Will raising the minimum wage help America’s poor?

Not really, writes Erica Alini

Erica Alini 5
(Armando Arorizo/Pi/ZUMA Press/Corbis)

(Armando Arorizo/Pi/ZUMA Press/Corbis)

America is pondering raising its federal minimum wage. President Obama talked about it in his State of the Union address and again last Wednesday in a speech The Washington Post‘s Ezra Klein called the best one he’s ever given. Senate Democrats also introduced legislation to bump up the minimum pay, and by more than the president initially advocated. New Jersey, D.C. and a little airport town near Seattle just went ahead to lift their own wage floor beyond what’s federally mandated. Meanwhile, executives at McDonald’s and WalMart are having to review that “how to deal with labour strikes and collective bargaining” chapter of the corporate handbook that they never thought they’d need.

So, should America do it? The debate, as always, tends to centre on whether around the question of whether bumping up the minimum wage hurts employment. Would a pay raise for the working poor worsen the lot for low-income job seekers? Despite what you might have once learned in Econ 101, it’s no longer accepted wisdom that minimum wage hikes invariably lead to less hiring. Some economic research has found that higher minimum wages push up the jobless rate, while other studies have found they have no effect or lower unemployment by limiting turnover. After neatly rounding up the arguments pro and against a raise, the Financial Times candidly admitted it doesn’t know where to stand.

I find some of the minimum-wage discussions that have populated the Canadian blogosphere particularly useful. Here on Canadian Business, Stephen Gordon and Mike Moffatt have noted that hikes to minimum wages  don’t seem to significantly affect hiring as long as they remain below a certain threshold, namely somewhere around 40-45% of a country’s average wage. By that measure, America’s minimum pay – a paltry $7.25 an hour — has plenty of headroom to grow. In 2010 the federal minimum was only 27% of the mean U.S. wage, the second-lowest of any OECD country for which such data is available:

Screen Shot 2013-12-05 at 8.26.15 PM

Source: OECD

Stephen and Mike, though, tend to treat minimum wage raises as doctors do vitamins: They might not harm, they will tell you, but they won’t do much good either. That’s because wage increases that are small enough to not discourage hiring are going to be… well, small (and any increases bigger than that will disproportionally hit low-income job seekers). It’s also because only a limited percentage of the poor actually toil in minimum-wage jobs. Many of poor are unemployed or out of the workforce entirely. At the same time, many minimum-wage workers aren’t exactly destitute — like high-school students who flip burgers as part-time job. Now, I suspect there are more people in the U.S. than Canada who are trying to support their family on low wages, but the profile of typical minimum-wage worker in America isn’t too dissimilar from what you find north of the border. Fully half of those making the minimum wage or less (there are exceptions to the federal rule) in the U.S. are under the age of 25, and only 2% of full-time workers hold minimum-wage jobs, according to the Bureau of Labor Statistics.

A better way to help the poor, and help more of them, would be to bump up U.S. federal tax revenue — and it could be done without hiking rates, by simply closing loopholes and broadening the tax base — and redistribute more of that greater revenue back to low-income and middle-class families.

I suspect the Obama administration is aware of this but sees the minimum wage as a battle it can win. A majority of Americans, after all, say they’re on board with it. The good news it that it won’t be harmful, as long as the wage hike is small. And with the highest income disparity and poverty levels among rich countries, battered Uncle Sam could sure use some vitamins. The bad news is that this is all it’s going to be: A very sick man gulping down a couple of health pills. Truly helping low-income Americans is going to take much more.

5 comments on “Will raising the minimum wage help America’s poor?

  1. Raising a minimum wage does have the initial impact of raising the take home pay. But that legislated raise, soon fades as cost of goods rises to put the low wage back to square one.
    There is one way and only one way to, over the long term, increase a person’s or society’s wage scale relative to others in that same society and that is to raise the education level in regards to financial education and towards job qualification.
    A band aid of forcing employers to raise a person’s wage just to satisfy some socialist do gooder will not cut the mustard, Education Education Education is the only long term solution.
    If you know what to invest in, how to invest, where not to invest, how to form and run a company, how to be a better employee, how to legally avoid retail taxation of the worker, then with that knowledge can you raise the relative remuneration of the worker, the entrepreneur.
    It’s the education of the ignorant , as to finance in all it’s forms and permutations, that will ultimately keep someone above their current financial status. Not raising the cost bar or the wage bar, education.

    Reply

    • Oh, please, the education horse has been flogged to death! We’ve greatly expanded the percentage of high school graduates who continue on into university and vastly increased the number of Masters and PHD graduates too. Community College enrollment has also been greatly expanded. The days where getting a higher education guaranteed a good job are over — almost all professions are well supplied with recent graduates. We do have regional worker shortages so if you are willing to move to Alberta or Saskatchewan it may be easier to find work..

      Think about the people you encounter on a regular basis — the people doing retail, collecting your garbage, fast food or restaurants. These are essential jobs — our society cannot operate without them, but how many of them require a higher education? We are not going to replace all these jobs with ones that require a higher education so we should be willing to pay these people a living wage.

      Reply

  2. You are absolutely correct “YellowCanoe” the education received by the public is completely lacking in it’s education towards financial literacy.
    I for one,, and for decades, did not understand how the financial, the stock, or how business entrepreneur worked and I quickly ran my financial position into the ground such that I was considering bankruptcy. I decided at that point, that I was going to climb out of the debt hole, and educate myself towards prosperity.
    Over the years, I, with the help of long term education and actions have turned my net worth from ( $ 40,000) with Zero assets, into a net worth over $ 1 Million and still rising. That is over a period of 15 years. But it came from my educating myself into the FINANCIAL REALM not the stupidity that our high schools and universities pass off as education. And that’s the whole point is it not, to raise the general financial well being of every one?
    Your banker does not care what your job, he cares about your ability to think in an adequate financial manner and your net worth is your report card. My net worth increase came about through financial education on a wide range of facets in the markets, taxes, jobs, stocks and bonds, company formation and it’s benefits, using the tax laws to our benefit in a legal manner, and how to use self restraint and credit cards and simple savings. That is not anywhere near what is taught in school, in collage or in university. And that is what I am advocating being done by the guy that is a waiter, a ditch digger, an engineer or a doctor.

    Reply

  3. Further to that last post a few minutes ago and in clarification??
    Where I wrote ( $ 40,000), I should have written, Negative $ 40,000 and without a job and just gone onto welfare. That is the position from which I changed. If I can do it, so too can anyone else. Goal set and educate in a financial manner and then take action.

    Reply

  4. Pingback: Will raising the minimum wage help America’s poor? | Economic Development.org

Leave a comment

Your email address will not be published. Required fields are marked *