Higher Minimum Wage Is Imperfect Idea Whose Time Has Come

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U.S. President Barack Obama is seeking to resurrect an idea that he set aside during his first term: Raise the minimum wage to help lift working families out of poverty. The proposal, which would take the minimum to $9 an hour from the current $7.25, is far from ideal. Still, it’s the right thing to do.

A better way to keep people working and out of poverty would be to expand the earned income tax credit, a program that makes direct payments to low-wage workers through the income-tax system. The tax credit for a single working mother earning $20,000 a year would be $4,618, for instance.

Both the minimum wage and the tax credit subsidize low-wage labor. The difference between the two is that the minimum wage puts the cost of the subsidy on employers, whereas the EITC puts it on taxpayers. There lies the main advantage of the EITC and, in the current political climate, the main defect. Because it doesn’t burden employers, the EITC may be safer when it comes to preserving jobs. Because it doesn’t burden employers, it has to burden somebody else.

One argument popular among opponents of raising the minimum wage is that higher labor costs will force employers to make do with fewer workers. They exaggerate the danger. Certainly, too big an increase -- imagine $20 an hour, rather than $9 -- would put people out of work. The preponderance of recent economic research, however, suggests that an increase as small as the one the president proposes would have little or no effect on employment.

Low Wage

Also bear in mind how low the U.S. minimum wage currently is by international standards. In the U.S. in 2011, the annual earnings of a minimum-wage earner -- at about $15,000 -- stood at just 38 percent of the median worker’s earnings, according to the Organization for Economic Cooperation and Development. In the 25 other OECD countries for which data were available, the average minimum-to-median ratio was 49 percent.

The stronger argument against a minimum-wage increase is that it’s badly targeted. In 2007, the Congressional Budget Office estimated that only about $1 of each $7 in higher wages would reach workers in poor families. This is because most minimum-wage earners are from somewhat higher-income households -- think teenagers and college students with jobs at bookstores and coffee shops. The positive effect could be further eroded by inflation if businesses raise prices to offset the cost of higher wages.

By contrast, the same CBO report found that, with a well-tailored expansion of the EITC, more than $1 of every $2 in tax credits would go to workers in poor families. Increasing the credit for workers without children, for example, would improve incentives to enter and stay in the workforce.

If all that is true, why don’t we simply advocate an expanded EITC? Actually, we do -- but we’re under no illusions about its prospects in the current political climate. Any measure that increases the budget deficit has little chance of succeeding, regardless of how desirable it may be. Raising the minimum wage won’t be much easier, yet it’s in the realm of the possible.

Whatever happens on the minimum wage, Congress and the administration should confront the problem of declining real wages in more far-reaching ways. The recession and the long, slow recovery have had a uniquely adverse effect on wage earners, especially the working poor.

Average hourly compensation has fallen in inflation-adjusted terms since the economy hit bottom in mid-2009, something that has never happened in any recovery on record, going back to 1947 (see chart). Pay has declined even as workers have boosted output per hour by about 6 percent.

Rising Inequality

The causes of this trend aren’t clear, but the consequences are indisputable: rising inequality and stagnant or falling living standards for most Americans.

Faster growth must be part of the answer. As Obama has emphasized, the U.S. needs to make its workforce more employable by raising the performance of its high schools. It must pay fresh attention to vocational training for students who won’t go on to four-year colleges and for workers switching jobs. It must get a grip on health-care costs -- one of the forces driving the wedge between rising productivity and sluggish wages.

All this needs attending to and will take years. The problem of the working poor is too pressing to wait. Obama’s plan for the minimum wage will help at little or no cost. We support it.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.