Unintended Consequences

Original Article:

  • Author: Craig Garthwaite

  • Publication Date: December 2004

  • Newspaper: New York Sun

  • Topics: Minimum Wage

When it convenes on Monday, the New York Senate is expected to vote on rejecting Governor Pataki’s veto of an increase in the state’s minimum wage. If it succeeds, New York’s minimum wage will spike to nearly 39% over the federal rate by 2007. But instead of giving low-income New Yorkers an early Christmas gift, senators voting for the wage hike will be saddling them with a host of unintended consequences.

Lawmakers who make wage floors the centerpiece of their fight against poverty have foolishly ignored the changing demographics of the minimum-wage labor force. Old picture: Few women worked outside the home. Most teenagers had limited job opportunities. Consequently, in 1950, 77% of the families living in poverty received most of their income from a single low-wage adult employee. That number dropped to 45% by 1970. New picture: Today, fewer than 30% of families in poverty depend exclusively on the earnings of a low wage employee.

It is perhaps no coincidence that a Cornell University study found only 15% of the prospective wage-hike beneficiaries are in poor families. While proponents of minimum wage increases often frame their efforts as a way to rescue society’s most economically vulnerable – a purportedly vast underclass of single parents raising their kids on a minimum-wage paycheck – beneficiaries of the law are more likely to have a household income more than three times the poverty line. Poverty is becoming a phenomenon confined largely to non-workers. None of them will benefit from a minimum-wage increase.

Higher wages mean little to people without a job. Duke University researchers have found that after an increase in the minimum wage, low-skilled adults are often crowded out of their jobs as better-educated teenagers (frequently from wealthier families) are drawn into the workforce 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. Meanwhile, the adults who need their jobs to support themselves and their families are forced out of the job market and onto the welfare lines.

In Congressional testimony this summer, the chairman of the Federal Reserve, Alan Greenspan, repeated his long-standing conclusion that hiking the minimum wage increases unemployment. Much of that unemployment is focused on those who already have the most difficulty finding jobs. High school dropouts, who already suffer an unemployment rate more than 50% higher than the national level, are often replaced by teenagers following a wage hike. The impact on minorities is even more dramatic. Black young adults bear four times the employment loss of their non-black counterparts after a minimum-wage increase. In California, an analysis of a similar proposal showed that while Hispanics comprise 31% of that state’s workforce, they would have accounted for 58% of job losses. The law was vetoed on account of these chilling effects on California’s workforce.

Once low-wage earners lose their jobs, they lose one of the state and federal governments’ most effective anti-poverty tools. The earned income tax credit programs provide up to $5,000 in tax-free income, but only for those who have a job. As Governor Pataki stressed, this represents an effective hourly wage rate of up to $7.83 for a full time minimum-wage employee. Even better, the combined EITC programs don’t lead to unemployment. Economists from the Federal Reserve and Michigan State University have found that EITC recipients increase their work output and enjoy higher earnings, leading them toward self-sufficiency.

A wage hike in New York imperils other federal assistance that has been available to low-wage earners for decades. Why? Each of these programs has strict income limits set by the federal government.

Among other programs, Congress offers housing subsidies, food stamps, and health insurance through Medicaid to qualifying persons. Each of these programs can represent up to several thousand dollars for their recipients. State-level minimum-wage increases typically push low-wage earners just beyond the cutoffs for federal assistance while failing to provide sufficient supplemental income to replace the lost benefits.

Florida voters recently approved a measure raising the state’s minimum wage to nearly 20% over the federal rate. Even the measure’s supporters admit that 18,000 children of low wage employees stand to lose their health insurance as their parents move just beyond Medicaid’s income limits. The increase in earnings doesn’t come close to matching the value of the lost health insurance.

The low-wage employment debate requires new approaches to a changing workforce, not blind adherence to generations-old notions of poverty. When confronted over an apparent shift in his position, famed economist John Maynard Keynes responded, “When the facts change, I change my mind. What do you do, sir?” Let’s hope the state Senate doesn’t answer “Nothing.”