Obama’s Proposal to Boost the Minimum Wage: Will It Help or Hurt Workers?

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JASON REED / Reuters

President Barack Obama is shown a truck engine block being manufactured as he tours Linamar Corporation in Arden, N.C, Feb. 13, 2013.

Of the proposals in President Obama’s State of the Union address, the one that’s perhaps getting the most attention is his push to have the federal minimum wage raised from $7.25 to $9.00 per hour. There are many reasons for this. First, it was one of the few concrete proposals to come out of the speech; and unlike many of the President’s industrial and tax policy ideas, it is easy to understand: Pass a law saying businesses can’t pay workers less than $9 per hour.

But does the law make sense for the low-income workers it aims to help? For years the conventional wisdom among many economists was that higher minimum wages actually reduced employment — for the simple reason that if you make something like labor more expensive, firms will purchase less of it.

But research in the 1990s, specifically a study authored by economists David Carr and Alan Kreuger, seemed to prove otherwise, or at least to poke holes in this theory. Carr and Kreuger studied the effect of an increase in the minimum wage in New Jersey from $4.25 to $5.05 per hour in 1992. They surveyed 410 fast food restaurants in New Jersey and nearby counties in neighboring Pennsylvania, which saw no increase in the minimum wage. Their study found that New Jersey’s minimum wage hike didn’t negatively affect employment — in fact, they found, employment increased.

(MORE: Does President Obama Really Believe in Deficit Reduction?)

Since this 1992 paper, several other studies using similar methodologies have come to similar conclusions. A review of this literature by the left-leaning think tank Center for American Progress summed up the logic behind why a minimum wage hike wouldn’t reduce employment:

“Studies generally find that policies that increase the compensation of low-wage workers significantly reduce turnover, boost worker effort, encourage employers to invest in training for their workers, and can increase demand for goods and services—all of which help balance out any potential negative effects.”

For proponents of minimum wage hikes, this is the end of the debate. But it turns out that a considerable amount of research has come to the opposite conclusion. In 2006, economists David Neumark and William Wascher conducted a comprehensive review of the economic literature on the subject since the early 1990s. They concluded that the data on the subject was decidedly mixed, which “makes it difficult to draw broad implications of the new minimum wage research.” Nearly two thirds of the studies, however, did show that minimum wage had negative effects on employment.

But given that there’s a good chance that minimum wage laws actually hurt the people they are designed to help, isn’t there a more effective way to help the working poor? Way back in 1998, Princeton (then-MIT) economist Paul Krugman came to the conclusion that there is. Krugman wrote that a much better method for raising the living standards of low-wage workers would be to increase worker incomes through policies like the earned income tax credit, under which workers who make less than a given amount of money receive money from the federal government rather than paying taxes.

(MORE: Why Can’t This Economy Really Get Going?)

This is a more efficient way to redistribute money. While a minimum wage is basically a tax that discriminates against businesses that use cheap labor — like fast food restaurants — the earned income tax credit could be financed through a broad-based tax that doesn’t encourage one business model over another. A tax credit could also be targeted at the people who most need it: the working poor, who are on their own or raising a family. A minimum wage hike, on the other hand, would benefit some people it’s not intended too, like middle-class teenagers with after school jobs.

So why are we still so hung up on the minimum wage when better tools are available? Krugman gives two answers:

“One answer is political: What a shift from income supports to living wage legislation does is to move the costs of income redistribution off-budget . . . But I suspect there is another, deeper issue here–namely, that even without political constraints, advocates of a living wage would not be satisfied with any plan that relies on after-market redistribution. They don’t want people to “have” a decent income, they want them to “earn” it, not be dependent on demeaning handouts.”

The first point seems particularly applicable to our current political environment. The near constant battle over the budget is already savage and melodramatic. Why add another wrinkle when we can just sign into law a redistribution program that doesn’t effect the federal budget and will at least help some deserving low-income workers?

