Minimum-wage hike the wrong way to lift working poor

And yes, that matters, not just for humanitarian and spiritual reasons, but also for social accord and cooperation.  A truly healthy society would have the working class within a dignified living standard, and even the poor able to access essentials such as food, shelter, and health care.  Fortunately, while we aren’t perfect, the standard of living for the poor in the US rivals that of the working and middle classes in some other Western nations, and has for decades.  While poverty has increased in the six years since the Great Recession began, a not-unexpected outcome, part of that has been an issue with definition; the Census Bureau focuses on income level rather than purchasing power, which has increased steadily across all income levels.  The problem during this era has been chronic unemployment and an expanding class of hopelessness that has lowered wage competition, rather than some kind of exploitation of the poor by the wealthy.

That’s why Barack Obama’s call to raise the minimum wage in Tuesday’s State of the Union speech seemed like such a non-sequitur.  At least the last time this subject arose, we had enjoyed several years of job-market expansion and increased competition.  With businesses laboring under ever-increasing costs (thanks to ObamaCare and expanded federal regulation on energy), this seems like the worst time to propose hiking costs by 24%.  As I argue in my new column for The Fiscal Times, it had the opposite effect of its intent the last time we tried it — and young workers are still paying for that policy to this day:

And that’s the big problem with these proposals.  They don’t make people more valuable on the job market, especially those with no experience or proven skills.  Minimum wage hikes make it more difficult for them to find jobs, especially in the short run.  The raise proposed by Obama would increase just the straight wage cost for a business by 24 percent in its entry-level positions (and probably in other positions near that level), which businesses would have to absorb in one of two ways.  Either they raise prices without providing consumers with a commensurate increase in product or service value, or they have to reduce staff to cover the increase.  The former is inflationary and harms their competitive edge, while the latter gives businesses less flexibility to take risks, especially on new hires. Forced to pay a higher cost for employees, businesses will stick with experience rather than look to younger workers entering the workforce.

Consider what happened when Congress last passed a minimum-wage increase in 2007.  At that time, overall unemployment was 4.7 percent and the job market favored workers.  Among those between 16 and 19 years of age, the jobless rate was 15.3 percent, on the lower end of the range seen during the previous four years, the highest rate of which had been 19.0 percent in June 2003 during the previous recession.

By July 2008, overall unemployment had jumped to 5.8 percent due to the then-moderate recession that had begun in December 2007, but youth unemployment rocketed upward by more than five full points to 20.7 percent.  As the wage floor stepped upward to its present level by July 2009, the youth unemployment rate rose to 24.3 percent.  And while the overall unemployment rate has declined from 9.5 percent at that time to 7.9 percent now (albeit with a plummeting workforce masking the true nature of chronic unemployment), youth unemployment remains at nearly the same level as in July 2009, at 23.4 percent.

Why has this been the case?  When forced to pay more for labor, businesses will insist on getting more value for their money – experience and proven skills, even in entry-level positions.  Younger workers never get a good chance to earn their stripes.  That has long-term implications for their ability to earn in the future, as well as the social costs of high unemployment and restlessness of youth.

The long-term social implications of that huge increase in youth unemployment will reverberate for decades.  Even the short-term implications mean more cost for law enforcement, government subsidies, and a decline in investment power for the parental generation as it has to shift capital from retirement investment and risk into adult-child support.

The Wall Street Journal calls a minimum-wage hike the wrong approach. If government wants to intervene on behalf of the working poor, it should work through the tax mechanisms already in place, such as the EITC:

Republicans have supported this tax credit because eligibility is based on working and earning income. Democrats hail the EITC because it’s refundable, meaning that a low-wage family without any tax liability nevertheless can file a tax return and get a check from the government. In a state such as New York, a single parent raising two children on the minimum wage would see their annual wage of $15,080 jump to $21,886 with the EITC, for an effective hourly wage of $10.52.

