A Poor Solution

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Reuters
By:  Reihan Salam
February 15, 2013

The minimum wage debate is back, thanks to President Barack Obama. In his State of the Union address this week, he noted that a full-time worker earning the federal minimum wage of $7.25 an hour would earn $14,500 a year. This is an amount that would be very low for a single adult living alone, let alone the parent with two children whom the president invoked in his speech. And so he called for a sharp increase in the federal minimum wage from $7.25 an hour to $9 an hour, an amount that would be indexed to inflation, as a way to fight poverty and to give the economy a boost.

What the president didn't mention is that the share of full-time workers who earn the federal minimum wage is very low. Mark Perry, an economist affiliated with the right-of-center American Enterprise Institute, observes that as of 2011, only 1.7 percent of full-time hourly employees were earning the minimum wage or less. Minimum-wage earners were more common among those aged 16 to 19 - 22.8 percent of these workers were earning the minimum wage or less. Of course, many of these workers live with their parents and are generally not the sole source of support for themselves or their families.

Another reason why so few workers earn the federal minimum wage is that as the value of the federal minimum wage has eroded, dozens of states have established or raised their own minimum wages. Thus far, only the state of Washington has a minimum wage, at $9.19 an hour and indexed to inflation, higher than the president's proposal.

One study, by economists Joseph Sabia and Richard Burkhauser, estimates that only 11.3 percent of the workers who would gain from an increase in the federal minimum wage to $9.50 are in low-income households, assuming no job losses result from the increase. The rest tend to be the aforementioned teenagers, spouses working part-time and semi-retired older workers. Interestingly, that was less true of the last federal minimum wage increase from $5.15 to $7.25. Sabia and Burkhauser find that 15.8 percent of the individuals who gained from that increase lived in low-income households. Conservative opponents of the minimum wage often argue that if a $9 minimum wage is a good thing, a $90 minimum wage must be a good thing as well, and of course a $90 minimum wage strikes most people as absurd. Sabia and Burkhauser's work reminds us that there really is a difference between raising the minimum wage to $9 and raising it to $90, as a $9 minimum wage prices far fewer less-skilled workers out of the labor market.

While increases in the federal minimum wage are popular with the public, they aren't the most efficient approach to alleviating poverty. The Earned Income Tax Credit, established in 1975 and expanded several times over the course of the intervening decades, is a highly efficient tool for raising household incomes. It is targeted at exactly the kind of low-wage workers President Obama has in mind, and it is higher for the parents of two or more children than it is for the parents of one child or childless adults. 

To the president's credit, he has backed a more targeted approach to poverty alleviation. The 2009 federal stimulus law, for example, created a Making Work Pay (MWP) tax credit that was extremely well-targeted. According to the left-of-center think tank Citizens for Tax Justice, 50.3 percent of the benefits of MWP went to households in the bottom three-fifths of the income distribution while only 22.2 percent went to households in the top fifth. The Social Security payroll tax cut that replaced MWP as part of the bipartisan 2010 Tax Hike Prevention Act delivered 46.8 percent of its benefits to households in the top fifth and only 26.8 percent of its benefits to households in the bottom three-fifths. Now both the Making Work Pay tax credit and the Social Security payroll tax cut are history, in part because of Republican opposition to redistribution in the tax code. 

Some of the president's defenders claim that while a minimum-wage increase isn't well-targeted, Republican opposition to measures like the Making Work Pay tax credit and increases in the Earned Income Tax Credit leave the Obama administration with relatively few options for boosting the incomes of poor households, and a minimum wage increase is better than nothing. This is a good point. If the congressional GOP blocks well-targeted anti-poverty policies, it is hardly surprising that congressional Democrats will pursue blunt, poorly targeted regulations instead - particularly when they're as politically popular as a minimum-wage hike. 

But is it true that a minimum wage increase is better than nothing? The classic critique of a minimum-wage increase is that it will decrease demand for less-skilled labor. Indeed, at least one advocate of a minimum-wage increase, Ron Unz of The American Conservative, has argued that eliminating low-end jobs would actually be a good thing, as these jobs serve as a magnet for less-skilled immigrants. 

Others, drawing on state-level studies conducted by economists such as David Card and Alan Krueger and, more recently, Arindrajit Dube, T. William Lester, and Michael Reich, argue that the employment effects of the kind of minimum-wage increases the president and his allies have in mind are likely to be minimal.

As Arpit Gupta suggests, however, it is possible that while the effect of a minimum-wage increase on aggregate employment might be minimal, it could change the composition of the workforce. For example, some spouses who might otherwise have devoted themselves to household production might be drawn into the workforce by a higher minimum wage, while less-skilled ex-offenders might find themselves priced out of the labor market. It might also encourage employers to reduce the number of work hours, shifting at least some workers from full-time to part-time status.

This matters because at the heart of America's poverty problem is a labor force participation problem. While President Obama spoke of the challenges facing a full-time worker earning the minimum wage, the poverty rate for individuals in families with no working adults is eight times higher than that of individuals in families in which at least one adult works full-time. 

The number of working poor individuals has increased since the start of the Great Recession ‑ as of 2010, 7.2 percent of individuals who work at least 27 weeks a year fall below the poverty level, up from 5.1 percent in 2007. Yet the poverty rate was much lower for full-time workers (4.2 percent) than for part-time workers (15.1 percent). A minimum-wage increase that reduces the number of full-time jobs while increasing the number of part-time jobs would undermine its poverty-fighting purpose.

What we need are poverty-fighting policies that expand rather than shrink labor force participation. To get there, at least two things need to happen: First, Republicans need to recognize that if they are going to oppose minimum-wage increases, they ought to be more open to measures, such as the Making Work Pay tax credit, that raise incomes for working poor families without pricing marginal workers out of the labor force.

Second, Democrats and Republicans alike need to pay careful attention to the work disincentives embedded in many anti-poverty programs. Scholars such as Eugene Steuerle and Edward Glaeser have made the case that because different anti-poverty programs taper off at different levels of earned income, poor workers often face high effective marginal tax rates as they climb the economic ladder. Simplifying and consolidating anti-poverty programs can go a long way toward reducing this burden and increasing labor force participation, a cause that ought to be bipartisan.

Apart from the good these policies would do, there is a political opportunity as well. As presidential hopefuls jockey for position in the run-up to 2016, being seen as a champion of hard-working families struggling to climb the ladder of opportunity can only be a plus.

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This page contains a single entry by CFED published on February 19, 2013 4:49 PM.

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