Raising minimum wage not the answer
Author: Mike Flynn
Publication Date: April 2006
Newspaper: Cincinnati Enquirer
Topics: Minimum Wage
H.L. Mencken once cannily remarked, “For every complex problem there is a simple solution. And it is always wrong.” Right now Ohio’s complex problem is helping struggling families throughout the state to better provide for themselves. The simple solution is to raise the minimum wage.
Ohio will face a ballot initiative in November to raise the minimum wage to $6.85 an hour and then indexed to inflation thereafter. But if a company is forced to raise wages, it will also be forced to reduce hours or cut jobs altogether in order to maintain a profit margin (companies without profits will soon be employing nobody). Higher labor costs only spur the trend of replacing marginal employees with self-service or automation. Former Federal Reserve Chairman Alan Greenspan put it succinctly: “The reason I object to the minimum wage is I think it destroys jobs.”
Usually, entry-level positions are the first to be cut. This is a mere setback for a teenager starting his first job, but a disaster for a single parent, or sole earner of a family household. In this case, the “simple solution” is not only wrong but actually counterproductive.
According to David Macpherson, a Florida State University economist, a wage increase in Ohio would lead to the loss of almost 12,000 entry-level jobs and the economy would take a $308 million hit.
Meanwhile, the supposed benefits are minimal. Nearly half of all minimum wage earners are teenagers or young people still living with their parents. About 75 percent are part-time employees. It follows that the average minimum-wage earner comes from a family with an average income of just over $52,000. Almost 80 percent of the benefits of a raise in the minimum wage would go to families that are not poor.
The recurring argument on behalf of a wage hike refers to its supposed timeliness. There is a nice bit of sophistry in claiming that America’s workers haven’t had a raise in nine years. The mental picture painted is inevitably of the same workers working steadily at $5.15 an hour for nine years straight. This is rhetorically effective, but patently absurd.
It mistakes the lowest rung on the employment ladder for the employee who is standing on it. The fact that the rung itself is stationary doesn’t mean that the person attempting to climb the ladder is as well. On the contrary: because the rung is fixed, the employee can more easily gain a footing in the first place, from which to ascend.
Every year, nearly two-thirds of minimum wage employees receive a pay raise. The median wage increase for a full-time minimum-wage worker is 14 percent per year. This is nearly three times the average wage growth for all employees.
A far better solution than a wage hike would be for Ohio state legislators to develop an Earned Income Tax Credit modeled after the highly regarded federal program. An EITC provides tax-free income to those most in need. The program can be tailored according to individual families, taking into account overall income and number of children, among other factors. As a result, working families with incomes of under $25,000 a year receive 94 percent of federal EITC benefits. By contrast, only 11 percent of the intended recipients of a wage hike are the sole earner in the family.
From the federal EITC alone, a full-time minimum wage employee can experience an effective wage rate of up to $7.20 an hour. A state EITC will only add to this hourly wage. The success of this program has led 18 states and the District of Columbia to create their own EITC.
The Association of Community Organizations for Reform Now has called the EITC “the largest and most effective poverty reduction program in the country.” In light of such strong support for the EITC, it’s curious that ACORN is pushing the ballot initiative for a minimum wage increase in Ohio rather than the more effective EITC.
The EITC may not be a simple solution. But it is far more effective and, yes, moral than eliminating employment opportunities for those who most need them.