It’s hard to advocate against policies designed to help the misfortunate. However, one of the worst ideas floating around Washington is to raise the federal minimum wage to $10.10 an hour. But before you call me heartless and say I hate poor people, let me quote Milton Friedman, who said that “one of the great mistakes is to judge policies and programs by their intentions rather than their results.” I believe that many have made this mistake over raising the minimum wage because, while it’s noble, it’s not an effective way to alleviate poverty in America.
The main reason is that a higher minimum wage causes lower employment among low-skilled workers, most often teenagers. A study by economists Sen, Rybczynski, and Van De Waal found that every 10% increase in the minimum wage rate causes a statistically significant 3%-5% drop in teenage employment. In addition, it also corresponds with a 4%-6% increase in the number of households categorized as “Low-Income” (2011). Interestingly, the increase in poverty constitutes lower earning families relying on working children for a significant portion of their wages. Therefore, the loss of teenage employment hurts them significantly.
Other studies have found the effects to be greater. Joseph Sabia while at the University of Georgia found that a 10% increase in the minimum wage causes teenage employment to drop between 5%-9%, and it reduces working hours for still-employed teens by 5% (2006).
The reason youth employment data are important is because, according to The Entrepreneur, the vast majority of minimum wage jobs are either entry-level positions useful for career advancement or low-skill ones that give quality work experience. In addition, “employers often select teenagers from middle-class families over poor adults” for minimum wage jobs due to teenagers’ “greater job potential.” Consequently, under 20% of minimum wage earners are actually from impoverished households. Therefore, raising the minimum rate would hurt young workers’ future job potentials more than it would reduce poverty (Shane, 2012).
Finally, data from the CBO suggests that raising the rate would be ineffective. To highlight the findings, an increase in the federal minimum wage to $10.10 an hour would cause a loss of 500,000 jobs. Of the 45 million people currently considered impoverished under law, just 900,000 (2%) would see their earnings increase enough to escape poverty (of course, we must “net out” the 500,000 newly unemployed, so it’s really only a 400,000 person improvement). Furthermore, while total earnings for minimum wage workers would increase by $31 billion annually, only 19% would actually go to impoverished households. 30% of the increased earnings would go to families making over 3 times the poverty limit, for reasons already discussed (2014). Clearly, the results aren’t optimistic.
Therefore, we must use different tactics to help the poor. One possible solution, according to The Economist, is to increase the Earned Income Tax Credit. By doing so, we’d be ensuring that help goes only to lower income families (unlike raising the minimum wage), and it does so without losing jobs or harming businesses (2006).
Of course, I’m not against increasing workers’ pay. Nor am I advocating to abolish the minimum wage. But I am against most government regulations and believe that consumers have more power than we exercise. Keep the rate at $7.25 nationally, with some higher state rates. But let businesses be free to decide whether or not to increase their own employees’ compensations above those levels (a few already have; a quick Internet search shows that Gap, Ben & Jerry’s, and Ikea, among others, already have self-imposed minimum wages above the mandated floor). Then, we as consumers must support those companies with our money. That’s the beauty of the free market; businesses cater to consumers’ desires. If consumers demand higher hourly wages, and back up demands with our spending, businesses will willingly oblige, all without government intervention.
