Follow the FreeStater Blog by Email

Wednesday, February 5, 2014

The Minimum Wage is a Poor Way to Support Working Families in Maryland

In a prior post, I argued against minimum and living wage schemes on the basis that they harm unskilled laborers and are far less effective than tax schemes like the Earned Income Tax Credit when it comes to targeting the working poor.  As Maryland lawmakers continue to consider a substantial hike in MD's minimum wage, I have been encouraged by the number of folks speaking against the perceived wisdom of such an increase.  Let me be clear, I do not oppose raising the minimum wage. In fact, I think a review of the history of the wage suggests that it should be raised to approximately $8.40 an hour and then indexed to inflation thereafter. But the proposal to make the MD minimum $10.10 by 2016 simply goes too far and would likely have significant negative effects on youth and unskilled employment levels.

In recent commentary, Barry Rascovar discussed the problems with a one-size-fits-all wage approach in a state with very different cost of living standards. Much like myself, Rascovar pointed to the better policy approach f increasing the Earned Income Tax Credit (a negative income tax that supplements the earnings of the working poor - especially those with children). Today, Howard Leathers, an associate professor in the Department of Agricultural and Resource Economics at the University of Maryland, published a piece in the Baltimore Sun in which he outlines the seemingly paradoxical reality that a substantial increase in the minimum wage would reduce net income for a working parent. In the example provided by Leathers, a 59% increase in the minimum wage would actually result in a 3% decline in net income for a working parent. How can that be? The answer is simple, with the higher wages, the low income working parent would pay higher taxes and lose eligibility for crucial social supports such as Food Stamps, subsidies for child care, and housing assistance.

Many may consider it a good thing for people to be more self reliant. In fact, decreased eligibility for social programs would result in less government spending for those programs - in theory. But consider the costs. The decreased government spending would be offset by higher spending by employers as a result of the higher hourly wage. Many of the businesses that pay minimum wage are small businesses with precious little profit margin. Faced with higher wage costs, those businesses would likely increase prices (if the market will allow) and customers would pay more for goods and services. Those businesses are likely as well to reduce their labor costs by reducing their workforce - meaning more unemployed individuals suddenly eligible for social support services. So we'd be left with some workers receiving a higher wage, but many being worse off due to lost benefits. And we'd have more people unemployed and drawing on the social services that the higher wages were supposedly replacing. It's a perverse form of income transfer as the low income workers who lose their jobs transfer their lost income to those who keep their jobs. Then, those who keep their jobs transfer their social service benefits to the newly unemployed.

And make no mistake, a minimum wage hike like that being proposed in Maryland will have a  negative impact on employment. Consider just two recent studies - in the first, professors from Texas A&M University determined "that the minimum wage reduces net job growth, primarily through its effect on job creation by expanding establishments. These effects are most pronounced for younger workers and in industries with a higher proportion of low-wage workers." In other words, businesses respond to higher wages by either not expanding or by hiring fewer employees when then do expand. The second study is the most compelling. Most studies of the employment effects of the minimum wage consider the impact of marginal increases in the wage - increases in the range of 10% or so. Maryland is considering a 40% increase in its minimum wage. Such dramatic increases are rare, and even more rarely studied. New York state implemented a 30% wage increase about 10 years ago and a recently published paper examined the impact of that increase. According to the authors - all college professors with expertise in the matter -  "the NYS minimum wage increase is associated with a 20.2% to 21.8% reduction in the employment of less-skilled, less-educated workers, with the largest effects on those aged 16 to 24."  Their results provide substantial evidence that state minimum wage increases can have significant adverse labor demand effects for low-skilled individuals.

