Maine news, sports, weather | Kennebec Journal, Augusta, Maine

March 17

Increasing cost of creating jobs is unwise in poor economy

Kevin A. Hassett

In announcing his wrongheaded proposal to increase the minimum wage to $9 per hour, President Barack Obama spoke in lofty terms: "In the wealthiest nation on earth," he said in his State of the Union address last month, "no one who works full time should have to live in poverty."

If the debate proceeds as it has -- many times -- in the past, then most Democrats will embrace the president's message and back the proposal, while most Republicans will oppose it, on the grounds that higher labor costs will lead to higher unemployment.

We shouldn't, however, rely on political opinions in this debate. Facts clearly demonstrate that raising the minimum wage is a bad idea.

The case against raising the minimum wage is straightforward: A higher wage makes it more expensive for companies to hire workers. How big an effect does this have on the job market?

Economists debate this, but no one argues that increasing the minimum wage increases the number of unemployed workers who find jobs. In the end, the trade-off is clear. People who keep their jobs get more money; those who lose their jobs, or fail to get new ones, suffer.

In announcing his proposal to increase the minimum wage, the president argued that doing so would alleviate poverty. The president is certainly correct to turn his attention to the poor, many of whom have been suffering for years in a tough economy. And it is clearly desirable for households that engage in full-time work not to live in poverty. But increasing the minimum wage would not accomplish this goal.

Research published in 2010 by economists Joseph Sabia and Richard Burkhauser concluded that if the federal minimum wage were increased from $7.25 per hour to $9.50 per hour (the president's proposal is to increase the minimum wage to $9 per hour), only 11.3 percent of workers who would gain from the increase belong to poor households.

Why?

First, many people who live in poverty do not work, and thus would be unaffected by an increase in the minimum wage. In addition, workers who earn the minimum wage are generally not the primary breadwinners in their households. They are secondary earners -- an elderly parent earning some retirement income or a spouse with a part-time job. Or they are young people living with their parents.

Data from the Bureau of Labor Statistics show that while workers younger than 25 make up only about 20 percent of those who earn hourly wages, they constitute about half of all workers earning the minimum wage or less. Raising the minimum wage is therefore an ineffective anti-poverty proposal.

The case for a higher minimum wage grows even weaker when we stop to consider that there are vastly superior alternatives for steering money to low-income households. For example, the nonpartisan Congressional Budget Office has found that expanding the earned income tax credit is a much more efficient way to fight poverty than increasing the minimum wage.

Why have we so often embraced a less effective tool? A tax credit is less politically palatable because it takes money directly out of federal coffers, while the minimum wage can be raised without it showing up directly on the government's books. The cost of a higher wage is borne by employers and consumers -- and by the unfortunate people who end up not working because of it.

It is also important to consider the president's proposal to increase the minimum wage in the context of today's labor market. The unemployment rate for African-American teenagers stands at a staggeringly high 43.1 percent. For white teenagers, the unemployment rate is 22.1 percent; a little more than 11 percent of workers older than 25 and without a high school diploma are unemployed.

(Continued on page 2)

Tweet