February 14, 2013
The only concrete proposal President Obama mentioned in his fifth State of the Union address on Tuesday was an increase in the federal minimum wage from $7.25 to $9.00 an hour. Unfortunately, this solution is counterproductive and does little to address the problem of poverty.
While this simple-sounding plan is appealing, it simply won’t work, Heritage Foundation expert James Sherk explains:
Labor economists have repeatedly studied the effects of minimum wage increases. They find no correlation between higher minimum wages and lower poverty. Raising the minimum wage to $9 an hour as the President suggests simply would not reduce poverty.
Here are four reasons increasing the minimum wage won’t resolve poverty:
- First, relatively few minimum wage workers are poor. The average minimum wage worker lives in a family making over $50,000 a year. Many minimum wage workers are teenagers or college students working part time—they are not trying to support themselves (or a family) with their income. Only one-ninth of the workers who would potentially benefit live in poverty. Raising the minimum wage will not affect many poor families.
- Second, higher minimum wages cost some workers their jobs. The true minimum wage remains $0 an hour. No business pays its employees more than they produce. A higher minimum wage would cause businesses to lay off every worker who does not add at least $9 an hour in value to their enterprise. The President’s proposed 25 percent minimum wage hike would unemploy about 5 percent of low-wage workers. (Some liberal economists disagree, but more recent research undercuts their arguments.)
- Raising the minimum wage makes these entry-level jobs harder to find. That makes it harder for less skilled workers to gain the skills necessary to get ahead. In effect it saws off the bottom rung of their career ladder. That is bad enough in normal economic times, let alone during an anemic recovery from a deep recession.
- Finally, the welfare state claws back raises that low-income families do receive. Low-income workers qualify for a host of means-tested federal benefits. These include food stamps, housing vouchers, Medicaid, and the Earned Income Tax Credit. As workers’ incomes rise they qualify for less and less aid—effectively an additional tax on their income. The Congressional Budget Office finds these reductions push many low-income workers’ marginal tax rates to nearly 100 percent.
Sherk points out that a person making minimum wage would likely forfeit some of the increase through reduced benefits.
Do you think raising minimum wage will reduce poverty rates?