Lexington, KY - Following-up on a campaign promise to further strengthen America’s middle class, President Barack Obama proposed to raise the federal minimum wage to $9 per hour during his most recent State of the Union address in February. Less than a month later, Sen. Tom Harkin, D-Iowa, and Rep. George Miller, D-Calif., introduced the Fair Minimum Wage Act of 2013, a bill aimed at raising the minimum wage from $7.25 per hour to $10.10 by 2016.
Predictably, this reignited the minimum wage debate that has been all but dormant since 2007, the last time Congress increased the wage. The million-dollar question: Does raising the minimum wage help or hurt America’s working poor, businesses and the overall economy?
The cons
In 2007, Ken Troske, Ph.D. and senior associate dean of the University of Kentucky Gatton College of Business and Economics, conducted a study examining this precise question but with regard to Kentucky’s working poor. While he admits this study is somewhat dated, he believes its conclusions still ring true.
The study concluded that “both the poor families, which the minimum wage is intended to help, and the state as a whole would be, if anything, less well off if the wage were raised.”
Troske argues that the demographic of people who might benefit from such an increase is not necessarily the working poor but college students and others who are working to supplement their household incomes.
“Some of them may be poor, but a large number of them aren’t particularly poor — they’re living in middle-class households or they’re the second-earner in a reasonably well-to-do household,” said Troske.
Additionally, Troske said the minimum wage has little to do with why some Kentucky families are living at poverty-level and that most of these people already earn more than minimum wage, so raising it provides very little benefit to them.
“If you look at our report, one of the reasons people are poor is not because they are earning low wages; it’s because they’re not working a lot, for a variety of reasons,” said Troske.
Troske said there are better, more effective ways to help America’s working poor and offered the earned-income tax credit (EITC) as a prime example.
“The reason the EITC is so effective is because it’s targeted at the poor,” said Troske. “To get the earned-income tax credit, you have to live in a household that’s considered poor. People living in households that are poor qualify for the earned-income tax credit, not middle-class people who have middle-class teenagers who earn low wages.”
“Another thing the earned-income tax credit can do is help overcome child-care costs, because it essentially gives people a raise, helps them better overcome costs that are preventing them from working, and gets them in the labor market,” he said. “The evidence is overwhelming. This is one of the most effective poverty-reducing programs that we’ve seen in the last 30 years.”
Of course, a minimum-wage debate wouldn’t be complete without weighing the costs to do so.
“One of the things most people don’t seem to understand is if you are going to raise these people’s wages, the money just doesn’t drop from above — that involves a cost and someone has to pay for it,” said Troske.
So, who pays? Consumers and jobseekers, he says.
“It’s not like these businesses are making a lot of money, so the only way they are going to survive is if they raise their prices, and they’re going to have to pass the additional cost on to consumers,” said Troske.
Troske also contends that businesses will be forced to hire fewer workers in the future with a higher minimum wage, resulting in fewer opportunities for jobseekers.
The pros
But, on the opposite side of the debate, proponents of raising the minimum wage offer their own evidence of the benefits to the working poor, businesses and the economy.
Jack Temple is a policy analyst for the National Employment Law Project (NELP), a non-partisan, not-for-profit organization that conducts research and advocates on issues affecting low-wage and unemployed workers. Temple said the minimum wage was initially intended to increase with the cost of living, but over the past three decades or so, Congress has largely ignored this intention.
At the federal level, the minimum wage was last increased in 2009, when it rose from $6.55 to $7.25 per hour, the last of a three-step increase approved by Congress in 2007. However, before 2007, the minimum wage had been stuck at $5.15 per hour for 10 years. What’s more, the “tipped” minimum wage has been frozen at $2.13 per hour since 1991, plummeting in value to less than 30 percent of the minimum wage.
“Employers back in the late ’60s were already paying the equivalent of $10.50 in today’s dollars,” said Temple. “So this is basically just restoring the value that’s been shed over the last 30 to 40 years due to the fact that Congress has been too slow to update the minimum wage.”
Despite inaction at the federal level, Temple said that states have been acting in record numbers to boost their minimum wages. He said his organization has developed a “rich body of evidence” from these states that clearly shows no reduction in employment growth or changes in job-growth patterns.
NELP’s research shows that, from 2004 to 2006, 25 states raised the minimum wage, including seven states where voters approved ballot initiatives to do so. Ten states have adopted “indexing” for their minimum wages to keep pace with the rising cost of living.
“Contrary to what some claim, when you look at the whole picture, there are actually some savings that result from paying higher wages, the most significant being sharp reductions in turnover and, particularly for low-wage employers, turnover is a huge expense,” said Temple. “You have to recruit new employees, you have to retrain them. They’re not as good when they first start. Especially if you’re a retailer or in food services, a lot of products can get wasted if your employees don’t know how to manage stock appropriately.”
Temple said businesses can also expect increases in worker productivity as wages increase.
NELP is not the only organization supporting an increase in the minimum wage. Just this month, the Economic Policy Institute, a nonprofit, self-described non-partisan economic policy think-tank, released the results of an analysis that examined how raising the minimum wage to $10.10 would impact working families and the overall economy. The study concluded that this would boost the earnings of working families hardest hit by the recent recession, spur economic growth and net about 140,000 new jobs.
The debate over raising the minimum wage has only just begun but could be over before any meaningful dialogue takes place, as the vast majority of bills introduced to the House and Senate never make it past committee. But the president’s endorsement has, no doubt, placed the issue in the spotlight, which is sure to keep supporters and opponents abuzz and pave the way for more serious consideration by Congress.