To put the New York study into perspective, consider this - the unemployment rate in Baltimore City for those aged 16-24 is a devastating 31%. That is more than twice the statewide youth rate of 13.4% and nearly double the national rate of 16.1%. Imagine a 21% increase in youth unemployment in Baltimore City. Instead of a devastating 31% we'd see a catastrophic 37.5% rate. That is simply unacceptable - but the empirical data, and Governor O'Malley always claims to be driven by data and not ideology, suggests that a $10 minimum wage would only exacerbate an already out of control unemployment problem in Baltimore. Good luck finding anyone who would argue that a 40% increase in the minimum wage would improve the employment situation in Baltimore City.  The Governor and the folks at Raise the Wage estimate that over 500,000 workers would get a raise if the minimum were set at $10.10. With just under 3 million employed workers in the state that amounts to nearly 20%! That represents a significant cost imposed upon businesses - how can anyone seriously think that employers will not respond by trimming hours, cutting positions, and refusing to hire the young and the less skilled?

I'd like to address as well the issue of income inequality and effective means of targeting the needs of the working poor. Minimum wage laws are indiscriminate and incredibly inefficient policy tools. Is it really a problem if an 17 year old middle class kid living at home earns $7.25 an hour while working at a fast food restaurant? The obvious answer is "no." That kid is not supporting a family and is not trying to "live" on minimum wage. At present, one-third of those earning the federal minimum wage are teens, and just over half of minimum wage earners are under the age of 25. The vast majority of minimum wage earners are not the sole source of income for a family. But employers are not permitted to offer different wages to different employees doing the same job simply based on need (keep in mind, it was once common for employers to pay men more than women for doing the same job based on the notion that men had families to support - today we call such practices discriminatory). Using the minimum wage to target the needs of working families would require employers to pay substantially higher wages to all workers. So in order to provide a $10.10 wage to a working parent with two kids an employer would need to provide that same wage to an upper middle class kid working part time to earn pizza money. That is not sound policy.

I may not care if that middle class kid earns $7.25 an hour, but do I care if a mother or father working one full time or several part time jobs is unable to meet the basic needs of their family. As a policy person, and as someone who believes in "to each according to their need," the question must be - how can we best support that family? The answer is not some misguided one size fits all minimum wage that treats the 17 year old and the single parent as if they are the same. The answer is not a minimum wage hike that effectively lowers the net income of working parents while simultaneously increasing unemployment.

Social support programs such as Food Stamps, child care subsidies, and the earned income tax credit allow society to effectively target need without creating the negative effects of artificially inflated wages. And perhaps of even greater import, these social programs are more effective at addressing inequality. A higher minimum wage simply transfers income between low income workers - those that keep their jobs and those that lose their jobs. But social programs like those listed here effectively transfer income from the well-off who pay income taxes to the less well off who earn too little to pay income taxes.

Those advocating the $10.10 an hour wage like to claim that had the minimum wage in the late 1960ssimply kept pace with inflation the wage today would be well be roughly$10.50 per hour. Unfortunately, those folks are being intentionally misleading.

The following graph, courtesy of the unbiased folks at PEW, shows that the period from the late 1960s through at least 1981 were an unusually "generous" period for the minimum wage. But the period was far from the norm. If one were to select the late 1940s or the late 1950s as the basis for today's wage in would be far below $10.50, below $10.10, and below the current level of $7.25  - so claims of an inflation adjusted $10 minimum wage are simply disingenuous.  That said, there is a case to be made that the inflation-adjusted average wage for the "generous" period should serve as a baseline for the wage moving forward. Without question, a concerted effort was made to increase the purchasing power of the minimum wage throughout the 1960s and 70s before a long slide began in the 1980s through until 2009. Boosting the wage to the 1960s and 70s level would yield a minimum wage for 2015 of approximately $8.40 per hour. If it were then indexed to inflation and automatically adjusted every year it would no longer go throw long periods of decline followed by sudden increases - it would provided some degree of predictability in the value of the wage to workers and the cost to consumers.

The real choice facing lawmakers in Annapolis is not whether or not they should support working families, rather it is how best they can support those working families. I think a wage of $8.40 per hour, adjusted for inflation, is the best option for the state and the country.