Though the Minimum Wage Needs a Boost, it is not a Living Wage

In prior posts, I've argued against proposals in Maryland to raise the minimum wage to $10.10 per hour on the grounds that it will do significant damage to the employment prospects of young and unskilled workers - and not provide much actual help to the working poor.

What I've not made clear is that 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. Those advocating the $10.10 an hour wage like to claim that had the minimum wage in the late 1960s simply kept pace with inflation the wage today would be well be roughly$10.50 per hour. Unfortunately, those folks are being intentionally misleading.

In fact, a new Congressional Budget Office report puts the lie to most of the claims made in support of the $10.10 minimum wage. According to the report, such a wage hike would result in the loss of 500,000 jobs. Though the wage hike would theoretically inject $31 billion dollars into the economy, only 19% of that would benefit families living in poverty while 29% would benefit families earning three times the poverty level or more - this is because most of those earning the minimum wage are not in poor working families. But the $31 billion figure is actually meaningless. The CBO estimates that 93% of the $31 billion would be negated by lost income to businesses, lost income from the resultant job loss, and lost income due to higher prices caused by the wage hike. In Maryland, Martin O’Malley has argued that a $10.10 minimum wage would pump $456 million into the Maryland economy, but if the CBO estimates are accurate, that $456 million would actually be less than $30 million owing to job loss, higher prices and lost business income. As an alternative, the CBO considered a $9 minimum wage as well and noted far fewer negative effects.

Are Minimum Wage Earners Young and Childless or Working Parents?
The other justification for the $10.10 per hour proposal is that it would raise the income of a family of four, with a single parent working full time, to the poverty level.  But this a dubious goal. The average family size in American is 2.6, not 4. At a recent town hall meeting in southern Maryland Senator Ben Cardin offered some less than helpful statistics regarding those earning minimum wage. He said that roughly 2/3 are women and the average age of an earner is 35. His intent was clearly to create the impression that most minimum wage earners are single Moms. This is not the case. Roughly 1/3 of low income families are in house holds with a single adult.

As to the average age, the statistics shows why social scientists have three measures of central tendency, 1) the mean or simple average, 2) the median or value at which half the observations are above and half are below, and 3) the mode or the most frequently observed value.  Though most people are familiar with concept of an average, the measure can present a skewed picture. Imagine 10 people, 9 of them have $10 and one of them has $1,000. Calculating the average cash on hand is easy - $1,090/10=$109. Clearly that is not an accurate accounting of the group. The median and modal values would be $10 - more accurate.  So, back to minimum wage earners - consider the average age of 35 and a working life of 16-65 years of age. There are 19 measurable years between 16 and 35, but there are 30 measurable years between 35 and 65. Because our working life excludes our first 15 years of life, the simple average age of a minimum wage worker would skew "old." Consider how difficult it is to reconcile the average age with this fact: 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. If just over half are 25 of younger it suggests the median age is approximately 24 years old. And one final point, the vast majority of minimum wage earners are not the sole source of income for a family. So suddenly the image of minimum wage earners as single Moms disappears. It is true that about 1/4 of minimum wage earners fall into the category of parents with children - but it's inefficient and poor targeting to implement a 40% wage hike for the 75% of wage earners who are no parents supporting a family just to provide an income boost to 25% - and a recent piece in the Baltimore Sun demonstrated that as a result of the wage hike, many of those in that 25% would lose eligibility for social supports and wind up with less net income.

Would the Inflation Adjusted Wage Really Be over $10 per hour?
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.  In the end, none of the main arguments for a $10 wage hold up to serious scrutiny.

Should the Wage Be Higher?
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 thereafter it would no longer go through long periods of decline followed by sudden increases. As result, it would provided some degree of predictability in the value of the wage to workers and the cost of labor to employers.

In a prior post I cited a New York study that estimated a 20% jump in job loss among the young and the unskilled as a result of a 30% hike in the state's minimum wage. Applying those findings to Baltimore City, where unemployment among those aged 16-24 is a devastating 31%, could lead to an unimaginable 37.5% unemployment rate. Beyond Baltimore City youth, the overall unemployment rates in Baltimore City, Washington county in western Maryland, and the counties of the lower Eastern Shore show that significant portions of the state simply could not absorb the job shock likely to be caused by a 40% wage hike.

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 17%! That represents a significant new 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?  How can anyone believe that the state's high unemployment counties will be made better off?

Senate President Mike Miller has been less than receptive to the idea of a $10.10 statewide minimum. He has raised the possibility of allowing counties to set their own wages. Though that is certainly preferable to a statewide minimum of $10.10 per hour, I think a wage of $8.40 per hour, adjusted for inflation thereafter, is the best option for the state (and the country). 

Why I Oppose Making the Minimum Wage a Living Wage

I get flack for opposing living wage schemes and minimum wage hikes... but I'm proud to oppose both. And I oppose them because I believe in a simple philosophy, "from each according to ability, and to each according to need." Neither the living wage nor a higher minimum wage live up to that belief - in fact, they undermine it. A column today from David Neumark perfectly captures my beliefs on the matter - so I quote from it heavily in the paragraphs below.

