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March 8, 2013

Why Focus on the Minimum Wage?

March 8, 2013

Point-Counterpoint: The Minimum Wage (part 2) Read Austin Nichols's minimum wage counterpoint.

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Photo by Flickr user anthonyzh82, used under a Creative Commons License (cc-by-sa 2.0)

 

Focusing on the minimum wage ignores the critical distinction between what workers earn for their economic contributions and what families require for basic living standards. Common terms that inappropriately mix the two concepts include “a living wage” or a “family sustaining wage.” Even for a family with a single earner, no social benefits, and no other income (such as child support payments), their living standard will depend not only on the worker’s hourly wage but also on the number of hours worked. For all other situations, the wage rate and living standards are clearly very different concepts.

Clearly, a middle-income family’s ability to buy necessities does not depend on whether their teenage son or daughter earns $7.25 or $8.50 per hour. But what about families with only one low-wage earner? In this case, the earner’s ability to work steadily at a full-time job is more important than the wage rate. Why? Because of the income-related cash and in-kind benefits that go together with work and earned income.

Let’s take the example of a full-time, full-year worker earning the minimum wage ($7.25) and supporting two children. At $7.25 an hour for 2,000 hours, the worker would earn $14,500 per year, far below the 2013 poverty line of $19,530 for a family of three. However, after including what the family qualifies for in tax and food stamp benefits and deducting payroll taxes, the family’s spendable resources jump from $14,500 to over $24,000. While this amount is far from comfortable, it does bring the family’s income 24 percent above the poverty line. 

It is a noteworthy public accomplishment to have a benefit system that encourages and rewards work enough to move even a minimum-wage worker’s family above the poverty line. Now, of course, such a family would be even better off if the worker earned $9 per hour, even after losing one-third of the worker’s earnings gain to increased taxes and reduced benefits. But, what if that worker faced a greater risk of unemployment or had to curtail his or her hours because employers decided to hire fewer minimum-wage workers? Then the result is far from clear. Areas where wage rates in various occupations are especially low will be unlikely to absorb a 25 percent increase in the minimum wage without significant job losses or reductions in working time. In other areas, the group most likely to lose jobs is the least advantaged: African American youth. Because families need to earn about $13,500 to qualify for the maximum EITC and child tax credits, reductions in hours worked may limit the potential of low-wage workers to move above poverty. Although ongoing debates suggest that it’s unclear how many the minimum wage would put out of work, do we really want to risk losing jobs when only 40 percent of African American men age 18 to 24 hold jobs of any kind?

More broadly, raising the minimum wage diverts attention from policies that can raise earnings by increasing the productivity of workers. Instead of debating the best ways to achieve these gains, we are mired in a less productive debate over how much to mandate higher pay through an arbitrary government wage policy framed inaccurately as a family income solution.

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