Raising the minimum wage would help and hurt women

September 2, 2013
Strikers in favor of raising the minimum wage (Washington Post)
Strikers in favor of raising the minimum wage (Washington Post)

Last year, 2.3 million women earned so little that if a typical woman worked 40 hours a week at minimum wage for the entire year, she’d earn just over $15,000. While a teenager living at home might find that much money is more than enough to pay for popcorn at the movies, a woman with a couple of kids would find herself struggling to put a wholesome meal on the table with just $15,000 to spend.

That’s the basic argument that many fast-food workers made as they went on strike on August 29 against fast-food restaurants, such as McDonald’s, Burger King, Wendy’s and Pizza Hut, calling for a $15-an-hour minimum wage for millions of burger flippers and pizza twirlers.

 

As the group “Low Pay is Not OK” said in an open letter to fast food chains, “Last year your combined profits were $7.35 billion. Yet you still paid most of your workers less than $11,200 a year – poverty wages. It’s shameful. And outrageous.”

Others argue that it’s not necessary to raise the minimum wage because it’s largely paid to teenage boys earning their first paychecks.

 

However, the data don’t support — and they haven’t for a long time — the number one myth about the minimum wage. The typical minimum wage worker isn’t a teenager and isn’t male. She’s an adult woman.

That’s right.

Based on data from the Department of Labor, among the 2.7 million hourly workers above age 20 who made the minimum wage or less last year, about 1.8 million, or two-thirds, are women.

One reason for this, as The National Women’s Law Center found, is because women tend to be employed in jobs that don’t pay very well — more than three-quarters of the workers in the ten lowest-paying jobs are women. These women toil away at taking care of others’ children, cleaning houses and hotel rooms, ringing up sales at the cash register, and serving burgers and fries.

Making matters worse, many of these working women have kids but no husband at home. The $15,000 she earns at minimum wage places her well below the poverty level of $22,891 for a single-parent family with three kids. Poverty, unfortunately, describes nearly one out of three families headed by a mother with no husband present, according to the U.S. Census Bureau.

It’s clear that if she earned more per hour, she could begin to climb out of poverty. The census bureau estimates that female-headed families with no husband present need to earn an additional $10,317 to rise out of poverty. Assuming that she works full time (2,000 hours a year), this mother would need to make roughly $5 more per hour to reach this goal.

Can U.S. companies afford to raise wages by $5 an hour?

It depends on who you ask. The National Federation of Independent Business, which represents the voice of small business, says that any increase in the cost of doing business (wages, of course, are a cost of doing business), would cause entrepreneurs to find ways to hire fewer workers. William Dunkelberg, chief economist for the NFIB, says that “The minimum wage is a major anti-jobs policy,” arguing that the “Law of Demand always works: the higher the price of anything, the less that will be taken, and this includes labor.”

He’s right, to a certain extent. Firms maximize profits when they minimize costs. Yet, this analysis leaves out one important issue: The costs that the private sector’s actions impose on society.

The states are well aware of the costs that low wages impose on them. For example, in 2008, an Ohio policy group reported that Wal-Mart, McDonald’s, Yum! Brands, and Wendy’s were the top employers with the largest number of employees using Medicaid, food stamps and Ohio’s cash assistance programs. Nearly 28,000 employees at these four companies applied for food stamps in 2008.

By covering these costs through various programs that help low-income people, the government picks up where the private sector leaves off.

For example, a single mother making $15,000 a year is entitled to various means-tested benefits that are targeted toward people with low earnings — the earned income tax credit, the child care credit, Medicaid, food stamps — that help her provide food, shelter and clothing for her family.

Raising the minimum wage would start to solve this poverty problem. However, there are two things to take into consideration.

First, the official poverty estimates are based solely on money income before taxes and don’t include the value of noncash benefits, such as those provided by the Supplemental Nutrition Assistance Program, Medicare, Medicaid, public housing, and employer-provided fringe benefits. These are the kinds of programs the government provides to those who don’t have the means to purchase them on their own. Second, they also don’t take into account the tax benefits that low-income workers receive. The earned income tax credit (EITC) is one of these benefits.

Under current rules, a single mother with three kids earning $15,000 a year would be entitled to a tax credit of $5,891. This tax credit offsets any income tax liability she might owe and, if the credit’s bigger than her tentative tax liability, she’ll get a refund for the difference so that she may end up with more than $20,000.

She’s still not out of poverty, but she’s better off now than before.

The experts at the Urban-Brookings Tax Policy Center estimated that nearly 26 million households receive $60 billion in benefits from the earned income tax credit.

Other low-income programs have a similar impact. They provide benefits to people who don’t have much income.

Since these benefits are means tested — people receive them only if their income falls below a certain amount — many taxpayers who now benefit from these credits would lose them if their earnings increased. The offset isn’t dollar-for-dollar, but benefits do fall as earnings increase. For example, the EITC for a single mother with three kids at home would fall by $2,275 if her earnings doubled. It’s in this way that raising the minimum wage both helps and hurts women. That’s how these means-tested programs are supposed to work. Benefits fall as income rises.

It’s good that the government provides assistance to citizens who don’t earn enough from their jobs to rise out of poverty. But, since providing assistance inevitably involves bureaucracy and some waste, it might be better to find a way to provide the assistance directly.

The government could, for example, charge firms a fee for the cost that their employees impose on society when they use government assistance programs. In so doing, firms would internalize the external cost their low wages impose on society. Such a program would benefit not just the government by reducing the cost of its low-income program, but also the women who make up such a large share of minimum wage workers.

Joann Weiner teaches economics at George Washington University. She has written for Bloomberg, Politics Daily, and Tax Analysts and worked as an economist at the U.S. Treasury Department. Follow her on Twitter @DCEcon.
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