While this impulse may be understandable, it doesn’t make a minimum wage hike the best policy. And since a Republican Congress would likely be more amenable to expanding tax credits than to raising the minimum wage, this proposal seems more like a political gesture than a serious attempt to improve the lives of the working poor.

(MORE: The Break-Up-the-Banks Drumbeat Gets Louder. But Is It Just a Bunch of Hot Air?)

77 comments
X.G.
X.G.

The writer misses so many key points, it's clear the author is in over his head. First, minimum wages are most certainly not a form of tax -that's Chicago school of business-like gibberish. Second, many fast food type businesses help create a whole slew of social problems (low-wage crap jobs, health issues, litter from their wrappers and containers, etc). The least they can do is pay a fairer (NOT even a fair) wage. 

I'd LOVE to see stats on the actual percentage of minimum wage earners under the age of 20. According to the US Bureau of Labor Stats, half of all minimum wage earners are NOT teens at all.

Also, completely missing in this trite article, the fact that higher minimum wages push ALL wages up over time. I live in Seattle. Apart from San Francisco, we have the highest minimum wage in the nation. Know what? Wages are higher across the board in this region. Many United Statesians never cease to amaze me in their lack of ability to have a discussion without omitting inconvenient-to-them FACTS.



TimmyKaye
TimmyKaye

the picture on this article has nothing to do with anything.  no autoworker is making less than 15 bucks an hour.

EdRector
EdRector

This article asks the wrong question.  The right question is not 'does it help or hurt [low-paid] workers?'.   The right question is 'will there be a net increase in aggregate demand across the entire economy'?  Considering there will be some multiplier effects - and with near zero interest rates - the answer may very well be 'yes'. 

ThinkingDifferently
ThinkingDifferently

"Pass a law saying businesses can’t pay workers less than $9 per hour."

Your bias shows in this early sentence where you frame the proposition.  An equally accurate (and perhaps more enlightening) framing is: "Pass a law saying nobody is allowed to work for less than $9 per hour."  Perhaps this will make people think about the problem in a different way.

VioletVal
VioletVal

One idea that may have better results than a minimum wage is a maximum workweek.  The government could set the standard workweek to 40 hours or less, then put a tax on chronic overtime profits with a tax exemption for companies that reinvest their overtime profits on hiring or training for new workers.  With incentives for people to work less, companies will need to hire more people, and the competition for employees will result in higher wages.

MatthewDiGeronimo
MatthewDiGeronimo

Chris - well written, fair, and balanced.  Thank you.  However, I adamantly disagree with minimum wage laws.  Fundamentally, they routed in a belief (often unspoken) that business owners are morally bankrupt and the government lives on moral high ground.  I can't barely stomach academics/bureaucrats spewing all of the benefits of raising the minimum wage - less worker turnover, higher morale, etc.  Are we suggesting that business owners are too stupid to realize this and they need "big brother" to force it upon them?  The free market does an incredible job (while government fails horribly) at rewarding those that make the "right" decisions . . . these decisions range from pricing their products, selecting their products, hiring employees that will perform at a high standard, reducing worker turnover, etc, etc.  

I understand that there was a time (ala Upton Sinclair's "The Jungle") when workers in this country were unfairly treated and needed government protection.  However, I believe that the intervention was never intended to be permanent.  The ref steps in when required, but not for the rest of the game.  Starbucks does well because it has a reputation for paying its employees well, treating them well, training them well . . . not because the government placed demands on them.

Lastly, I firmly believe that proponents of minimum wage increases have this perception (often unconsciously) that business owners have a bottomless pit of money from which to draw.  Nothing could be further from the truth, they are often battling financial struggles of their own.  How about minimum earnings for business owners?  These business owners (more aptly spoke - "job providers") are the ones doing the heavy lifting for our economy, it would be nice to see the government recognize this and show them some respect and dignity by easing off on this incessant push to seize operational control from them and into the hands of the least capable amongst us . . . government bureaucrats. 

