The Minimum Wage Debate Should Be About Poverty Not Jobs
http://www.forbes.com/sites/jeffreydorfman/2014/02/22/the-minimum-wage-debate-should-be-about-poverty-not-jobs/#40386d5a4e5c
Jeffrey Dorman, Forbes Contributor
FEB 22, 2014 @ 09:29 AM
This week the debate over raising the minimum wage became a battle of two competing studies. First the White House’s Council of Economic Advisors came out with a briefing that was trumpeted for its claim that we could raise the minimum wage by almost 40 percent (from $7.25 to $10.10 per hour) with no loss in jobs. Then this week the Congressional Budget Office (CBO) released its own, nonpartisan, report which said the proposed minimum raise increase would result in 500,000 fewer jobs.
The policy universe erupted. The White House and its liberal supporters defended their position of no job losses and attacked the CBO. Meanwhile, conservatives gleefully emphasized the CBO’s finding of job losses. All this concentration on whether raising the minimum wage will cause employment to decline or not completely misses the point: both reports make clear raising the minimum wage is a terrible anti-poverty policy.
The CBO report says the possible range of job losses is from a slight negative affect to as much as one million fewer jobs in 2016. Whether the policy leads to a reduction in employment of 0, 500,000, or 1 million jobs does not really matter. Compared to the size of the American labor force (155 million people), these are all small numbers. Besides, nobody thinks the point of raising the minimum wage is to create jobs; the idea is to reduce poverty or, more generally, to provide a living wage to workers. However, both reports make clear that the minimum wage is not a smart way to combat poverty.
According to the CBO report, raising the minimum wage from $7.25 to $10.10 per hour, a nearly 40 percent increase, will only reduce the number of people in poverty by 900,000. This is in spite of the report saying that 16.5 million people will benefit from pay increases. The reality is that only a small minority of minimum wage earners are in poverty now, so increasing the minimum wage cannot lift many out. Instead, a majority of the benefits go to people that are definitely not the examples that President Obama is pointing to in trying to sell his proposal.
In fact, after accounting for both gains in pay and losses from the inflation caused by businesses that will pass on this cost increase to their customers through higher prices the CBO finds that only 19 percent of the benefits go to households in poverty. In contrast, households that earn more than three times the poverty level capture 29 percent of the total gains.
The White House’s numbers are a little more favorable to their case (surprise!), but they still suggest 2 million or so households might be lifted out of poverty at best. I cannot quote an exact figure because the White House report never says specifically. Instead, I had to make some assumptions and estimates from the numbers that they do provide. I suspect that the ambiguity is because they know the truth is not favorable to their case.
The reality is that families in poverty very rarely have a full-time worker in the family; in fact, only 7 percent of the time. The entire bottom 20 percent of income earners (which includes some people above the poverty line) averages only 0.42 earners per household. People are not in poverty because the minimum wage is too low, or because their hourly pay is too low even when they make above the minimum wage. People are in poverty because they are not working or not working enough. They need jobs, not an increase in the minimum wage.
The sympathetic examples that the White House and its supporters will use to sell the proposal will mostly or all be families with kids. Yet households with kids are only 26 percent of those who will gain income from raising the minimum wage. Many of those households are already above the poverty line, so while they may be better off with a higher minimum wage the policy is not lifting families out of poverty.
According to the White House briefing documents, the Earned Income Tax Credit and other government benefit programs have lifted 13 percent of American households out of poverty, meaning the poverty rate is 16 percent instead of 29 percent. That is rather effective anti-poverty policy.
In contrast, the CBO report estimates that raising the minimum wage all the way to $10.10 will lift only 900,000 people out of poverty. That will not even reduce the national poverty rate by 1 percent.
Yet the cost of raising the minimum wage is enormous. Neither report specifies the total dollars involved but based on the number of workers that the White House says are in line to gain from the policy and the hourly pay increases people stand to receive it appears that the President is proposing to redistribute around $100 billion per year from business owners and customers to low wage workers.
If so, the proposal is to spend $100 billion to remove 900,000 people from poverty. That is about $110,000 per person lifted out of poverty. Considering that the poverty line for a family of four is $24,100 and that people who are working must (by definition) already be earning something, any policy that costs more than $6,000 per person lifted out of poverty is quite expensive.
Our current welfare programs spend about $1 trillion per year and are lifting about 40 million Americans out of poverty. That is $25,000 per person, still much too expensive, but a bargain compared to $110,000.
In terms of cost effectiveness, a policy of simply giving money to people in poverty would likely remove ten to fifteen times as many people from poverty as the proposed increase in the minimum wage. For a policy touted as necessary to help poor people earn enough to live on, raising the minimum wage appears to do a particularly poor job at its stated goal.
It would make much more policy sense to increase the Earned Income Tax Credit. Because the amount of the credit is a function of how much you earn and your family size, changes in the EITC can be targeted so that all the money goes to actual workers living in poverty. To reach those who are not working, we would do better to spend money on training, education, relocation subsidies, anything that helps to make them employable.
If government is going to interfere in the labor markets on such a large scale as a 40 percent raise in the minimum wage, potentially redistributing $100 billion, we should expect to get our money’s worth from the policy. Instead, we find that a majority of the income gains go to households already above the poverty line including many already middle class and even upper middle class families.
The CBO estimates a measly 900,000 people will be lifted out of poverty by this policy, a number that could end up being smaller than the eventual loss in jobs. This is certainly good for those 900,000 people, but at an enormous cost.
If the aim is to redistribute income without people noticing because the government role in the process is once removed, raising the minimum wage might be a good choice. However, if the goal is to help workers in or near poverty to earn a better living, the policy fails due to its poor focus and extraordinary cost relative to the reduction in poverty. We can do better by poor workers than this.
