Raising Minimum Wage - More Harm than Good?

Tue, Feb 25, 2014 - 8:33am

The recent CBO minimum wage study has sparked a lot of headlines because it concludes that if the US moved to a $10.10 minimum wage, the increase would cost the economy about 500K jobs, most of which would be those of low-wage workers. While that number gets headlines, the real meat of the study is concerned with identifying the segments of the working population that would be the winners and losers in terms of income gains and losses as a result of such a policy. The study suggests that some 16.5 million, or about 10% percent of the labor force, would see increased earnings from an increase in the minimum wage to $10.10. The increase would generate about $31 billion in increased income for all affected workers, not all of whom were receiving below the new proposed minimum wage. An estimated 900K of those individuals (constituting only 2 percent of those estimated to be at the poverty level) would be elevated out of poverty. And of those winners only 19% of the $31 billion, would be realized by workers currently living at or below the poverty level.

Bigger gains would be realized by families earning more than the poverty level. This is because not all low wage earners are from low-income families below the poverty level. For example, $12 billion would be realized by households earning incomes one to three times the poverty level (that is with earnings between $19K and $56K for an individual and between $24K and $72K for a family of four). Another $2 billion would be realized by those earning between three and six times the poverty level (i.e. between $56K and $112K for an individual and between $72K and $145K for a family of four). This three-to-six-times group meets the current definition of “middle class.”

At the same time, real income would also be reduced by an estimated $17 billion for those earning six times the poverty level or more. Effectively, the change in policy would sacrifice the incomes of those earning “six times and more” the poverty level to achieve increase the incomes of those earning less than six times the poverty level but who are not considered to be living in poverty. It is also important to note that the negative impact of an increased minimum wage is concentrated at the low end of the distribution of those in the “six times and more” group and does not affect the so-called “one percent” — those making more than $394K per year.

So the proposed change in the minimum wage would not only reduce employment by an estimated half a million people but also reduce incomes of individuals making more than $112K and families of four making $145K. Most of us would consider this cohort to be part of the middle class, not the super-rich.

The CBO study also tells us who the low-wage workers are. Some 12 percent of all low-wage workers are teenagers between the ages of 16 and 19, but 87 percent of those in that age group are low wage workers. The CBO indicates that 58 percent of those workers with less than a high school education are low wage workers. Many of these can’t be high school dropouts and are more likely still in school but working part time to earn a bit of spending money. The CBO suggests that 58 percent of low-wage workers worked less than 35 hours per week.

So what do these data and estimates tell us about the situation of those earning less than the minimum wage? First, 87 percent of teenagers will be low-wage workers. Second, 22 percent of all workers over the age of 20 will be low-wage earners, and 58% of all workers who with less than a high school education will be low-wage workers. In the case of the teenagers, they are the new entrants to the labor force and are also the ones who will likely bear the brunt of the 900K decline in employment the CBO estimates, as will older workers with less than a high school education. Third, the gains in income for low income households are relatively small, and can be viewed as a redistribution of income from those regarded as upper middle class – part of a group that has supposedly been in decline and one that the administration has proposed policies to help.

The CBO study supports two other conclusions. First, raising the minimum wage is not a very effective way of dealing with poverty. The proposal makes only a small dent in the proportion of people living below the poverty level, and the CBO states that the net addition to income is only $200 to $300 per year per household. Second, the key to enabling people to climb out of poverty is devoting time and attention to education and to dropout prevention. Higher education reduces the likelihood of being a low wage earner even more and offers big paybacks. For those people currently in poverty, raising the minimum wage is at best a poor mechanism to help the disadvantaged, and it hurts other important segments of the working population.

About the Author

Chief Monetary Economist
Bob [dot] Eisenbeis [at] cumber [dot] com ()