The Real Value of the Minimum Wage
Last week, the minimum wage bill that sailed through the House of Representatives on January 10 made its way through the Senate; unfortunately, while the original bill was a "clean" bill that would have raised the minimum wage to $7.25 in three increments by 2009, the bill that ultimately passed in the Senate included $8 billion in tax breaks for small businesses. Now the altered legislation will return to the House of Representatives, to be set aside indefinitely or considered in conference. Given the Democrats' much-touted commitment to raising the minimum wage, a bill will probably be passed eventually. The question is what this new minimum wage will look like. Will it mitigate the problems faced by America's low-wage workers, or will its potential for a positive impact be eroded by political compromise and partisan bickering?
It has been ten years since the last minimum wage increase. The wage hike in 1998 under the Clinton administration brought the value of the minimum wage up to $5.15, or about $6.31 in today's dollars. When combined with the benefits of the Earned Income Tax Credit (an income support available to low-income workers), this was high enough to keep a three-person family (wage earner and two children) out of poverty. Today, inflation has eroded the real value of the minimum wage by about 20%, or over $2,500 in yearly income. Even combined with the EITC a minimum wage income is no longer enough to bring a family of three to the 2005 poverty threshold of $15,735 (which, by the by, doesn't actually reflect what it takes to support a family of three, but that's a different rant . . .).
There are two arguments that are most often presented in opposition to raising the minimum wage. The first concerns the demographics of the minimum wage workforce, namely that the average minimum wage earner is perceived to be a pimply teenager from a well-off household working part-time for some extra cash. James Sherk and Rea Hederman of the Heritage Foundation, for example, point out statistics from the Department of Labor that show that the average minimum wage earner lives in a household with a family income of over $50,000 a year.
However, while it is true that many minimum wage earners come from households with solidly middle-class incomes, the characteristics of those who would be affected by the proposed minimum wage hike (workers earning between the state minimum wage and $7.25) tell a different story of the impact a minimum wage hike could have for low-income earners. According to the Economic Policy Institute, 71% of the workers who would be directly affected by the proposed increase in the federal minimum wage are twenty years of age and older and 43% work full time. Furthermore, a raise in the minimum wage would disproportionately help poor families. Currently, over half of the benefits of the minimum wage flow to families in the bottom 30% of the income scale, and about 18% of the workers who would be afffected by the proposed minimum wage hike were in families that had a total cash income below the federal poverty threshold in 2004. Raising the minimum wage has the potential to help millions of workers in the United Sates increase their ability to survive on low-income jobs.
The second argument that opponents of a minimum wage increase often cite is that raising the minimum wage will hurt businesses' ability to compete and force them to hire less workers to compensate for the increased cost of labor. However, most economists agree that the effect of modest increases to the minimum wage in the past have been neglible. Work by Card and Krueger in the 1990s, for example, found no significant impact of minimum wage increases on employment in the fast food industry in New Jersey. Indeed, it's worth noting that the low-wage labor market following the last increase in minimum wage in 1996/97 was the best in decades. Even studies that do show an impact of minimum wage increases on employment generally acknowledge that this impact is not statistically significant.
Unfortunately, it seems that there are some members of Congress who are giving significant weight to arguments that raising the minimum wage will have a negative impact on business. The proposed $8 billion in tax breaks for small businesses is founded on the mistaken idea that the minimum wage is bad for business. While there are some sectors that may have to raise prices or hire a few less employees to mitigate the impact of a wage increase, these same sectors may also see a rise in employee retention and a simultaneous reduction in the cost of employee turnover. Combined with the inconsistent evidence that the minimum wage has any real impact on reducing employment opportunities, this suggests that giving tax breaks in conjunction with the minimum wage increase is largely unnecessary.
Furthermore, it is uncertain what the impact of tax breaks will be relative to the rate at which inflation will erode the real value of the minimum wage. Jared Bernstein of the Economic Policy Institute has commented that "Unless they are strictly temporary, any tax cuts are likely to cost more and last longer than the minimum wage increase, i.e., the offset will deprive the federal budget of more revenues than the policy is supposed to be offsetting." Over time, as the value of the new minimum wage erodes, the value of the tax breaks may actually turn out to be larger.
If Congress was truly serious about getting the most for poor and hungry people out of the minimum wage increase, it would pass a bill with no tax breaks and index the minimum wage to inflation. That way, we won't have to have this largely inane and overly politicized debate again five or ten years down the line when inflation has once more made the minimum wage a largely useless tool for fighting poverty. Many Americans depend on low-wage work to support families, and they deserve the dignity of earning wages that bring them over the poverty line.
Bernstein, Jared (10 January 2007). "Tax Incetives for Business in Response to a Minimum Wage Increase." Economic Policy Institute.
Sherk, James, & Rea S. Hederman (23 January 2007). "Who Earns the Minimum Wage? Suburban Teenagers, Not Single Parents." Heritage Foundation.
Economic Policy Insitute. "EPI Issue Guide: Minimum Wage."
Zappone, Chistian (30 January 2007). "Minimum Wage: Small-Biz Breaks Added in Senate." CNN Money.
Ferraro, Thomas (1 February 2007). "Senate Votes to Raise Minimum Wage." Washington Post.
Marron, Donald (9 January 2007). Letter to Charles E. Grassley concerning the consequences of a minimum wage hike. Congressional Budget Office.
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