Raising the minimum wage is the kind of cheap policy proposal politicians love. In a wave of their legislative hand, they can boast they have given millions of Americans a pay raise. It's an emotional issue powerful enough to stand up to decades of economic research. Most Americans are decades-away from the kinds of jobs that make up the minimum wage workforce, blunting the obvious implications of federally mandated wages. Still, like all other government mandates, a wage hike sets off unintended consequences that end up harming the very people politicians say they are trying to help.
Let's set aside the economic arguments against raising the minimum wage. The issue is the poster-child for both side's ability to torture statistics enough to confess anything. The simple truth is that minimum wage workers are such a small amount of the workforce today, that the macro-economic effects are relatively small either way. On the margins, and for certain populations, however, the impacts can be devastating.
The basic problem with the issue is that we literally don't know what we're talking about. Obama and other supporters of mandated wage hikes spin a Dickensian landscape of millions of workers struggling to raise families on a minimum wage job. This is so separated from reality that it necessitates a look at who these workers actually are.
Myth 1: Hiking wages for those at the lowest rung of the job market will boost the economy.
The truth is, there simply aren't that many people earning the minimum wage. In 1979, almost 14% of hourly-paid workers earned the federal minimum wage. Today, according to the BLS, just around 4% of hourly-paid workers earn it. Among all wage and salary employees, only a little over 2% earn the minimum wage. Among the entire labor force, the number is even smaller. In 2012, just 1.6 million employees were paid the minimum wage.
Myth 2: Minimum Wage Workers Are Poor
Even if the number of minimum wage workers is small, at least a mandated wage hike would boost the fortunes of the lowest-income Americans, it is argued. The problem with this argument is that most minimum wage workers aren't poor.
A recent study looked at those who would benefit from an increase in the federal minimum wage from $7.25 to $9.50, comparable to the level proposed by President Obama. Just over 11% of workers who would gain from an increase live in poor households. Over 63% of the workers who would gain are second or third earners in families making well over the federal poverty line. 43% of workers who would benefit live in households with income over $50,000 a year.
The simple truth is that most minimum wage workers are teens, young adults just starting in the labor force and spouses providing a second income to a household. In fact, as federal minimum wages increase, these workers become a larger share of the minimum wage workforce as they crowd out those workers with fewer skills.
Myth 3: Minimum Wage Workers Are Supporting a Family
The most emotional appeal for increasing the minimum wage is the picture of a family struggling to get by on a minimum wage job. It seems inconceivable to many Americans that someone would be able to raise a family on just a minimum wage job. Fortunately, the vast majority of Americans earning the minimum wage aren't trying to raise a family.
According to BLS, about half of those earning the minimum wage are under 25. A recent study by Dr. Bradley Schiller, professor emeritus at American University, found that among families where an adult was earning the minimum wage, 94% had a spouse who was also employed, often far above the minimum wage. In almost half of these families, the spouse was earning over $40,000 a year. That small subset of adults trying to raise a family on a minimum wage job have very low skill levels. Unfortunately, it is these workers most vulnerable to any contraction in employment caused by a minimum wage hike.
Myth 4: A federally mandated wage hike is the only way minimum wage workers get a raise
Minimum wage hike supporters often talk about workers "stuck" in minimum wage jobs. To many politicians, the only way a minimum wage worker gets a raise is through legislative action.
Research, fortunately, shows a different picture. Nearly two-thirds of all minimum wage earners receive a raise with the first 1-12 months on the job. This is consistent with what we anecdotally know about minimum wage jobs; they are "first jobs." They are entry-level job, providing many workers with their first job experience. As they gain experience and skills, employers will increase their pay to retain their better-skilled employees.
The pernicious effect of a mandated wage hike is that it increases the entry-level skill-set required to take these first jobs. It artificially lifts the first-rung of the job ladder, denying low-skilled workers the opportunity to gain skills and move up the job ladder.
Myth 5: A mandated wage hike is the best way to improve income for minimum wage workers who are poor
The number of minimum wage workers who are poor and struggling to raise a family is thankfully very small. That said, some number of these workers do exist. Even if there are negative consequences elsewhere, at least these few would see a benefit, right? In short, no.
In the 1970s, President Gerald Ford signed into law the Earned Income Tax Credit. The program is based on the negative income tax concept first developed by Milton Friedman. Low-income households receive a refundable tax credit, the amount of which is based on their other income. It acts as a guarantee of minimum income, rather than a minimum wage.
As a worker's wages rise, the amount of EITC they can claim goes down. Their wages may go up, but the overall amount of household income they have may stay the same. If, however, the mandated wage hike has a disemployment effect on these low-wage workers, they may be far worse off than before the wage hike.
The benefit of increasing the EITC, rather than a simple minimum wage hike, is that you can concentrate the benefits on those politicians claim they want to help; low-income, poor workers struggling to raise a family. If a minimum wage his causes people to lose their jobs, it is these workers, with lower skill-sets, most vulnerable to the job loss. The will reap the fall-out of those politicians trying to help.
We have to begin any discussion of raising the minimum wage with a basic question of what it is we are trying to do. If our goal is to help those few workers who are trying to raise a family on the minimum wage, a federally mandated increase may be the worst thing we can do.
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