarily helps part time and elderly workers, how does keeping it low increase “labor force participation”? Generally those workers must work to survive anyhow.

The German Weimar Republic followed policies of inflationary printing of money, preservation of economic aristocracy and abandonment of the poor and working classes. In fact, those policies sound particularly familiar to people paying attention to American policies over the past 20 years or so. Does anyone recall the outcome of those policies and their consequences for the wealthiest 10% of Germans at the time?

While it is true that a thriving economy leads to a thriving society, it does not follow that a thriving upper class leads to a thriving economy. That is our problem and that should be our guide for action. We need to judge by observable results rather than wishful thinking.

Posted by usagadfly | Report as abusive

The minimum wage issue is a red herring designed to take the heat off the wealthy class who refuse to pay their fair share of taxes.

From the UK Guardian:

“Denying minimum-wage workers a raise is craven and grotesque”

Corporate CEOs make 231 times more than the average worker, but balk at the idea of raising minimum wage by $1.75

http://www.guardian.co.uk/commentisfree/ 2013/feb/14/minimum-wage-raise-obama-sot u

Posted by PseudoTurtle | Report as abusive

Raising the minimum wage to anything higher than it is now will cause employers to hire part-time workers over full-time workers?

What has this author been smoking? Employers do that NOW, but it isn’t to avoid paying $1.75 an hour more – it’s to keep those employees off their benefits packages.

That’s going to be the argument though, isn’t it – Let’s not raise minimum wage because it isn’t good for those people earning minimum wage now. (However, it’s very good for the employers)

Posted by JL4 | Report as abusive

Additionally, the author’s comment restates, in a circuitous way, the age-old, nonsensical justification for paying women less than men:

“Of course, many of these workers [who earn minimum wage] live with their parents and are generally not the sole source of support for themselves or their families.”

Is it better to take the Earned Income Credit and have the taxpayers pick up the slack than for companies to pay a decent wage?


Posted by JL4 | Report as abusive

What a stupid article in the extreme. On nearly every point the author is wrong. The low skilled jobs that are left in this country are the ones that can’t be outsourced. There will be no contraction of employment. In fact in WA raising the rate has seen business income rise 11% last year with higher employment because of increased demand. The economists used have a deep bias toward business profits and low labor costs, their studies are slanted and bogus. Business does not want benefits paid is the reason for part timers. With high unemployment they can get people to work part time. WalMart the largest private employer in the country has workers average $9.15. To use a figure at min. wage should not be used, a figure on how many will see an increase will be used. The teen employment of 22.5% is not real, nor how many in households above poverty. Common sense tells you too many Americans don’t make enough to pays the bills. Raising the rate will help millions of households, will increase consumer demand, will have little impact on sales as business recoups the additional cost. People will shop at WalMart, will buy their fast food, will have the cleaning lady prim up the office. With more than 3/4 of the people at min. wage as adults, 25% of the working populace below 9.25/hour, this is a much needed boost. There is no problem with investment supply seeing 2 trillion sitting on balance sheets. There is a problem with demand, no sane businessman expands without a market. Increasing min. wage most certainly will increase demand. People at that income level will spend that money into the economy.

Posted by JamesChirico | Report as abusive

Excuse me mn-man, the recession is not Obama’s, it was born under Bush and the republicans and their almost complete defunding of regulatory bodies but sired by both parties.
I submit Usagadfly is spot on and while I am someone who thinks this proposition is a reach and unnecessary (while the last increase was overdue), as a reader of economics I have to say JamesChirico’s post is compelling.

Posted by Mac29 | Report as abusive

“….assuming no job losses….” – this is the big question that has no answer yet.

Remember – to “assume” can make an “ass” of you and “me”! No one knows yet that the results of Obamacare will be when it goes into full bloom in January of 2014. The program for those with pre-existing conditions has already run out of funding.

Posted by AZreb | Report as abusive

The author raises many excellent points. I think raising labor force participation is key. Unfortunately, government fiat cannot raise the economic value of an individual’s labor, and so a number of folks will be priced out of the market. On the other hand, there are ways to eliminate barriers to labor force participation beyond the cash subsidy type programs the author mentions. Low end workers are often fired for not showing up or being tardy. Health and transportation are two big barriers here. I would put the highest priority on expenditures for healthcare and public transportation to eliminate those barriers to participation.

Posted by QuietThinker | Report as abusive

What is completely missing in this article and the comments above is the very basic fact that most workers in the restaurant trade, agriculture, and other low-skilled jobs are working often up to 60 to 80 hours a week just to survive. Do the math yourself and try to figure out how you would survive making that kind of income, esp. after payroll taxes and sales taxes.

Additionally, these jobs rarely if ever offer any benefits, such as health care or even unemployment insurance. The working poor are probably some of the hardest working people in AMerica yet have no benefit from the riches of this country: higher education, health care, retirement. These workers also live in constant hear of losing their jobs which are often seasonal.

The result is often an underground economy where these workers are paid off the official payroll, denying them social security benefits, unemployment benefits and any kind of job security. It is the equivalent of 21st century slave labor.

The academics who use their models and statistics to shoot down the idea of a $2/hr wage increase and the conservatives who consider these workers lazy and expendable should try picking vegetables, washing dishes, cleaning homes, digging ditches and other manual labor for $7.50/hr. I think their outlook of this “sub-class” of America would change very quickly.

Posted by Acetracy | Report as abusive

I’m curious as to the number of people who are working part-time jobs at minimum wage because they were laid off or unemployed before and haven’t been able to find full-time work in their areas of expertise again.

And, of those earning more than “minimum wage or less” – what are the graded increases in value. How many workers are only earning $.25/hr more than minimum wage; $.50 more?

They’re still underemployed. And how many people currently working for rates between today’s minimum wage and the proposed minimum wage are collecting any sort of welfare benefit to pad their income? Will those people be able to come off of those programs if they earn more, or is it not enough?

I’d like to see a LOT more research.

Posted by DonaCollins | Report as abusive

I’m sure it must be fun to give the patina of academic authority to political positions that in practice amount to saying “I’ve got no idea what to do here, but the liberals must be wrong,” but surely it’s getting to you, Reihan. Is there some way to turn tax cuts into jobs? No? That doesn’t really work? I guess that’s it for conservative proposals, but who cares about the poor lazies anyhow.

Posted by gerontion | Report as abusive

@DonaCollins – nice post. The people I see working at the Home Center stores, grocery stores, Walmart, Target, McDonalds…they aren’t college kids for the most part.

I’m not economist, but isn’t it odd that the author, and Republicans, are quick to say the Earned Income Credit is an effective way to pull people out of poverty. Are they saying that a refund check from the government for $650.00 (if they’re lucky) is enough to do that? If only that’s all it would take.

Posted by JL4 | Report as abusive

I started working before the minmum wage laws were enacted and each time it rose from the initial 1.15, the purchasing power of a dollar fell. The whole idea of any minimum wage is a job killer, an inflation stimulator and now that there is a global economy it will accelrate the jobs being sent overseas. If it were such a good idea why not set the minimum wage at 1000.00 per hour and then we would all be rich – right?

Posted by zotdoc | Report as abusive