Why Raising the Minimum Wage Doesn’t Work

Jul 1, 2013 by AFP

Poll after poll shows that most Americans agree: the current federal minimum wage is not enough to live on. It’s hard to imagine a single parent trying to raise a child on just $15,000 a year. However, a closer look at the type of person that earns a minimum wage surprisingly suggests that almost no one depends solely on those earnings to survive. Instead, the largest group minimum wage recipients is comprised mainly of teenagers and spouses working to gain experience or supplement the main source of their family’s income. As such, decisions to increase the minimum wage do little to benefit the groups they are meant to help while hurting everyone else in the process.

According to the Bureau of Labor Statistics, there are about 1.6 million Americans earning minimum wage.  Of those Americans, 40% percent—over 600,000 people—are teenagers or other dependents living with family members. Another 56% are adults living with a spouse who also works. Therefore, over 96% of minimum wage earners do not solely depend on that income to live. A study by the Employment Policy Institute found that for eight in ten families with children in which one parent was making the minimum wage, the parent’s earnings accounted for less than 20% of the household’s total income. Based on these statistics, the vast majority of minimum wage workers are young entry-level employees hoping to gain experience or parents earning extra income for their families. The discussion about whether the minimum wage is a “livable” one largely ignores the conditions under which most people earn it.

The evidence that so few Americans depend on the minimum wage to survive may seem puzzling at first, especially since there are 16 million households living on less than $15,000 a year. Of those households, however, only 36% have someone that earns any income at all. Unemployment—not low wages—is the real problem. In fact, minimum wage hikes only make it worse. 85% percent of studies since 1990 have found that increasing the minimum wage causes companies to cut jobs. By reducing full-time employment opportunities, minimum wage hikes especially prevent low-skilled workers from gaining on-the-job experience, making them more likely to stay unemployed. High minimum wages have also been linked to the alarming rate of youth unemployment and underemployment as well. In light of these issues, it is clear that ensuring a high number of entry-level jobs for low-skilled and inexperienced workers is far more important than artificially raising wages.

What about the remaining 4%—some 64,000 people—that do depend on the minimum wage to live? Even for this small group of workers, a higher minimum wage is both unnecessary and harmful. First, workers that depend on the minimum wage to live qualify for the Earned Income Tax Credit (EITC), which supplements their income based on their pay and number of children. For example, a minimum-wage-earning parent with two children gets $5,236 a year, raising his effective pay from $7.25 to $9.77 an hour. In many states, the credit is even higher. Second, most people making minimum wage do not stay at that level for long. For example, a joint-study by Miami University in Ohio and Florida State University found that over two-thirds of people earning the minimum wage received raises within a year. Moreover, minimum wage earners’ raises, on average, are higher than pay increases for the rest of the labor force. Due to the risk of causing further unemployment, minimum wage hikes jeopardize the jobs minimum wage earners already have, depriving them of experience, the chance for promotion, and qualifying for the EITC.

The idea that many workers depend on the minimum wage rate to survive is merely an illusion. Unsurprisingly, policies that raise the minimum wage do not achieve what they set out to do, causing unemployment and hurting the job prospects of many in the process. If it is still decided that people cannot live on the minimum wage, a better solution would be to increase the Earned Income Tax Credit, which would still allow low-skilled and inexperienced workers to gain valuable job-experience while providing money to those who truly need it. Either way, the nature of the discussion on minimum wages needs to change if we want to fairly address the issues of poverty and teen unemployment in the country.
By Steven Russell