In his State of the Union message, President Barack Obama said that too many Americans live in poverty and it is time to solve the problem by raising the minimum wage. He asked for nine dollars an hour, which works out to be $18,720 a year, which is still poverty for most families. Why not make raise the minimum wage to $20 an hour, or $41,600 a year for every wage earner and eliminate poverty altogether?
The answer, of course, is that a $20 minimum wage would vastly increase poverty by destroying many existing jobs. Telling a worker, “The government decrees that you are now worth $20 an hour” might make him feel good but won’t help him if the skills he has to offer are not worth that much to a prospective employer. The idea of a federal minimum wage arose when many Americans worked as unskilled laborers on farms, in factories, or retail stores or as household help and were often paid less than their work was worth. That situation has changed as most of those jobs have disappeared in the age of technology.
President Obama’s economists understand this, which is why they don’t propose anything close to $20. However, there are indications that the difference between a $20 wage and a nine dollar wage would only be one of degree. There would still be a negative impact.
The grimmest poverty statistics in America are in the inner cities and on Indian reservations, where there are many high school dropouts with very few skills. Unemployment rates there are over 50 percent. A nine dollar minimum wage would not create any new job opportunities for those who live in these places but would almost certainly eliminate some of the marginal jobs that currently exist there.
Michael Saltsman, Research Director for the Employment Policies Institute, can put a number on how hard it would hit the needy, citing a study showing that employment of single mothers drops by 6 percent whenever there is a 10 percent increase in the minimum wage, and employment, not wage level, is the driving force behind poverty.
Saltsman reports, “According to the Census Bureau, 60 percent of people living below the poverty line didn’t work last year. They don’t need a raise, they need a job, period. And among those who do work and earn the minimum wage, the vast majority live in households above the poverty line. This partially explains why numerous studies have shown no relationship between a higher minimum wage and lower poverty rates ... the benefits generally aren’t accruing to those in poverty.”
How can it be that “the benefits (of the minimum wage) generally aren’t accruing to those in poverty”? One reason is that many minimum wage jobs go to teenagers, working not because their families need the money but simply because they want the experience of holding a job. Raising their pay doesn’t help the poor.
There is a better way to do that, one that enjoys bipartisan support. The Earned Income Tax Credit (EITC), was established in 1975 under President Ford as a wage supplement for low income families. It has spread to many states, which have added their own benefits to it. The study cited above found “a 1 percent drop in state poverty rates associated with each 1 percent increase in a state’s EITC.” A low wage family can file a tax return and get a check from the government, which encourges work even at entry level, low paying jobs.
To fight poverty, strengthen the EITC. Raising the minimum wage is an idea whose time has gone.
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