Burning Question: Will it help or hurt to increase the minimum wage?
This kind of legislation is enormously popular with the public. Eighty-five percent of Americans polled in 2006 were in favor of the wage increase. And in the last election cycle, ballot measures aimed at raising state minimum wages above the current federal standard passed in all six states where they were considered. Twenty-eight states now have minimum wages higher than $5.15 an hour. It may seem surprising, then, that this would mark the first time in ten years that Congress has increased the federal minimum wage.
The long delay hasn't bothered economists. As a group, we're not nearly so excited about raising the minimum wage--and that's not because we hate poor people. Basic economic theory predicts that, other things being equal, a minimum-wage increase will mean fewer jobs for low-skilled workers.
Admittedly, recent applied studies find that this effect on hiring is minimal. The studies suggest that employers aren't very sensitive to even fairly large changes in the minimum wage. So it would seem that gains to workers who see their wages rise will more than offset the income lost by those workers who lose their jobs.
But the more substantive criticism of minimum-wage legislation is that it's an expensive way of putting money into the hands of poorer Americans. That's because fewer than a fifth of workers currently earning less than $7.25 an hour are living at or below the official poverty threshold. (The rest are mostly teens living with parents, or adults whose spouse or partner has a better-paying job.) As a result, businesses will see their payroll costs increase by about $7 for every $1 that finds its way into the pockets of poor workers.
A better policy would target the poor more directly. Economists' favorite example is the federal earned income tax credit. This program subsidizes the earnings of low-income families by giving them a forty-cent tax credit for every dollar they earn, for example turning $5.15 an hour into $7.21. A family with two kids can receive an annual credit as large as $4,500 (though that credit starts to shrink if a family earns more than $15,000 a year). Not only does this program directly target poor families, but it does so without increasing what it costs employers to hire low-skilled workers.
This last point is important. Anything that increases employers' costs is going to mean lower profits, higher prices for their customers, or (most likely) some combination of the two. In other words, increased labor costs due to a higher minimum wage almost guarantee higher prices at the convenience stores, gas stations, and fast-food restaurants that hire low-skilled workers. And these are all businesses where poorer Americans spend a disproportionate chunk of their income. In a roundabout way, we're robbing Peter to pay Peter.
Personally, though, I think the best argument in favor of expanding the earned income tax credit (as opposed to raising the minimum wage) is that if boosting the earnings of the working poor is something that we as a society are really interested in doing, then it's something that we as a society should be willing to pay for. The costs of the earned income tax credit are borne broadly because they're funded by federal income taxes that almost all of us pay. The costs of a higher minimum wage, on the other hand, are borne narrowly by businesses that hire low-skilled workers, and by those businesses' customers.
--Jay Corrigan's research interests include the value of nonmarket goods and public-sector economics. In addition to teaching a range of economics courses, he codirects the Environmental Studies Program.
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