During the State of the Union address on Feb. 12, President Obama outlined his plan to bring more prosperity to the middle and working class by calling for a hike in the federal minimum wage from the current $7.25 an hour to $9 an hour. The last time the minimum wage was raised was in 2007 and it’s time for it to be raised again.
Any economics textbook will tell you that the minimum wage is a terrible policy because the hike in wages spreads the available capital for labor among a smaller segment of the work force which leads to higher unemployment. Essentially, a higher price for labor leads to a price above equilibrium on the supply and demand chart. While this may be true, there has been some empirical evidence that raising the minimum wage by small amounts does not lead to unemployment.
A study in 1994 done by David Card and Alan Krueger observed a minimum wage change in New Jersey and contrasted that change with the static eastern Pennsylvania minimum wage. The study focused on the fast food industry and surveyed 410 different establishments after New Jersey raised its minimum wage from $4.25 to $5.05.
The study found that over the course of a year there was no statistically significant change in employment in New Jersey except for a relative increase in employment among teenagers. Consequently, this study showed that minimum wage increases account for little or no change in employment.
Despite some empirical evidence that small increases in the minimum wage do not harm employment in the short term, it is still not the most effective means of eliminating poverty. Ideally, a better approach to ensuring that those at the bottom of the economic ladder are able to adequately provide for themselves is to give wage subsidies to those below the poverty line. This line of thinking was the brainchild of famed economist Milton Friedman and led to the establishment of the Earned Income Tax Credit (EITC) in 1975.
The EITC is a subsidy given to workers in a full time job that still do not make enough to cover basic living expenses and are still below the poverty line. This isn’t a welfare handout; those who wish to receive the tax credit must work a full time job in order to qualify. However, in order to qualify, most need to have dependent children. This leads to a significant portion of the working class ineligible to receive the tax credit due to not having children. The standards should be changed to include single adults without children. Poverty does not only strike those with children.
In 2009, as part of the stimulus program, the EITC was increased to account for families with three or more children and to slightly lower the threshold for married couples. As part of a compromise with Republicans, single adults were again left out of the expansion of the EITC.
Since a massive expansion of the EITC to eliminate poverty is a political non-starter, the next best policy tool to give workers a living wage is to raise the minimum wage. It may not be as efficient as the EITC but it is politically popular and it is much easier to get through a fight in Congress than a massive expansion of the EITC to include everyone under the poverty line.
Ironically, it’s the Republicans who have an aversion to the expansion of the EITC despite the fact that it was their party that implemented this program. The people who compose the “47 percent” mentioned by Mitt Romney that don’t pay federal income taxes, are people who already work a full-time job but receive the EITC to compensate for not making enough to escape poverty. There is a segment of the Republican Party that views these subsidies to workers as handouts and that they should be eliminated rather than expanded.
It’s a shame that the most efficient solutions to eliminating poverty cannot pass political muster and thus less efficient solutions are the only options left on the table. Raising the minimum wage will not hurt lower income workers as some have suggested, but rather it will increase the standard of living for those at the bottom.
Alex Caraballo can be reached at alex.caraballo@spartans.ut.edu