Why Maryland shouldn’t raise its minimum wage

February 6, 2014

In a prior post, I argued against minimum- and living-wage schemes on the basis that they harm unskilled laborers and are far less effective than tax schemes such as the Earned Income Tax Credit when it comes to targeting the working poor.  As Maryland lawmakers continue to consider a substantial hike in the state’s minimum wage, I have been encouraged by the number of folks speaking against the perceived wisdom of such an increase.

In recent commentary at MarylandReporter.com, Barry Rascovar discussed the problems with a one-size-fits-all wage approach in a state with very different cost-of-living standards. Rascovar also pointed to the better policy approach of increasing the Earned Income Tax Credit (a negative income tax that supplements the earnings of the working poor, especially those with children). Today, Howard Leathers, an associate professor in the Department of Agricultural and Resource Economics at the University of Maryland, published a piece in the Baltimore Sun in which he outlines the seemingly paradoxical reality that a substantial increase in the minimum wage would reduce net income for a working parent. In the example provided by Leathers, a 59 percent increase in the minimum wage would actually result in a 3 percent decline in net income for a working parent. How can that be? The answer is simple, with the higher wages, the low income working parent would pay higher taxes and lose eligibility for crucial social supports such as Food Stamps, subsidies for child care and housing assistance.

Many may consider it a good thing for people to be more self-reliant. In fact, decreased eligibility for social programs would result in less government spending for those programs — in theory. But consider the costs. The decreased government spending would be offset by higher spending by employers as a result of the higher hourly wage. Many of the businesses that pay minimum wage are small businesses with precious little profit margin. Faced with higher wage costs, those businesses would likely increase prices (if the market will allow) and customers would pay more for goods and services. Those businesses are likely as well to reduce their labor costs by reducing their workforce, meaning more unemployed individuals suddenly eligible for support services. So we’d be left with some workers receiving a higher wage, but many being worse off due to lost benefits. And we’d have more people unemployed and drawing on the social services that the higher wages were supposedly replacing.

It’s a perverse form of income transfer as the low-income workers who lose their jobs transfer their lost income to those who keep their jobs. Then, those who keep their jobs transfer their social service benefits to the newly unemployed.

[Continue reading Todd Eberly's post at the Free Stater Blog.]

Todd Eberly blogs at The FreeStaterBlog. The Local Blog Network is a group of bloggers from around the D.C. region who have agreed to make regular contributions to All Opinions Are Local.

 

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