Cashma
Cashma

"You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.  What one person receives without working for, another person must work for without receiving.  The government cannot give to anybody anything that the government does not first take from somebody else.   When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is the beginning of the end of any nation.  You cannot multiply wealth by dividing it." ---  Adrian Rogers, 1931


DBritt
DBritt

This was a very thoughtful and balanced article. I was worried when I read the title, as many of the arguments against minimum wage are simplistic and reductive (see, for example, half of the comments here). But the author sticks to serious, credible sources and outlines a very reasonable debate. Nice article.

Cashma
Cashma

There once was a Town with three residents: a carpenter, a farmer and a tailor.  Each person had $1.  When the tailor wanted food he paid the farmer $1.  When the carpenter wanted his clothes mended he  paid the tailor $1, and so on.  LIfe was good!  One day the carpenter's uncle died and left him another $1. Immediately the carpenter felt wealthier, but within six months everything in the Town cost $1.33.  So it goes with raising the minimum wage. Briefly people have more money but quickly inflation kicks in and soon they have no increase in buying power.  (Governments love to increase the minimum wage because it sounds good, costs them nothing and, due to inflated dollars, actually increases their tax receipts) 

gopvictory
gopvictory

One dollar burgers becomes two burgers. It starts from the farm to your restaurant.

PapaFoote
PapaFoote

Another "Thoughtful Thinking" - Usually, The "Simplest" Theories Have "Complex" Veins Running Through It!

The Old Mountain Goat

RichardKBahenaSr.
RichardKBahenaSr.

When employers are not even forced to give their employees a cost of living raise, never mind a merit raise, increasing minimum wage will be a temporary but necessary effort. It is not just high school students who earn minimum wage, it is also many retired trying to make ends meet on limited income and head of households. Cost of living increase should be mandated and a merit increase should be based on merit. There are employees that have gone years without a raise as the decision is up to the employer. Although I understand it is difficult to pay to have employees, businesses need to figure out the expense involved and adjust their charges accordingly. People need to stop making excuses for progress and realize increasing taxes or tax credits is not always the best way.

drexellake
drexellake

@VioletVal  You people are obviously socialists.  Pathetic idea.  Obama needs to allow businesses to grow, open up our resources, and remove the jobs killing regulations so more can find jobs.  You don't re invent the wheel for one failing president and his poor policies. 

Cashma
Cashma

@VioletVal Wow, get paid more for working less.  Even better, penalize people for getting more education and/or vocational training.  That would save even more money.  Curse those time and a half and double time payments. But wait, isn't that the system we have now?

MrTaiwan
MrTaiwan

@VioletVal 

A good idea. I believe the practice is viable in the US. The success or popularity of a minimum wage is determined by two factors (so far I can think of). One is whether most business owners are , like Matthew said, morally bankrupt or not. the other is a strong labor law enforcement agency in place. I am from Taiwan. Our government has embraced this policy for many years, but the responses from the public are mixed - some benefit, but many others suffer. Because Taiwan's most employers are good at finding loopholes within the labor protection acts,  they can place the workload for three on two workers, but only slightly increase the pay for the two. I believe the US is a far more developed democracy and economy, so practices of this kind must be rare in the US.

tom.litton
tom.litton

@Cashma That is an over simplification.  It doesn't take into account deficits and multiplier effects.

 Besides it misses the point.  The reason to give poor people enough resources to survive is because it benefits society as a whole.  Imagine that 5-10% of the population (about 15 million people) starving and freezing to death in the streets.  Ignoring the moral implications, think of the crime that would cause.  

Also, it is a relatively tiny fraction of the federal budget.  Something like 15% (needs citation) or less (and will decrease as the economy improves).  

tom.litton
tom.litton

@Cashma There is a flaw in that logic.  The uncle would be participating in the economy as well, so that the over all amount of money is not increased, and no inflation occurs.  

RobotPiratNinja
RobotPiratNinja

@Cashma This argument assumes everyone gets paid the same and already has the same amount of money and all services are equally priced.  Which is to say....this has silly and unrealistic assumptions...the same as the conclusions.  GIGO.