Compared with the EITC, government-mandated minimum wage increases have major flaws. One is targeting: According to the Census Bureau, 60% of people living below the poverty line didn’t work last year. They don’t need a raise; they need a job, period. And among those who do work and earn the minimum wage, researchers at Cornell and American University have found that the vast majority live in households above the poverty line.

This partially explains why numerous studies have found no relationship between a higher minimum wage and lower poverty rates—because, unlike the EITC, the benefits generally aren’t accruing to those in poverty.

Another reason a higher minimum wage doesn’t reduce poverty rates is that a hike in hourly pay doesn’t necessarily translate to an annual income bump. If employers faced with suddenly higher labor costs reduce hours or employment, take-home pay will decline. Economists writing in the Journal of Human Resources in 2005 found that to be the case, with the “losers” from a higher minimum wage—who moved closer to the poverty line after the policy was passed—outnumbering the winners.

Not only that, but like most regulation and government intervention, it disproportionally hits small businesses.  Large businesses can absorb regulatory costs more easily through economies of scale, while small businesses have to make more significant cuts or price increases — both of which make them less competitive against the very CEOs against whose salaries Obama railed in the SOTU address.  CBS interviewed one such businessman in Texas about what a minimum-wage hike would do to his restaurant:

At Cafe Joey’s Italian Restaurant in Aubrey, Texas, owner Joe Picca is not OK with the president’s proposal to increase the minimum wage.

“Right now, we’re barely making ends meet as things stand right now,” he says.

Picca has 13 employees at his restaurant; five of them earn minimum wage. Picca says the higher costs would be crippling.

“I have actually a couple of choices — two choices,” Picca says. One is to close down. The other choice is to increase prices.”

But even if the minimum wage is raised to $9, the income of a family of four with one worker would still be nearly $5,000 under the poverty line of $23,550 — although federal tax credits would ultimately bring the family slightly above that level.

So how do we lift the working poor in public policy?  As a hiring manager for more than a decade for entry-level positions, I’ve seen what works:

I spent 15 years hiring people into entry-level office positions for call centers, positions that usually paid above the minimum wage but reliant on it as a compensation basis.  When the economy was slack and investors discouraged, I would have a flood of applicants for every open position, including on one occasion an unemployed man with a doctoral degree, and an unemployed college professor on another.

There was no competitive pressure to raise the entry-level wage, and my employees didn’t get wanderlust at the wage they were being paid.  Most importantly, I never had to take a flier on an inexperienced but impressive applicant, thanks to the volume of more experienced candidates who were practically bursting through the door.

Read my conclusion at TFT for the answer, but in a nutshell, it’s this: there is no better program for lifting the living standards of the working poor than a properly regulated free-market economy that encourages investment and reduces the cost of entry, for labor and investors alike.  What we have had for nearly four years of Obamanomics and the Obama recovery is nearly the antithesis, and it’s reducing rather than raising living standards.

Update: I should have linked to the study done by David Neumark which underscores my points:

A higher minimum wage will likely reduce employment among the very low-wage, low-skilled workers that minimum wage proponents are trying to help. A large body of research illustrates the disemployment effects of minimum wage.

Moreover, even if many workers affected by a higher minimum wage would see increased wages and suffer neither reductions in employment nor hours, minimum wages may do little or nothing to help poor and low-income families. Minimum wage laws mandate high wages for low-wage workers, rather than higher earnings for low-income families. But low-wage work and low family income are quite distinct, because many minimum wage workers are in higher-income families, and many poor families have no workers.

Mandating higher wages for low-wage workers in high-income families, such as teenagers from well off families working a summer job, does nothing to help poor and low-income families. Indeed, if the job losses from a higher minimum wage are borne by minimum wage workers in poor, low-income families, minimum wages can have unintended harmful distributional effects — possibly increasing the number of poor or low-income families. Reflecting these issues, research fails to establish that higher minimum wages help poor or low-income families.

More at the link.

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David Strom 10:01 AM on February 04, 2023