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Finding a better solution than $10.10

| Wednesday, February 19, 2014

One of President Obama’s most popular policy ideas as of late has been the proposal to “Give America a Raise” by raising the federal minimum wage to $10.10, up from its current level of $7.25. It’s not right, he argues, for a full-time worker to make less than the federal poverty line. While I agree with this sentiment, the truth is that now is simply not the right time to raise the minimum wage.
This past week, the nonpartisan Congressional Budget Office (CBO) released a report about the likely impact of a higher minimum wage. According to the CBO, an increase to $10.10 would likely increase earnings for about 16.5 million workers while costing another 500,000 their jobs. At first glance, this seems like it works out to a net positive, with several million people ending up better off. But let’s go a bit deeper and look at the distribution of the benefits of a higher minimum wage.

According to the CBO, a higher minimum wage would result in a total of around $31 billion in increased earnings for low-wage workers, but less than one-fifth of these earnings would actually go to low-income families, while around 30 percent would go to families earning more than three times the federal poverty limit. Why? Simply put, most workers earning the minimum wage are not members of low-income families. According to the White House, more than half of all minimum wage workers come from households earning more than $35,000 per year, and according to the Department of Labor, around a third of all minimum wage workers are teenagers between the ages of 16 and 19. Moreover, despite the president’s characterization of the minimum wage as a support for struggling families, according to the White House Council of Economic Advisors, only about a fourth of minimum wage earners have kids.

What all this suggests is that simply raising the minimum wage is not the most effective antipoverty policy in the world, with a lot of its benefits accruing to people other than those our antipoverty policies should best target. But despite that, it still might be a good idea were it not for the poor state of our labor markets and the existence of better alternatives.

A Gallup issues poll this week showed that Americans named unemployment as the largest problem in America, and it’s hard to disagree. As of today, the official unemployment rate in the United States is 6.6 percent. For high school dropouts, it’s almost 10 percent, and many believe that these numbers are lower than they otherwise would be because of discouraged unemployed individuals dropping out of the workforce altogether. While a minimum wage may bring good effects to some, is now really the time to adopt policies that make it harder for businesses to hire more low-wage workers? Admittedly, the academic literature on a minimum wage’s employment effects is unclear, but with a labor market as weak as ours, it seems prudent to play it safe.

Fortunately, there are other ways we can both encourage employment and alleviate poverty among low-income families. The biggest of these is the Earned Income Tax Credit (EITC), which acts as a wage subsidy to boost incomes of low-wage workers. Economist Michael Strain from the American Enterprise Institute argues that the EITC is precisely the policy we should be championing as an antipoverty tool, as it both supplements earnings and incentivizes work. Moreover, since subsidies phase out as incomes rise, the benefits of the EITC will target only those people who need it most — low-income workers — and not other groups, as the minimum wage does.

There is reason for cautious optimism about a potential EITC expansion. Along with his call for a higher minimum wage, President Obama did also call for an EITC expansion in his State of the Union address. I sincerely hope he makes progress on it. In talking about the EITC, the president also referenced Senator Marco Rubio, who recently outlined an antipoverty agenda which proposed reforming the EITC and turning it into a more direct wage subsidy for low-wage workers. House Budget Chairman Paul Ryan has also talked positively about the EITC in recent days, comparing it favorably to a minimum wage hike as an antipoverty tool.

Simply put, there is a better way to help the poor than just raising the minimum wage. An expansion of the Earned Income Tax Credit would encourage more employment, not less, and would more directly benefit the people that need our assistance the most. In a labor market as weak as ours, any policies that make it harder to hire low-income workers should be considered very thoroughly before enacted, and when better alternatives exist, they should not be enacted at all. I couldn’t agree more with the president. We need to do more to help low-income workers get out of poverty. But a higher minimum wage isn’t the right solution to the problem.

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