Cashma
Cashma

@RichardKBahenaSr. When cost of living increases are mandated you guarantee a certain level of inflation, costs go up purchasing power goes down - nobody wins.  Better to take care of those who truly can not take care of themselves and provide the others with the additional education or training that will enable them to earn more.

Cashma
Cashma

@ThinkingDifferently But . . . implicit in this minimum wage discussion is: 1) that all employers who only pay minimum wages are evil, greedy sociopaths and, 2) that all the people who work for minimum wages are hard working, family oriented people who are being abused by the evil doers.  No doubt some of that is unfortunately true.  However, so too is the fact that many minimum wage jobs are held by unskilled teenagers or others.  How much training or skill goes into learning the phrase, "Do you want fries with that?"  Further, if a person stays in a minimum wage job for an extended period of time doesn't that say something about the person's ambition or drive to get ahead?  One problem with our society is the contention that if anything good happens we earned it but when anything bad happens it is someone else's fault.


VioletVal
VioletVal

@drexellake @VioletVal Our economy is a mix of capitalism and socialism.  Too much of one or the other isn't good for the economy.  We didn't have enough socialism in the economy when the banks were excessively deregulated and all the subprime mortages and other shady practices led to the economic disaster of 2008 that we have not yet fully recovered from.  The president's policies haven't failed--jobs grew after President Obama's economic policies were implemented.  In contrast, jobs fell drastically after Bush's policies were implemented.  Now we just need the economy to improve even faster.

X.G.
X.G.

@Cashma @VioletVal Sadly, Cashma, you missed Violet's point entirely. Obviously, you have your own neo-con agenda.

VioletVal
VioletVal

@Cashma @VioletVal The problem with the economy is that there aren't enough jobs for the people who want to work.  Getting more education or training is not enough to change that, otherwise there wouldn't be so many college-educated people who are unemployed or underemployed.  Enforcing a 40 hour workweek would help solve that problem.

Cashma
Cashma

@tom.litton @Cashma First, note your use of the word "give."  Who is to give and or what is to be taken from them?  I don't want anyone to starve and have no objection our country setting up safety nets to prevent that.  However, it is not proper to put all of that responsibility solely on the back of service companies.  Second, do not over look that fact that as incomes rise many low income people no longer qualify for government aid programs that are already in place.  Instead of raise the minimum wage I think the idea of a tax credit mentioned in the subject article is really worth further consideration.

Cashma
Cashma

@tom.litton @Cashma No, the uncle came from a different Town.  One with a different social-economic structure, where people are actually able to keep, save or pass on to their chosen beneficiaries some of what is earned

Cashma
Cashma

@RobotPiratNinja @Cashma When the government forces those with more to pay more, that additional cost does not come out of a bank or out of profits, at least not for long.  It is added to selling prices and passed on to the consumers.  When prices go up the value of currency goes down and so the poor remain poor, the elderly on fixed incomes have less and the cycle moves on.   In a phrase, "There is no free lunch!"

tom.litton
tom.litton

@Cashma@RichardKBahenaSr.There is a case to be made for more inflation:

http://www.slate.com/articles/business/the_dismal_science/1998/08/babysitting_the_economy.html

Additionally, if nobody is spending because they are trying to pay down their debt, then inflation is one way out of that.  It makes debt cheaper. 

Besides, i haven't heard of min wage increases causing inflation.  It will raise the cost of certain goods (ie fast food), but wouldn't effect a great majority of things.  Min wage jobs just isn't a large contributing factor into the cost of most things. 

Of course, i should point out that i haven't heard of min wage increases not increasing inflation.  So if you know of data that i'm not aware of, then i would appreciate a link.

Cashma
Cashma

@tom.litton @TomPiper @Cashma OK, then give the employer the tax credit so he can pass it through to the minimum wage employees.  That would amount to the same thing but the point is if the government wants to make the rules than it should pay the cost - not just the employer who often is just trying to get by him/herself.

tom.litton
tom.litton

@TomPiper @Cashma @tom.litton I agree 100%

My point isn't that i'm against expanding the tax credit.  I'm not, even if it means raising my taxes to pay for it.

