Making More Pays Less
Author: Richard V. Burkhauser
Publication Date: July 2004
Newspaper: New York Times
Topics: Minimum Wage
Ithaca — ALL of us can agree that people who play by the rules and work hard should not live in poverty. On the surface, it would seem that raising the minimum wage paid to workers would help them out. But statistics tell a different story, one that should be considered by state legislators who plan to consider whether to raise the minimum wage in New York to $7.10 an hour from $5.15 when they go back into session this week.
First, raising the minimum wage is an inefficient way to lift workers out of poverty. Using Current Population Survey data, my colleague, Joseph Sabia and I estimate that 60 percent of the workers who will gain from this increase are the second- or third-highest earner in their family. Of the rest, 12 percent live alone. Only about 19 percent are single parents with children. This explains why only about 14 percent of workers helped by this minimum-wage increase live in poverty. Unlike an increase in the state’s income-tested earned-income credit, a general increase in the minimum wage is unable to discern between a low-wage teenager (who may be from a wealthy family) and a low-income head of household.
And sadly, while the benefits of the increase are not concentrated on low-income families, the costs certainly are. My research on previous minimum-wage increases found that low-skilled young adults (those without a high school diploma) suffer four times more employment loss from a minimum-wage increase than their more educated peers. Other vulnerable groups already struggling to maintain employment, such as young African-Americans, suffer similarly high job losses.
Researchers from Duke University show that the new competition for these jobs comes primarily from teenagers in higher-income families. These teenagers couldn’t be motivated to look for a job at $5.15 an hour. At $7.10, however, they will move into the labor force, which means more competition with low-skill employees for jobs. When they have the choice, business owners will hire these better educated teenagers instead.
Those jobs not lost in this way are automated or eliminated. Some lanes at your local grocery store now have self-checkout machines rather than cashiers. When is the last time someone bused your table at a fast-food restaurant or filled up your gas tank? These are all markers of opportunities once open to entry-level employees with little or no experience. And the lack of entry-level opportunities doesn’t simply deny low-skilled Americans employment, it deprives them of the opportunity to work their way up into higher paying jobs. Recent research from Miami University of Ohio and Florida State University found that about two-thirds of minimum-wage employees receive raises within a year of starting their jobs, and the median raise is six times higher than that of all other employees.
Fortunately, the solution for helping workers who live in low income families is right in front of us. New York already ensures that a minimum-wage worker in a low income family will earn well over $7.15 per hour through the New York earned-income credit supplement, which is one of the most generous in the United States. For instance, for every dollar in wages a low-income family with two children earns, the federal government provides a tax credit of 40 cents. New York adds 12 cents more to that credit. A low-income minimum wage worker in New York therefore earns the equivalent of $7.83 per hour total, or up to $5,000 per year from these credits. New York legislators who want to further help these low-income families should increase this credit, rather than a minimum wage that will primarily benefit those living in middle- and upper-income families.
In the long run, the key to higher wages for all workers is sustained economic growth. As we emerge from recession, this is not the time to block job opportunities for the least-skilled workers.
— Richard V. Burkhauser is the chairman of the department of policy analysis and management at Cornell.