In a November 2013 Gallup Poll, 76 percent of Americans favored a federal minimum wage increase to $9 per hour, up from the current floor of $7.25. Only 22 percent said they would vote against it. A year after this poll was conducted, Alaska, Arkansas, Nebraska and South Dakota passed a minimum wage increase through state referendums. There is no doubt this policy is popular politics.
In reference to raising the minimum wage, President Obama proclaimed in his 2014 State of the Union address, “Americans overwhelmingly agree that no one who works full time should ever have to raise a family in poverty.”
This is certainly a noble sentiment, but is a nationwide wage floor an appropriate response to helping poor families? According to White House data, only 26 percent of workers that earn minimum wage have kids. Would raising the minimum wage result in a net-positive effect for poor households? A paper in the Southern Economic Journal disputes this notion.
According to authors Joseph Sabia and Richard Burkhauser, “Only 11.3 percent of workers who will gain from an increase in the federal minimum wage to $9.50 per hour live in poor households.” The same paper finds that, “Of those who will gain, 63.2 percent are second or third earners living in households with incomes twice the poverty line, and 42.3 percent live in households with incomes three times the poverty line, well above $50,233, the income of the median household in 2007.” These numbers suggest raising the minimum wage would not be the best measure to target poverty in families.
Not only does fixating on the minimum wage not help the vast majority of poor families, it adversely affects an even larger population. Generally speaking, when the cost of an item goes up, people buy less of that item. The same goes for labor. Take Borderlands Books in San Francisco as an example. Borderlands has been in business for 18 years and has survived a 100 percent rent increase and a subsequent relocation, the rapid growth of online booksellers like Amazon, popular e-reading innovations like the Nook and Kindle and the recession that began in 2009. San Francisco’s new minimum wage law is causing Borderlands to close.
In a statement informing its customers of the closing, the store said, “Borderlands Books as it exists is not a financially viable business if subject to that minimum wage.” The effect of the mandated wage floor on Borderlands paints a bleak picture of not only its bottom line, but other businesses like it. The statement went on to say, “The change in minimum wage will mean our payroll will increase roughly 39 percent. That increase will in turn bring up our total operating expenses by 18 percent. To make up for that expense, we would need to increase our sales by a minimum of 20 percent.”
Other businesses and, by extension, current workers and future employees stand to lose a great deal if these compulsory wage increases continue. Businesses will have to respond by not hiring new workers, laying off current employees, slashing hours or closing up shop altogether. In an already tepid economic recovery, the last thing poor families need is a constricted labor market.
What is a more effective way to assist and offer relief to families below the poverty line? The Earned Income Tax Credit (EITC) is a government program that has proven to lift families out of poverty by encouraging work and then bolstering wages to incentivize staying in that job. An added bonus: it’s a bipartisan issue. President Obama and Chairman of the House Ways and Means Committee Paul Ryan find common ground when discussing the EITC.
As it currently stands, the EITC best serves individuals and families with children, but it could be utilized by more people and more effectively if it were expanded to help childless workers. This is a response to the rapidly declining labor participation rate and unemployment rate among young adults. According to a report released last year by the House Budget Committee Expanding Opportunity in America, “By increasing work’s rewards, the expansion would encourage formal work over informal work, make non-custodial parents more likely to pay child support, and possibly draw more people with disabilities into the workforce.”
The EITC shows there are alternatives to raising the minimum wage. While there is popular support for raising the minimum wage, it flies in the face of economic growth — just ask Borderlands Books in San Francisco.