My point is this:  It is more emotionally satisfying to get money from your employer for work that you did, than it is to get money from the government (even if it is based on hours worked).   And that should should be taken into consideration too.

The health of the economy and the health of America, while strongly correlated, are not the same thing.

TomPiper
TomPiper

@tom.litton A person making $18k would pay no federal income tax and receive an $89 credit. However, when you include payroll, state and local taxes they effectively pay from around 12.5% to 20%.

Now, I'm in the 1% income bracket and I've never paid more than an effective rate of around 12% to 15%, but there's more. Since I own a corporation I receive many corporate paid benefits that aren't included in income. For example, I can be jetted to any lavish vacation spot in the world all expenses paid, as long as I bring along my corporate minutes book.

tom.litton
tom.litton

@Cashma @TomPiper @tom.litton I don't think anybody really disagrees with that analogy.  The problem happens when the bill is raised by $20.  Who pays for the extra? 

It would be best if everyone pays according to the income bracket.  What happens if the lower income people can't afford to pay more and will be forced to stop drinking if they have to?

Cashma
Cashma

@TomPiper @Cashma @tom.littonThis little story about some beer drinkers explains a lot.

A good lesson for our country.

Suppose that every day, ten men go out for beer and the bill for all ten

comes to $100. If they paid their bill the way we pay our taxes, it

would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men drank in the bar every

day and seemed quite happy with the arrangement, until one day, the

owner threw them a curve. 'Since you are all such good customers, he

said, 'I'm going to reduce the cost of your daily beer by $20. Drinks

for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the

first four men were unaffected. They would still drink for free. But

what about the other six men - the paying customers? How could they

divide the $20 windfall so that everyone would get his 'fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted

that from everybody's share, then the fifth man and the sixth man would

each end up being paid to drink his beer. So, the bar owner suggested

that it would be fair to reduce each man's bill by roughly the same

amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33%savings).

The seventh now paid $5 instead of $7 (28%savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before And the first four continued

to drink for free. But once outside the restaurant, the men began to

compare their savings.

'I only got a dollar out of the $20', declared the sixth man.

He pointed to the tenth man,' but he got $10!'

'Yeah, that's right', exclaimed the fifth man. 'I only saved a dollar,

too. It's unfair that he got ten times more than I!'

'That's true!!' shouted the seventh man. 'Why should he get $10 back

when I got only two? The wealthy get all the breaks!'

'Wait a minute,' yelled the first four men in unison. 'We didn't get

anything at all. The system exploits the poor!'

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat

down and had beers without him. But when it came time to pay the bill,

they discovered something important. They didn't have enough money

between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our

tax system works. The people who pay the highest taxes get the most

benefit from a tax reduction. Tax them too much, attack them for being

wealthy, and they just may not show up anymore. In fact, they might

start drinking overseas where the atmosphere is somewhat friendlier.


TomPiper
TomPiper

@Cashma @tom.litton While you're on the subject of "give" let's not forget that big businesses in this country are given more than a trillion dollars a year in giveaways, subsidies and handouts themselves.

I'll worry about the piddling giving to the less fortunate when the "real" takers give up their sugar teat.

Cashma
Cashma

@tom.litton @Cashma Not so. There is no Federal Income Tax on income below Adjusted Gross income of $8,000 year.  However,When most people talk about the poverty level or poverty line, they are usually referring to the Federal poverty guidelines. This is the definition of poverty issued each year by the Department of Health and Human Services (HHS). It's used to determine who receives federal subsidies or aid.

For 2012, the Federal poverty guideline is an annual income of $23,050 for a family of four. This is the most commonly used statistic. Add $3,960 for each additional person to compute the Federal poverty level for larger families. Subtract $3,960 per person to compute it for smaller families. For example, a single-person household is considered poor if his or her income is $11,170 or less. These are the guidelines for the 48 contiguous states. Guidelines for Alaska and Hawaii are a little higher, since it is more expensive to live there. The Federal poverty level is updated every year.

