Minimum wage hike? Maximum problems

Original Article:

  • Author: Mike Flynn

  • Publication Date: March 2006

  • Newspaper: Philadelphia Inquirer

  • Topics: Minimum Wage

Oscar Wilde once cynically remarked, “All bad art is the result of good intentions.” The same is often true of bad economic policy. A case in point: This month, the Pennsylvania Senate will consider a bill to raise the minimum wage – possibly to as high as $7.15 an hour.

The minimum wage was introduced in 1938 to combat the exploitative working conditions in an economy reeling from depression and economic shocks. Although economic realities have drastically improved since then, much of our discourse on the subject has not. Many still imagine the minimum wage as one of the front lines in the battle for economic justice, with unscrupulous bosses on the one side and the downtrodden masses on the other.

If only it were that simple.

Caricatures like these have long allowed adherents of wage-hike policies a political free ride, despite the obvious costs of their proposals. If a company is forced to raise wages, it will also be forced to cut jobs or reduce hours in order to maintain a profit margin. 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.

According to David Macpherson, a Florida State University economist, a wage increase in Pennsylvania would lead to the loss of more than 10,000 entry-level jobs and the economy would take a $350 million hit. Meanwhile, the supposed benefits are minimal. Nearly half of all minimum-wage earners are teens or young people still living with their parents – many of them quite wealthy. Most are part-time employees. Eighty percent of the benefits of a raise in the minimum wage would go to families that are not poor.

While there remains a perception that large corporations will merely be reaching a little deeper into their already deep pockets in order to finance the wage hike, 97 percent of Pennsylvania firms are small businesses. They would be particularly ill-equipped to deal with the costs of raising employee wages.

This is not to say that nothing useful can be done. Legislators have a great opportunity during a special hearing March 21 and 22 to work toward developing an Earned Income Tax Credit (EITC) in the commonwealth. This program, providing tax-free income, was originally instituted to reimburse working families for their federal income tax. Its success led a number of states to enact their own programs.

The Pennsylvania legislature could increase the credit according to the number of children in a household. Under such a program, a household head working full time and making minimum wage could potentially earn an effective wage rate of more than $7.20 an hour.

Working families with incomes of less than $25,000 a year receive 94 percent of federal EITC benefits. The program is specifically tailored to help those who are most in need. A wage hike, by contrast, simply disperses the money to whoever is making minimum wage, regardless of family income.

As former President Bill Clinton said: “We can increase the Earned Income Tax Credit by a couple of billion dollars a year and, far more efficiently than raising the minimum wage, lift the working poor out of poverty.”

There is no reason why the needs of low-income families throughout the state cannot be met with reasoned, considered policies. It is not enough merely to want to do good. To paraphrase somewhat, the road to economic stagnation and increased unemployment can be paved with good intentions. And good intentions are not enough.