Raising minimum wage stands to hurt low-income workers

Original Article:

  • Author: Craig Garthwaite

  • Publication Date: February 2005

  • Newspaper: Detroit Free Press

  • Topics: Minimum Wage

No one who listened to Gov. Jennifer’s Granholm’s State of the State address could have mistaken her administration’s top priority — job growth. And no wonder. While the nation added 2.2 million new jobs last year, Michigan lost nearly 50,000, bringing the statewide unemployment rate to 7.3 percent — tying for last place with Alaska.

“We will recover … but not through the traditional solutions of another era,” Granholm said.

Yet that’s exactly what the governor proposed. Falling back on policies forged in Depression-era America, Granholm called on legislators to increase Michigan’s minimum wage by 39 percent. Lawmakers may still be promising a chicken in every pot, but raising the wage floor in today’s economy will force many of Michigan’s most vulnerable into the bread lines.

The governor ought to recall that Federal Reserve Chairman Alan Greenspan cautioned Congress just last summer against raising the minimum wage. The chairman pointed out that such a move “increases unemployment and, indeed, prevents people who are at the early stages of their careers … from getting a foothold in the ladder of promotions.”

Once they’re on the job, minimum wage employees make dramatic progress up the pay scale. Although proponents of wage hikes often argue that minimum wage employees haven’t had a raise since Congress last increased the national rate, few entering the workforce at the minimum wage stay there for long. Nearly two-thirds get a raise within 1-12 months, according to academic studies. After improving their skills and establishing their value, these employees receive raises at a rate nearly six times larger than everyone else. All without mandatory wage hikes.

A small group of the least skilled may remain at a minimum wage salary for extended periods. However, these are actually the people most likely to lose their jobs following a wage hike.

Duke University researchers have found that after an increase in the minimum wage, the lowest skilled adults are crowded out of their jobs as better-educated teenagers (frequently from wealthier families) are drawn into the workforce. Their “need”? Simply to earn money for video games and iPods. These teenagers require less training and are an attractive hire for employers seeking to get the most out of their dramatically higher payroll costs.

Businesses also adapt to mandatory wage increases by turning to automation or reducing service to their customers. Think this is unlikely? Just look at the proliferation of ATMs and self-checkout lanes at grocery stores. McDonald’s, one of the most reliable sources of entry level job opportunities, is already experimenting with fully automated self-serve kiosks instead of cashiers. These new technologies, designed to reduce labor costs, eliminate jobs in the process.

As she promotes wage floors as the most effective way to help low-skilled employees, Granholm is ignoring the changing demographics of the minimum wage labor force.

In the past, few women worked outside the home. Most teenagers had limited job opportunities. Consequently, in 1950, 77 percent of the families living in poverty received most of their income from a single low-wage adult employee. That number dropped to 45 percent by 1970. Today, only 34 percent of families in poverty depend exclusively on the earnings of a low-wage employee.

During her address, Granholm framed wage hikes as a way to rescue Michigan’s most economically disadvantaged — a purportedly vast underclass of parents supporting a family on just a minimum wage paycheck. But according to an analysis of U.S. Census Bureau data, only 14 percent of Michiganders currently earning less than $7 an hour fit that description. Most people working at this salary aren’t primary wage earners. Their average household income is actually more than $51,000.

In fact, a Cornell University study found only 15 percent of prospective wage hike beneficiaries across the nation are in poor families. Poverty is becoming a phenomenon confined largely to those who don’t work full-time (or don’t work at all). None of them will benefit from a minimum wage increase.

Every Michigander shares the governor’s heartfelt concern for the state’s low-skilled workforce. Fortunately, there’s a way to improve these employees’ lives without putting jobs at risk. Instead of bogging down in another debate over the minimum wage, Granholm and the legislature should be working to adopt an earned income tax credit for low-income Michiganders.

State earned income tax credit programs (patterned after their hugely successful federal predecessor) provide substantial tax-free income, but only to those with a job. Economists from the Federal Reserve and Michigan State University have found that earned income tax credit recipients increase their work output and enjoy higher earnings, leading them toward self-sufficiency. And unlike minimum wage increases, the earned income tax credit doesn’t lead to unemployment.

Gov. Granholm is right — Michigan needs to look beyond timeworn approaches to its unemployment crisis. But with other states already positioning themselves as the leaders of the 21st Century economy, Michigan can’t afford to backpedal with a minimum wage increase.