The Federal poverty level is also used to give subsidies to some families who earn more. For example, some programs give subsidies to families that are 150% of the Federal poverty level. For a family of four, this would be 1.5 x $23,050 = $34,575. To find out more about these specific guidelines, see HHS 2012 Federal Poverty Guidelines.

Cashma
Cashma

@tom.litton @Cashma I have no problem with that but before we ask the government to set up or expand another bureaucracy, why not simply stop taxing income below the poverty level?  The effect would be immediate (higher take-home pay), existing benefit programs would not have to be reindexed and the cost to the Treasury would be the same.

tom.litton
tom.litton

@Cashma @tom.litton What do you think of the idea of expanding americore.  Instead of a tax credit americore could set up part time jobs (say 5-10 hours per week) that pays the same amount.

That way people can earn their paycheck (as a min wage increase would do), the cost is distributed (as would a tax credit would do), and there is an added benefit that the government would get something of value (even if it is marginal).

Cashma
Cashma

@tom.litton @Cashma Again you say "give."  The tax credit should be based upon hours worked.  Almost 45% of the people in this country (children, students, prisoners, the ill, elderly, the working poor . . .) pay no Federal income taxes now. I am not advocating for more.  Rather, the tax credit would  be means of distributing those with need throughout a larger pool of resources.


tom.litton
tom.litton

@Cashma @tom.litton If a more generous tax credit is what happens, then i wouldn't be disappointed.


However, having people earn more money rather than give it to them seems more appealing to me (from an emotional level) than giving them more money via a tax credit.  

So long as the negative effects are not too bad (which seems so, or the studies would be more consistently against it).

tom.litton
tom.litton

@Cashma @tom.litton Why wouldn't he just get food from another farmer that charges only a $1?

Why doesn't he grow is own food, if he could presumably do it for less than a $1?  Why not go without new clothes instead of paying the tailor? 

Cashma
Cashma

@tom.litton @Cashma Ah but the Tailor and the Farmer, knowing that there was more money to be add, set out to get some of it for themselves so they raised their prices.  Same value for more money = inflation.  With two against one the carpenter eventually had to choice but to give in a pay more.  (Food was most important so he caved in to the farmer first). . .

tom.litton
tom.litton

@Cashma @tom.litton Then that would be a better analogy for printing money than for raising the min wage. 

And it still wouldn't cause inflation if carpenter saved the dollar instead of spending it.  Which is likely what he would do, since he obviously doesn't need anything other than what the $1 already buys him.

ThinkingDifferently
ThinkingDifferently

@tom.litton @Cashma @RobotPiratNinja Why do you want to increase the minimum wage?  Because the price of everything is going up!  And when you raise the minimum wage, by definition you are raising the costs of those business who employ minimum wage folks.  Thus forcing them to either increase their prices, or reduce their own standard of living.  See where you are reinforcing the vicious circle of inflation?  Perhaps we should think about solving the problem by reducing inflation (that is, stop printing money) rather than passing laws to make the problem worse.

tom.litton
tom.litton

@Cashma @RobotPiratNinja Your assuming min wage is a significant part of the cost of every item.  If it's 50% then it will cause inflation (or more likely simply erode the purchasing power of everyone).

If it's 1% or less (which seems more likely), then it will have negligible effect on prices at best.

tom.litton
tom.litton

@Cashma @tom.litton @RichardKBahenaSr. A bit more of that attitude (spending money now before inflation eats at the value) could really help the economy (see the link i posted for an explanation as to why).  

Not that i'm advocating for 20% inflation rate, but you would have to increase min wage quite a bit more than $9 an hour to get that.

Cashma
Cashma

@tom.litton @Cashma @RichardKBahenaSr. Sure inflation is good for paying down fixed debts - that's why governments and other debtors all over the world just love it.  However, it is not so good  if you are living on a limited or fixed income.  Do not forget what happened in this country approached 20% APR in the 1980s, or what happened in Germany after the Second World War, when inflation was rising so fast that people literally ran from their paymaster to the bank to get cash and spend it before it was worth even less.