Maybe raising the minimum wage isn’t such a good idea after all

February 28
Increasing the minimum wage might not help reduce unemployment (Washington Post photo)
Increasing the minimum wage might not help reduce unemployment (Washington Post photo)

It’s been almost five years since the federal minimum wage went up from $6.55 to $7.25. Now, House Democrats are demanding to “Raise the wage” to $10.10 and just filed a discharge petition calling for a vote on The Fair Minimum Wage Act that will do just that. This move follows President Obama’s recent executive order to raise the minimum wage to $10.10 for federal contractors starting next year.

As the president said, “In the wealthiest nation on earth, nobody who works full time should have to live in poverty — nobody, not here in America.”

But is raising the minimum wage the best way to reduce poverty?

Douglas Holtz-Eakin, who is a former director of the Congressional Budget Office, doesn’t think so. In fact, he doesn’t think the federal government should have a minimum wage at all.

In a speech to the National Economic Club on Thursday, Holtz-Eakin said that raising the minimum wage “is an incredibly unwise thing to do.”

Not only does it put low-skilled, low-educated workers at risk of losing their jobs, but also it prevents those who most need a job from getting one, he said.

This conclusion comes from recent research by Jonathan Meeks and Jeremy West of Texas A&M University showing that raising the minimum wage reduces net job growth primarily by hampering job creation in expanding industries. The effect is especially strong for younger workers and in industries with a higher share of low-wage workers.

Nearly five years after the recession officially ended, less educated and inexperienced workers are still finding it hard to get a job. And, if Meek and West’s analysis of how the minimum wage affects job creation is right, these people are going to be unemployed for even longer and bear the brunt of a federally mandated wage increase.

As Holtz-Eakin explained, although increasing the minimum wage might cause some people to lose their jobs, it’s more likely to keep people out of work.

But, there’s more to the story.

Holtz-Eakin pointed out that the dividing line between those who are in poverty and those who aren’t is whether the person has a job.

The poverty rate is four times higher for people who aren’t working than for those who are, he said.

Holtz-Eakin isn’t opposed to paying people more. What he opposes is a federal mandate making employers pay more. He would prefer allowing companies to decide whether to pay workers more, as the retailer The Gap has said it will do, or to allow states to set their minimum wage rates above the federal rate, as 21 states and the District of Columbia have done.

Having a job is a good way to climb out of poverty.

A recent report from the Congressional Budget Office showed that raising the minimum wage from $7.25 to $10.10 would lift 900,000 people out of poverty.

That figure partly explains why Holtz-Eakin dismissed the CBO’s estimates as not being big enough to worry about. With 45 million people in poverty, helping fewer than one million doesn’t give much bang for the buck.

Holtz-Eakin made it clear that there’s a better way to win the war on poverty.

The earned income tax credit is that way.

The EITC, which has been around since the Ford administration, gives workers a refundable credit against their taxes that varies with income and family size and that phases out as earnings increase. The Urban-Brookings Tax Policy Center describes the earned income tax credit as a subsidy for low-income working families and estimates that 26 million households will receive $60 billion in reduced taxes and refunds due to the EITC in 2015. (The tax reform proposal released by Rep. Dave Camp (R-Mich.) would raise more than $200 billion over 10 years by significantly scaling back the EITC.)

EITC and wage

When people say that the EITC lifts families out of poverty they’re referring to statistics, like those from the Census Department, that show that the EITC and other refundable credits cut the poverty rate by 3 percentage points.

Policy analyst Ben Gitis of the American Action Forum gave another reason to prefer expanding the EITC to raising the minimum wage. A lot more of the people living in poverty get the EITC than earn the minimum wage.

Regardless of whether it’s the minimum wage or the earned income tax credit, you have to have a job to get the benefit.

And, with mounting evidence that raising the minimum wage stifles job creation, that may be why raising the minimum wage isn’t such a good idea after all.

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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