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Minimum Wage Increase: Does it Work?

Minimum Wage Increase: Does it Work?

Las Cruces – In his 2014 State of the Union address Barack Obama said of raising the minimum wage: “It’s good for the economy; it’s good for America.” An opinion piece published in December by the executive director of NM CAFé, a public advocacy group, echoes the popular policy rhetoric that “raising the minimum wage helps families break their dependence on government assistance” and is serving as a last bulwark “keeping people from a plunge into deep poverty.”

NM CAFé’s director, or a thorough perusal of material on websites they link to or host, does not offer a single iota of evidence that any of this is true. Proponents of poor policy have to lean heavily on emotional appeals, when people like me show up mumbling incantations about numbers and regressions they tell us we are heartless (literally). The reality is the pursuit of economically destructive policies tends to hurt the people the policies are claiming to help.

The reality is the pursuit of economically destructive policies tends to hurt the people the policies are claiming to help.

Minimum wage increases do not improve the broader economy, do not “break,” defer, or even reduce dependency on taxpayer largesse, and increases in the minimum wage tend to have ambiguous net effects though what ends up happening is that the policy just results in wealth transfers among the poor (not between the poor and the wealthy or middle class).
Rather than absurdly advancing the baseless NM CAFé claim that “we are told to despise the poor for their poverty” (told by whom??) and need to “stop pretending that low-wage workers are invisible” we should proceed dispassionately by asking whether minimum wage increases actually help those in poverty.

The answer is not really, but it’s more complicated than that. A NBER paper by economists David Neumark and William Wascher (experts on the subject) set out to answer the same question. Using CPS surveys they find that “over a one-to-two year period, minimum wages increase both the probability that poor families escape poverty and the probability that previously non-poor families fall into poverty (NBER, 1997, Do Minimum Wages Fight Poverty?).”

How can this be?

While proponents claim that businesses either won’t be impacted or will actually see business increase, the ‘poor people will have more to spend’ fallacy, survey results and empirical evidence run counter to this claim. So while Silva states “there was no significant economic impact” from the most recent Las Cruces minimum wage increase we should be extremely skeptical. University of Washington researchers were commissioned by the city of Seattle to study impact of phasing in their $15 minimum wage over the next several years. Their initial updates on this longitudinal study are also proving ambiguous. While initial study results found no broader impact to price level at an increase to $11 per hour (one contention of critics is minimum wage increases stimulate inflation) restaurants had increased prices by an average of 7.7%. More interestingly, earnings remained almost identical to before the step increase. How is that possible?

One key point minimum wage advocates either ignore or don’t understand is that businesses will react to a change in their cost structure. Research suggests that in the short term this reaction may be pretty small. It could range in everything from hours worked being cut back to actually firing people to no response at all. Much of the impact is industry specific and has to deal with how willing customers are to take on price increases, how profitable the business currently is, and how much product value is derived from the inputs of minimum wage employees. Marginal businesses who rely heavily on cheap labor will fail if they cannot pass costs on to customers. Ironically, in Seattle some minimum wage workers are now voluntarily asking to have their hours cut so they do not lose government benefits.

So this all ends up being a big shell game.

In the end minimum wage will improve the wages of those who remain employed and don’t have their hours cut, while it will reduce or eliminate the wages of employees who have hours cut or are let go. We can see the persistent detrimental long term effects of minimum wage laws by looking at comparisons. For instance, in Europe countries with more aggressive minimum wage laws have higher unemployment (a result predicted from basic economic theory) then countries with lower minimum wages. Minimum wage increases decrease the relative costs of automation also further reducing the need for low skill workers.

More to the point, minimum wage workers are not who advocates would like us to believe they are. The U.S. Bureau of Labor Statistics releases an annual survey on characteristics of minimum wage workers. In 2015 about half of all minimum (or less than minimum) wage workers were under the age of 25. Minimum wage (or less) workers only numbered 2.6 million in total or less than 1% of the population. Wage workers, as opposed to salaried employees, made up 58.5% of the workforce in 2015. Of this 58.5%, less than 2% of employees are older than 25 and earn minimum wage or less. The ‘less than minimum’ category refers to positions like servers in a restaurant that are making an hourly rate below the federal minimum but often doing significantly better when you include tips and they represent the lion’s share of the 25+ category.

Of the half of minimum wage workers under the age of 25, nearly two-thirds are currently enrolled in school ostensibly improving their skillset to move on to more remunerative work in the future. These workers tend not to be the sole breadwinner for their household and come from homes with family income averaging over $65k per year (i.e. middle/upper middle class). To wit, more than two-thirds come from families with incomes 150% above the poverty line, only about 20% come from families at or below the poverty line. Even among the older 25+ workers, 76% come from households above the poverty line. In short, most minimum wage workers are not facing poverty, most are in fact young and from the middle or upper middle class.

Poverty looks much different in the US than advocates for economically dubious policies like to suggest. According to US Census data, between 1987 and 2011 only 9% of individuals age 16+ who worked full time year round lived below the poverty line. Minimum wage increase advocates’ dirty secret: just over 2/3 of individuals living below the poverty line during this period did no work at all.

And here we arrive at the crux of the issue. Minimum wage increases do not help to ween poor families off government assistance because anyone who is helped by an increase in their wage is generally offset by those who lose hours or their jobs completely. Minimum wage increases do not help those deepest in poverty for the simple reason that most poverty in America is not caused by not earning enough, it is caused by earning nothing at all or, in 25% of the cases, working but not full-time year-round. Minimum wage increase benefits tend to accrue heavily to those not living in poverty because most minimum wage earners themselves do not live in poverty and minimum wage earners from higher income brackets tend to have better skills and connections and are hence more likely to accrue the positive benefits of minimum wage increases. Advocates hate being confronted with the data because, I think, they believe that people who disagree with their policy proposal disagree with the desired outcomes.

We do not.

Minimum wage increases do not help those deepest in poverty for the simple reason that most poverty in America is not caused by not earning enough, it is caused by earning nothing at all or, in 25% of the cases, working but not full-time year-round.

If NM CAFé and Las Crucens want to help poor families they can advocate for effective policies such as the expansion of the Earned Income Tax Credit, a flatter tax code that does not so harshly penalize wage increases for low income workers through higher tax rates secondly and loss of government benefits primarily, reduced business regulations that allow business more flexibility in hiring and lower cost operation, and lastly by working to ensure that other types of training for varied skill sets are available. EITC is particularly interesting because unlike minimum wage you can, in theory, tax high income earners to pay for the subsidy and unlike the minimum wage the empirical evidence does support the assertion that EITC is an effective policy tool to combat poverty. Not everyone is going to be a rocket scientist and U.S. manufactures and energy producers report persistent multi-decade skilled worker shortages for jobs that often require no college degree and pay six figures annually – we are clearly leaving low-hanging fruit on the vine.

The only long term way to improve humanity’s lot is by growing our productivity, our ability to create more with less. This can be accomplished through intelligently subsidizing low income wages (EITC), creating a tax code that does not so harshly penalize households in lower income deciles, removing barriers to small business growth, and providing non-traditional educational outlets to meet demand for today’s high paying jobs. Anything else effectively amounts to rearranging deck chairs and cannot seriously be expected to produce the results claimed by advocates.