Raising minimum wage a worse idea than ever

February 19, 2014 

Raising the minimum wage to $10.10 an hour, as President Barack Obama urged in his State of the Union address last month, is as popular an idea as ever. It’s also a worse idea than ever.

Obama presented it as a way to help struggling families: “Americans overwhelmingly agree that no one who works full time should ever have to raise a family in poverty.”

That comment provides a misleading picture of who minimum-wage earners are. The White House’s own graph promoting the idea shows that only 26 percent of minimum-wage earners have kids; 30 percent either have spouses and no kids or are kids themselves.

Raising the minimum wage is not an effective tool against poverty, either. A 2010 study found that state poverty rates were unaffected by minimum-wage increases. It also found that if the minimum wage were raised to $9.50 an hour from $7.25, only 11 percent of the beneficiaries would be people who live in poor households; 42 percent would be people living in households making more than three times the poverty line (which means they’re well above the country’s median household income). So the benefits of raising the minimum wage are not as large as you might expect. On to the costs.

For a long time, economists generally agreed that raising the minimum wage reduced employment. The logic is straightforward enough: Raise the price of something, and people will buy less of it – even when that “something” is labor, and the people in question are employers.

In the 1990s, some prominent research caused economists to re-evaluate this issue. It suggested that raising the minimum wage did not lower employment, or at least not that much. Other research, though, has continued to suggest that doing so has a negative effect on job growth, especially for “younger workers and in industries with a higher proportion of low-wage workers.”

Economists no longer have a consensus. A 2013 survey asked them whether raising the minimum wage to $9 an hour “would make it noticeably harder for low-skilled workers to find employment.” Thirty-four percent said yes, 32 percent said no and 24 percent said they were not sure. (Answers to another question on the survey suggest that some of these economists thought that raising the minimum wage to $9 would cost jobs but should be done anyway.)

Note, we are talking about a minimum wage higher than $9. Going up to $10.10 would be an almost 40 percent increase, and that increase would take place in a labor market that, while slowly improving, has been weak for years.

Advocates of that increase say it would merely take the minimum wage back to its value in 1968; inflation has eaten away at it since then. Scott Winship, a researcher at the Manhattan Institute, points out in response that advocates are using a measure of inflation that experts generally think overstates it. Use the best measure of inflation, he says, and $10.10 would be high compared with historical minimum-wage levels.

None of these facts – that the increase would be large, that it would push the minimum to a high level, that it would take place amid high unemployment – clinch the case that it would have bad effects on the labor market. They do, however, suggest reasons for worry.

My American Enterprise Institute colleague Michael Strain puts it this way: “Hundreds of thousands of low-skill workers are trying to find a job but can’t. Is it really the right time to raise the cost of hiring and make it harder for businesses to hire them? Some studies say a higher minimum wage will lower employment; some say employment will remain unchanged. Shouldn’t we err on the side of caution?”

Strain goes on to advocate other ways of raising take-home pay for low-income workers, such as expanding the earned income tax credit. That program has its flaws – the IRS has estimated that 21 to 25 percent of payments made under it are improper – but it has two great advantages over raising the minimum wage. It is better targeted at people in low-income households, and it is very unlikely to reduce employment.

You can see why politicians and activists prefer talking about raising the minimum wage rather than about the earned income credit. A higher minimum wage has a lot of popular support, and it does nothing directly to make the federal budget numbers worse. Even members of Congress who think it’s a bad idea hesitate to oppose it. A bad idea is still what it is.

Bloomberg

Ponnuru is a Bloomberg columnist and visiting fellow at the conservative American Enterprise Institute and a senior editor at the conservative National Review

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