The Minimum Wage Is An Expensive Way To Help the Poor

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President Obama wants Congress to raise the minimum wage from its current $7.25 per hour to $10.10 per hour. He says this is needed to be fair to workers and to help lift poor, working families out of poverty. The first part is probably not true and the minimum wage is a very inefficient way to accomplish the second goal.

In a previous column, I showed that productivity of low-wage workers does not appear to have risen as fast as the minimum wage over the past quarter century. I used food service workers as a proxy for all low wage workers because the government does not track productivity for minimum wage workers and over 40 percent of all minimum wage workers are in the food service industry. Food service workers have averaged a gain of 0.6 percent per year in productivity. Prices for food away from home have risen about 2.8 percent per year in this period (1987-2013) and the minimum wage has risen by 3.1 percent per year, averaged over this period. That sounds roughly fair except that food costs have risen considerably more than restaurant prices so much of the price increase went to offset ingredient costs, not to pay labor.

To further bolster his claims of fairness, the White House's briefing states that the minimum wage has fallen 36 percent since 1968 when adjusted for inflation and that the ratio of the minimum wage to the average wage has also fallen from 54 to 36 percent since 1968. The main problem with these claims is that 1968 is the historical high point for the minimum wage. Comparing now to then is like complaining that the stock market only went up 32 percent last year not the 52 percent it did in 1954.

The White House briefing does not say exactly what data they used, but if we examine the minimum wage over just the past 25 years it is well above its average in inflation adjusted terms. The ratio of the minimum wage to the average wage also appears to be around its average for the past quarter century and has clearly improved over the course of the Obama administration. If we do not choose a time period particularly favorable to the administration's case, fairness in historical terms does not seem to be an issue.

However, the main issue here is the inefficiency of the minimum wage as an antipoverty tool. Proving this point will be easy as the White House was kind enough to provide all the relevant statistics. In this briefing, the White House stressed that "nearly half of the benefits [go] to households making under $35,000" and "only 12 percent of the beneficiaries are teenagers."

Digging a little deeper into the White House's own report we find that 22 percent of the households with workers who would get a raise under their proposal already make $75,000 per year or more. We also find that while only 12 percent of the affected workers are teenagers, 44 percent are unmarried people with no kids and another 18% are married people with no kids. In all these cases, working full time at the minimum wage would place these people above the poverty line before any raise in the minimum wage.

That leaves only 26 percent of the beneficiaries being households that contain kids. Given the income statistics in the White House briefing, with only 46 percent making less than $35,000 and the amount it takes for a family of four to be above poverty (about $25,000) it appears likely that fewer than 10 percent of the affected households would be currently below the poverty line.

Does the President really believe the best way to working families in poverty is to raise the minimum wage when those households make up fewer than 10 percent of those that would be affected by the policy?

In fact, The Congressional Budget Office just came out with their "score" of the President's proposal. Their report estimates that raising the minimum wage from $7.25 to $10.10 per hour will only reduce the number of people in poverty by 900,000. A 40 percent increase in the minimum wage that the President said would lift hard working families out of poverty will instead, according to the CBO report, result in only 19 percent of the benefits going to households in poverty. In contrast, households that earn more than three times the poverty level capture 29 percent of the total gains. Raising the minimum wage is just not a good anti-poverty measure.

If this is a problem that needs addressing, the more logical approach is to increase the Earned Income Tax Credit. Raising the minimum wage forces business owners and their customers to bear the cost of an income redistribution scheme when neither the customers nor business owners are guaranteed to be richer than the workers getting the raise (especially given that 22 percent of the redistribution will be to families making over $75,000 per year). Further, as much as 90 percent of all the benefits will go to households already above the poverty line.

The Earned Income Tax Credit was specifically designed to provide targeted income support to working families who were not earning enough to reach an adequate standard of living. Increasing the EITC would ensure that the extra income redistribution would go only to those truly in need (especially if the IRS cracked down on the fraud in the program). Using the EITC would also mean that the bill would go to all taxpayers, which would mean that poor families that go out to eat at fast food restaurants would pay very little of an increase in the EITC compared to their burden if the minimum wage is increased and business owners subsequently raise their prices.

So if the minimum wage is at a fairly normal level historically and raising the minimum wage is an inefficient way to help the poor, why is President Obama calling for Congress to raise the minimum wage? The answer is most likely unions. Many union contracts have clauses in them that give the union workers either an automatic raise when the minimum wage is increased or the right to renegotiate their contracts. Given that unions are the largest donors to and supporters of the Democratic Party, President Obama needs to keep them happy.

Raising the minimum wage is not called for by productivity gains or by historical norms. Even the White House's own briefing documents make clear that the minimum wage is a very inefficient way to help the working poor, with the overwhelming majority of benefits accruing to those already well above the poverty line. The Earned Income Tax Credit seems like a more logical way to go.

In his recent State of the Union address, President Obama did call for expanding the EITC to childless workers, a proposal that some Republicans support. Yet, since the speech, all the talk from the White House has been about the minimum wage, not the expansion of the EITC. Union workers do not benefit from increasing the EITC, so President Obama does not seem all that interested in pursuing the more obvious and more obtainable solution.

Perhaps after he gives enough speeches about the minimum wage to make the unions happy, the President will work with Congress to expand the EITC and actually address the problem he claims to want to fix.

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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