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Policy: Labor

Focusing on inflation-adjusted minimum wage is misguided

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Opinion,Philip Klein,Columnists,Barack Obama,Labor,Economy,Minimum Wage

Under fire for the botched rollout of President Obama’s health care law, Democrats have vowed to step up the push for increasing the minimum wage.

Politically, it’s easy to see the attraction of the idea, as it’s a long-favored Democratic policy that will help mobilize the party’s base in an election year, and the concept also has broad populist appeal.

But the arguments being made in favor of the minimum wage present a misleading picture of its role in economic policy.

To put things in perspective, when Obama wanted to downplay the number of individuals who had received cancellation letters due to his health care law, he portrayed the 5 percent who obtained their health insurance through the individual market as representing a small segment of the population.

In comparison, 1.6 million Americans earned exactly the federal minimum wage in 2012, according to the Bureau of Labor Statistics, and another 2 million had wages below that due to certain exemptions. Combined, the 3.6 million earning at or below the minimum wage represented less than 3 percent of working Americans.

A deeper look into the data cuts against the idea that this group is comprised predominantly of Americans working full-time at the minimum wage to support families.

According to the BLS, a slight majority of 50.6 percent of minimum wage workers are between 16 and 24 years of age; 64.4 percent were working part-time; and 65.2 percent were never married.

In an economic speech at Knox College in Galesburg, Ill., on July 24, Obama argued, “I am going to keep making the case that we need to raise the minimum wage -- because it's lower right now than it was when Ronald Reagan took office.”

It’s true that when Reagan took in Jan. 1981, the minimum wage of $3.35 per hour would actually be worth $8.11 per hour in July 2013 dollars, according to the Congressional Research Service, more than the current $7.25 per hour. But this doesn’t provide the full story.

David Neumark, professor of economics at the University of California, Irvine, has done a significant amount of work reaffirming the classical economic view that raising the minimum wage tends to reduce employment.

In a December blog post for the New York Times, Neumark explained that since the late 1970s, federal policy has shifted away from the minimum wage as a means of helping low-income families and toward expanding the Earned Income Tax Credit.

The EITC helps subsidize certain low- and moderate-income working Americans. Because the subsidy grows for those with children, it’s more targeted at providing assistance to families than raising the minimum wage, which could just as easily benefit an affluent teenager with a summer job.

“Economists of all persuasions in the minimum-wage debate agree that mandated wage floors do a bad job of directing benefits to low-income families,” Neumark wrote. “This is confirmed in recent research by my graduate student Sam Lundstrom, calculating who would be affected by increasing the current federal minimum to $8.25 from $7.25. He finds that only 21.3 percent of the affected workers would be in poor families, while 30.9 percent would be in families with incomes more than three times the poverty line.”

Neumark looked at data going back to 1976 (when the tax credit went into effect) and calculated the earnings of an adult with two children working full-time at the minimum wage and taking advantage of the EITC. He found that “the real income of this family is as high or higher than it was in past decades — when the real minimum wage was relatively high — and much higher than it was in most of the intervening years.”

Thus, any argument in favor of raising the minimum wage that rests on the idea that it’s declined in value when adjusted for inflation should recognize that other government policies have been put into place to target assistance to low-income families.

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Author:

Philip Klein

Commentary Editor
The Washington Examiner