Minimum Wage Proposal Renews Economic Debate
By calling for an increase in the minimum wage during this month’s State of the Union address, President Barack Obama waded into a long-running debate among labor economists, with some saying the proposal would raise incomes and others countering that it would lead to decreases in employment.
In his speech, Obama said the minimum wage should increase from $7.25 an hour to $9 an hour by 2015 and be indexed to inflation. That would bring families out of poverty and reduce the widening gap in incomes, he said.
“No one who works full time should have to live in poverty,” he said. “Working folks have to wait year after year for the minimum wage to go up while CEO pay has never been higher.”
The minimum wage was last raised at the federal level in 2009. Since increases don’t account for inflation, Congress must periodically boost the pay floor.
But Obama’s proposal is relatively modest and would have relatively little effect — either positive or negative — on the economy. Economists say it would not bring a huge number of people out of poverty and its effects would not be evenly distributed across industries and regions.
“I would be surprised if it had any measurable effect on poverty whatsoever,” said Michael Strain, an economist at the American Enterprise Institute.
And while the president’s plan would increase the incomes of the lowest-paid workers, it wouldn’t have much of an effect on the widening income gap because that gap is mostly driven by top earners outpacing everybody else.
“So much about our dynamics of income inequality have been about the very top,” said Heidi Shierholz, a labor economist at the Economic Policy Institute. “This is not going to have a huge impact on that dynamic of the top pulling away.”
About 3.8 million people, or 3 percent of the overall workforce, earn at or below the minimum wage (waiters and those in other professions who earn tips or commissions are sometimes paid less than the minimum wage). That’s down from almost 8 percent of the workforce in 1979, according to the Bureau of Labor Statistics.
Still, the White House estimates that raising the minimum wage to $9 per hour would raise the salaries of 15 million workers because those who currently make between $7.25 an hour and $9 an hour would get a raise. Employers who now pay slightly more than the minimum wage would also bump up salaries.
While that’s a sizable share of the labor force, most minimum wage workers are already above the poverty line, economists say. Roughly 23.5 percent of minimum wage workers are teenagers, many working after-school jobs. Another group of minimum wage workers are members of two-earner households whose income places them above the poverty line.
According to data compiled by the BLS, half of all workers at or below the minimum wage live in the South. And half of them work in the hospitality or leisure industry.
That industry has come to rely increasingly on their work, according to the BLS. In 2003, about 15.3 percent of the industry’s workforce earned the minimum wage or less. In 2011, 22 percent did.
The effect of raising the minimum wage, therefore, would mostly be concentrated in the South and among hospitality workers. Eighteen states and the District of Columbia already mandate higher minimum wages than the federal rate. They would not be affected by the change.
Economists are still divided on the question of whether a higher minimum wage would lead to fewer jobs. But they agree that if there is an effect on employment, it is likely to be small. And while a wage hike would increase consumption among lower-income people, the higher labor costs would also likely raise prices, eating into some of that new spending power.
But even though it would not make a huge difference in income inequality or poverty rates, Shierholz said she supports raising the minimum wage.
“This is a basic labor standard, and when it’s allowed to erode, it hurts not just low-income people but also moderate-income people,” she said.
Other economists, such as Harry Holzer, a public policy professor at Georgetown University, are more reticent, saying the labor market is still too shaky to absorb a higher minimum wage.
“My personal preference is to avoid anything that might give employers an excuse not to hire,” he said. “We’re already giving them a lot of excuses not to hire.”
They agree, however, that if the administration wants to reduce income inequality or bring more people out of poverty, there are other, more effective ways to do it.
Holzer said he would rather wait until the unemployment rate has dropped to 6 percent or so before raising the minimum wage. For now, he thinks infrastructure projects and beefed-up apprenticeship programs for younger workers would be more effective.
Strain said a simple cash transfer, in which the government boosts low-paid workers’ wages, would be a better, more targeted way to alleviate poverty. And both Holzer and Strain support expanding the Earned Income Tax Credit, which gives low-income working parents a break on their taxes.
Shierholz is dubious about the EITC, however. Employers have found a way to capture some of the program’s benefit by offering lower wages, knowing that workers’ after-tax pay will be higher thanks to the credit. Instead, she said the better way to address income inequality is through limiting free-trade agreements that hurt low-skilled workers, improving labor law protections for workers and having the Federal Reserve focus more on employment than on inflation.
But unlike those other options, a higher minimum wage has undeniable political appeal for the White House. First of all, it is broadly popular. A recent poll from USA Today and the Pew Research Center found that 71 percent of Americans support Obama’s proposal. So even though Republicans in Congress will almost certainly kill any minimum wage bill, it gives Obama an opportunity to point out his differences with the GOP.
Just as significantly, the higher minimum wage would not cost the government anything. Unlike the EITC or infrastructure investment, mandating a higher minimum wage is revenue neutral. In today’s deficit-obsessed capital, that may be the root of its appeal.