- Raising the minimum wage will make it more expensive to hire younger and low-skill workers.
- Many people who live in poverty do not work, and would be unaffected by an increase in minimum wage.
- Expanding the earned income tax credit is a much more efficient way to fight poverty than increasing the minimum wage.
Raising the wage will make it more expensive to hire younger and low-skill workers. There are better ways to help the poor.
In announcing his wrongheaded proposal to increase the minimum wage to $9 an hour, President Obama spoke in lofty terms: "In the wealthiest nation on Earth," he said in his State of the Union address last month, "no one who works full time should have to live in poverty."
If the debate proceeds as it has - many times - in the past, then most Democrats will embrace the president's message and back the proposal, while most Republicans will oppose it, on the grounds that higher labor costs will lead to higher unemployment.
But we shouldn't rely on political opinions in this debate. Facts clearly demonstrate that raising the minimum wage is a bad idea.
The case against raising the minimum wage is straightforward: A higher wage makes it more expensive for firms to hire workers. How big an effect does this have on the job market? Economists debate this. But no one argues that increasing the minimum wage increases the number of unemployed workers who find jobs. In the end, the trade-off is clear. People who keep their jobs get more money; those who lose their jobs, or fail to get new ones, suffer.
In announcing his proposal to increase the minimum wage, the president argued that doing so would alleviate poverty. The president is certainly correct to turn his attention to the poor, many of whom have been suffering for years in a tough economy. And it is clearly desirable for households that engage in full-time work not to live in poverty. But increasing the minimum wage would not accomplish this goal.
Research published in 2010 by economists Joseph Sabia and Richard Burkhauser concluded that if the federal minimum wage were increased from $7.25 an hour to $9.50 an hour (remember that the president's proposal is to increase the minimum wage to $9 per hour), only 11.3% of workers who would gain from the increase belong to poor households.
First, many people who live in poverty do not work, and would thus be unaffected by an increase in the minimum wage. In addition, workers who earn the minimum wage are generally not the primary breadwinners in their households. They are secondary earners - an elderly parent earning some retirement income or a spouse with a part-time job. Or they are young people living with their parents. Data from the Bureau of Labor Statistics show that while workers under age 25 make up only about 20% of those who earn hourly wages, they constitute about half of all workers earning the minimum wage or less. Raising the minimum wage is therefore an ineffective anti-poverty proposal.
The case for a higher minimum wage grows even weaker when you stop to consider that there are vastly superior alternatives for steering money to low-income households. For example, the nonpartisan Congressional Budget Office has found that expanding the earned income tax credit is a much more efficient way to fight poverty than increasing the minimum wage.
Why have we so often embraced a less effective tool? A tax credit is less politically palatable because it takes money directly out of federal coffers, while the minimum wage can be raised without it showing up directly on the government's books. The cost of a higher wage is borne by employers and consumers - and by the unfortunate people who end up not working because of it.
It is also important to consider the president's proposal to increase the minimum wage in the context of today's labor market. The unemployment rate for African American teenagers stands at a staggeringly high 43.1%. For white teenagers, the unemployment rate is 22.1%; a little more than 11% of workers older than 25 and without a high school diploma are unemployed.
To put these numbers in perspective, overall unemployment at the height of the Depression was about 25%. Especially for low-skill workers and for young workers, the two groups of workers who will be disproportionately hit by a minimum-wage increase, ours is a labor market in crisis. Increasing the cost of job creation now is unwise.
One reason public officials continue to embrace such a bad idea is that it's popular, and thus can provide an opportunity to score political points. The last time we had this debate, it was President George W. Bush who signed a minimum-wage increase into law. The fact that even a Republican president did so shows just how tempting this policy is to politicians.
The head of the Democratic Congressional Campaign Committee, Rep. Steve Israel, knows this. He told the Washington Post last month that the minimum wage was "a reminder to suburban independent voters that House Republicans are extreme, and out of touch." Rep. Nancy Pelosi seconded that notion, explaining to the Post that Democrats intend to embrace a simple message: "We want to raise the minimum wage, and you don't. Why not?"
Why not support increasing the minimum wage? Because it will make it more expensive for businesses to hire young and low-skill workers at a time of crisis-level unemployment. Because it will not alleviate poverty. Because there are much better alternatives to help poor families, and because the minimum wage is a dishonest approach that hides the true cost of the policy.
Kevin A. Hassett is director of economic policy studies at the American Enterprise Institute, where Michael R. Strain is a research fellow.