"Proponents of raising the minimum wage often point out that the real minimum wage is lower now than it was decades ago.  But the federal policy aimed at low-wage work and low-income families has shifted — wisely — away from reliance on the minimum wage and toward a generous earned-income tax credit, which is better focused on poor families.  There is nothing wrong with reducing our reliance on a less effective policy when we have adopted a more effective one.  In fact, we should hope that research on public policy leads to exactly this kind of outcome."

Minimum wages and living wages are indiscriminate and incredibly inefficient policy tools. I don't care if an 17 year old living at home earns $7.50 an hour to put a basket of frozen fries into a vat of oil. I would care if that kid suddenly made $15 for doing the same skilless task. However, I do care if a mother or father is working a full time or even several part time jobs and is still unable to meet the basic needs of their family. As a policy person, and as someone who believes in "to each according to 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 parent as if they are the same.

The Earned Income Tax Credit allows us, as a society, to support working families by targeting income to those who need it most. "So suggesting that federal policy addressing low-wage work and low-income families has somehow failed because the minimum wage has not kept pace with inflation ignores the fact that we have moved away from a focus on the minimum wage — a policy with many flaws — and toward the earned-income tax credit."

"Nonetheless, there are important differences between the earned-income tax credit and the minimum wage. The fundamental difference is that the earned-income tax credit aims benefits at low-income families with children, rather than simply low-wage workers. This is in large part its virtue, and it makes a lot more sense than the minimum wage’s focus on low-wage workers."

The earned income tax credit is targeted to working families, it enjoys bipartisan support, it's indexed to inflation, and it does not negatively impact the employment of teens and unskilled workers. It is in every way superior to a living wage or a higher minimum wage. And people and policymakers who want to help working families really need to shift their focus away from those inefficient and inappropriate policy options.

I Support a Minimum Income, but Oppose a Living Wage

On Thursday February 16th a forum will be held at St. Mary's College to discuss whether the staff at the college should be paid a living wage. According to material distributed by organizers of the forum, some staff at St. Mary's earn as little as $24,500 per year while the annual cost of living in St. Mary's County is $34,000. Many of the staff employed by the college are single parents.

I sympathize with the motives of the living wage proponents, unfortunately I cannot support them in their effort because it would harm the very folks it's meant to help and would do nothing to address the growing problem of income inequality in America. I hope this forum provides an opportunity to discuss alternate, and I think better, ways to raise the standard of living of working folks and address the problem of inequality.

To elevate the salary of someone earning $24,500 to the living wage of $34,000 would require nearly $10,500 when factoring in the College's share of Social Security and Medicare taxes. In the end, to raise the salary of two staff members would require an amount nearly equal to the salary of one staff member in the absence of a living wage. Assuming the state refuses to provide sufficient funds to pay for the raises required by a living wage (a reasonable assumption) the only way to fund the pay increases would be to reduce the number of staff.  So for each two staff members who receive a pay increase, one staff member would receive a pink slip.

Economist David Neumark studied the effect of living wages after Baltimore City instituted such a policy in 1994 for workers paid through publicly supported funds. Neumark found forcing up wages causes demand for labor to fall. In his study he determined workers covered by the living wage law typically see a 3.5 percent increase in wages, but there was a 7 percent increase in unemployment among low-wage workers.

The living wage essentially creates an income transfer between low income people. In this case, two people see their standard of living rise at the expense of another person's job. Living wages are a poor means by which to increase living standards and do virtually nothing to deal with inequality. Worse, a living wage is a blunt instrument that does nothing to address actual need. A living wage would provide the same income to a working single parent with children as it would to a 17 year old dependent living at home.

But there is a better approach. The earned income tax credit (EITC) is a refundable tax credit offered by the federal government and the state of Maryland. The EITC offers low income workers additional income, and because it is linked to family size, earnings, investment income, and other measures it is based on need. The 17 year old living home with Mom and Dad would not qualify, but a single parent would, and the amount of the credit would reflect such crucial matters as the number of dependent children in the family.

Under current tax law, a single parent with one child earning $24,500 would qualify for approximately $2,000 through the federal EITC (the amount is larger as income declines). In Maryland, the typical EITC amount is roughly half the federal amount - in this case $1,000.  So the staff member earning $24,500 in 2011 would actually receive $27,500.

But there's more. There is also the federal child tax credit (CTC) of $1,000 per child. The tax credit is used first to reduce your federal tax bill, but for low income parents if the amount of the credit exceeds the total taxes due the parent can receive the difference in a refund via the additional child tax credit (ACTC) - this could mean an addition $1,000 for a family with one child.

Perhaps more important, because the EITC and the ACTC are distributed via taxes they transfers income from those who pay income taxes to those whose incomes are so low that they do not - it redistributes wealth from those who have to those who have not. No employer needs to worry about firing one employee in order to increase the pay of two others. And living wage movements that target only specific employers distract from the larger and more important goal of reducing inequality in society.

If folks really want to address income inequality the better approach is to lobby the state to increase the EITC and ACTC for low income earners. If you believe in the basic premise of "from each according to his ability, to each according to his needs" then the living wage is not the way to go. It removes from society the burden of responsibility to see to it that those who work are able to provide for their families. Only through a collective mechanism such as the tax code and the EITC and the ACTC can we address the issues of income inequality and ensure that we are not increasing the burden on the very folks we seek to help.