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President Obama has proposed raising the federal minimum wage from $7.25 per hour to $10.10 per hour by 2016. The Democrats are aligned with their President, and a wide majority of the American public also wants to raise the minimum wage. Republicans are against it. House Republicans unanimously voted down an amendment to raise the minimum wage to $10.10 last year.
Enter the Congressional Budget Office (CBO), which estimated the following effects from a minimum wage hike to $10.10. This is from the L.A. Times:
1. Wages would rise for 16.5 million workers.
2. Income for families living below the poverty line would rise by a combined $5 billion, and by $12 billion for those earning less than three times the poverty level.
3. About 900,000 people would be moved out of poverty.
4. The raise would reduce total employment by about 500,000 workers.
To clarify, the CBO actually said jobs would be reduced somewhere between very little and a million. 500,000 is it's middle estimate.
There would be job winners and job losers with the President's proposal. The White House is attempting to downplay the losers, while the Republicans are attempting to play up the losers by saying the last thing we need right now is more job losses. I imagine the White House isn't very fond of the CBO these days. This month alone, the CBO has estimated that Obama's policies will cause 3 million job losses (between Obamacare and the minimum wage). That's not good news for the President when the latest Gallup poll shows that the biggest concern of Americans is jobs, and number two is the economy in general.
The good news for Democrats and the lower income workers who don't lose their jobs is, the CBO estimated a net income gain to workers of $2 billion with the minimum wage hike. That money will help the low-income folks and provide some stimulus to the economy.
In trying to decide who is right between the Democrats and the Republicans on this issue, I think I have decided that they are both wrong. How can that be ? Here's how:
On the one hand:
- The Republicans are wrong because the minimum wage is relatively low right now. It hasn't kept up with inflation. When Obama said the minimum wage is 20% lower than when Reagan took office, for once he wasn't totally lying, just exaggerating a little (I estimated it at 16% lower. At the previous link, Politifact estimated it at 15.6% lower). During Reagan's tenure, the minimum wage ranged between being equal to what it is now and being 16% lower after adjusting for inflation.
- The Republicans are wrong because income inequality has risen and median wages have been going down for five years straight. If getting people off welfare and into becoming productive is the Republicans goal, as they keep saying it is, then that $2 billion in net additional income from the minimum wage hike will help accomplish that goal. We want self-reliant citizens.
On the other hand:
- The Democrats are wrong because we really DON'T want any more job losses at a time when we have a 35-year low labor workforce participation rate and high unemployment. Even if the job losses ARE less than what the CBO predicts, raising the minimum wage certainly won't help create any new jobs. It will inhibit new job creation by raising the cost of business startups and struggling businesses, and we don't need that.
- The Democrats are wrong because much of the minimum wage hike will miss the mark of helping lift up the neediest people. In addition to those at the very bottom rung losing their jobs with a mandated wage hike, much of the minimum wage workforce is made up of teenagers who live at home with their families. They aren't needy, and they don't need any wage hike.
You might be thinking, "Well, that's great, King. Way to straddle the fence, but you haven't helped the situation. What SHOULD we do ?"
Liberal arguments for increasing the minimum wage have a fundamental flaw: They restrict the set of policy choices to either a minimum wage increase or doing nothing. That means they overlook the single most important federal policy for the poor: the Earned Income Tax Credit [EITC]
The EITC is a measure in the federal tax code to support the living standards of the poor without creating a "welfare trap" by diminishing the incentive to work. Economists widely consider the credit a success for reducing poverty while increasing employment. Created in 1975, the credit has been successively expanded in five times since. It is now the nation's largest anti-poverty transfer program.
In its latest iteration, for families with two or more children, the credit is 40 percent of the first $10,750 of earned income. After earned income exceeds $15,040, the credit is phased out at a rate of 21.06 cents per marginal dollar, and it goes away fully at the point when earned income reaches $35,458. (The EITC code is similar for smaller families, childless married couples and singles.)
Democrats who want to address income inequality would be much better served by increasing the EITC rather than the minimum wage. Alternatively, if Republicans shifted strategy and suggested an increase in the EITC as a counteroffer to Democratic minimum-wage proposals, they would have the clearly stronger argument on merits. They have the opportunity to do so now, with the "fiscal cliff" deal only temporarily extending the 2001 and 2009 expansions of the credit.
Republicans could correctly argue that compared to the EITC, the minimum wage is a flawed and frankly out-of-date policy tool. First, the minimum wage is inefficient: The same income support could be provided at a quarter of the cost with the EITC, according to Forbe's Adam Ozimek. Second, its benefits are poorly targeted, with little going to the neediest families, according to Employment Policies Institute fellow Michael Saltsman. This is in part because, as Bureau Of Labor Statistics show, many minimum-wage workers are actually teenagers entering the workforce who come from middle-class families.
Although supporting the EITC in opposition to the minimum wage may seem like a change of argument for the Republicans, it would actually be a return to the case that conservatives and free-marketers once argued. George J. Stigler, the Nobel laureate and torchbearer of the Chicago school of economics, once made the outlines of this argument by recommending a negative income tax. Milton Friedman also endorsed the idea as the best way to provide for the social welfare of the poor.
WIth this proposal, we encourage people to work, we help the lower income people, we don't punish the business sector, we don't raise prices, and we don't incur any job losses. The temporary jump in welfare transfer payments should diminish as workers start moving up the ladder. This could help get us back on the right path.
It makes sense to me (or at least more sense than the alternatives), but I doubt it will get much traction. The Democrats want to make the minimum wage a mid-term election wedge issue, and frankly, the Republicans are probably too dumb and divided to endorse any such proposal.