Jan 10, 2014 - 12:00pm

A Better Approach Than the Minimum Wage Distraction

Former Senior Vice President, Economic Policy Division, and Former Chief Economist

In a classic case of odd timing the Obama Administration has launched a push for a higher federal minimum wage. The timing appears odd because even after four years the economic recovery remains disturbingly weak. Consequently, the unemployment rate remains high, declining over the past year primarily because workers have simply given up and left the workforce. Raising the minimum wage can only make these matters worse. 

On the other hand, the timing does have the advantage for the Administration that it can then play the ever-popular redistributionist income inequality card and distract the nation from the poor consequences of its own economic policies. This income inequality pivot, too, is odd. Not because income inequality doesn’t exist. It does, of course, and always has. The proper response is to ensure a robust safety net, and to seek to assure equal opportunity as much as possible. But it is folly to seek generally equal outcomes.

The minimum wage debate is misplaced as part of the income inequality debate simply because raising the minimum wage by $1 an hour, for example, adds about $2,000 to the pre-tax income of those few full-time minimum wage adult workers. (Most minimum wage earners are either teenagers or are working part-time). A $2,000 increase would make a difference to the worker, assuming he or she still has a job, but it doesn’t do much for income inequality when stacked against the incomes of those at the very top of the income scale. 

In addition to the standard and correct arguments against a minimum wage hike – hurts small businesses and raises unemployment especially among marginal workers and teenagers – policy makes should consider two other facets of the minimum wage issue. 

First, according to the Bureau of Labor Statistics 21 states plus the District of Columbia, including five of the seven most populous states, already have minimum wages well above the federal minimum of $7.25 an hour. Thirteen of these states raised their minimum wages at the start of the year. The converse is that 29 states have chosen not to raise their minimum wage rates above the federal rate. 

Seen in this light, the Administration’s effort to raise the federal minimum wage is really about compelling these other 29 states to get with the progressive program. These states’ Governors and state legislatures have chosen for their own reasons not to suffer the downsides of a higher minimum wage, but of course, the general Washington philosophy is that Washington knows best. 

Second, as Harvard University’s Greg Mankiw reminds us writing in the Sunday New York Times, policymakers can quickly force up the incomes of low-wage workers in basically two ways. The first is to raise the minimum wage. Businesses with minimum wage workers are then involuntarily compelled to act as agents of the federal government in executing and bearing the direct costs of a socio-economic policy.   

This is obviously unfair. If we decide as a nation to reform the safety net to give some low-income workers and their families more cash, an understandable desire given the economy’s poor performance and what this has done to America’s struggling families, then we as a nation should bear that cost, not pass it off onto businesses. In 1975, this more correct approach gave rise to the Earned Income Credit (EIC).

The EIC provides a direct cash benefit rising with the worker’s income, up to $5,236 in cash for a full-time minimum wage worker with two children in 2013. That’s equal to a $2.61 cent an hour higher wage. Coupled with other benefits like the refundable Additional Child Tax Credit, these direct tax benefits are key components of the federal safety net. However, oddly enough such a worker without children would have too much income to receive EIC benefits. 

Policymakers should not force businesses to bear the burden of national socio-economic policies. These policies express the national will as proxied by congressional action and should be paid for by the nation as a whole. As the economy labors under the Administration’s economic policies this is no time to be putting additional burdens on small businesses.   

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About the Author

About the Author

Former Senior Vice President, Economic Policy Division, and Former Chief Economist

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.