Blogs & Comment

Will raising the minimum wage help America’s poor?

Not really, writes Erica Alini

(Armando Arorizo/Pi/ZUMA Press/Corbis)

(Armando Arorizo/Pi/ZUMA Press/Corbis)

America is pondering raising its federal minimum wage. President Obama talked about it in his State of the Union address and again last Wednesday in a speech The Washington Post‘s Ezra Klein called the best one he’s ever given. Senate Democrats also introduced legislation to bump up the minimum pay, and by more than the president initially advocated. New Jersey, D.C. and a little airport town near Seattle just went ahead to lift their own wage floor beyond what’s federally mandated. Meanwhile, executives at McDonald’s and WalMart are having to review that “how to deal with labour strikes and collective bargaining” chapter of the corporate handbook that they never thought they’d need.

So, should America do it? The debate, as always, tends to centre on whether around the question of whether bumping up the minimum wage hurts employment. Would a pay raise for the working poor worsen the lot for low-income job seekers? Despite what you might have once learned in Econ 101, it’s no longer accepted wisdom that minimum wage hikes invariably lead to less hiring. Some economic research has found that higher minimum wages push up the jobless rate, while other studies have found they have no effect or lower unemployment by limiting turnover. After neatly rounding up the arguments pro and against a raise, the Financial Times candidly admitted it doesn’t know where to stand.

I find some of the minimum-wage discussions that have populated the Canadian blogosphere particularly useful. Here on Canadian Business, Stephen Gordon and Mike Moffatt have noted that hikes to minimum wages  don’t seem to significantly affect hiring as long as they remain below a certain threshold, namely somewhere around 40-45% of a country’s average wage. By that measure, America’s minimum pay – a paltry $7.25 an hour — has plenty of headroom to grow. In 2010 the federal minimum was only 27% of the mean U.S. wage, the second-lowest of any OECD country for which such data is available:

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Source: OECD

Stephen and Mike, though, tend to treat minimum wage raises as doctors do vitamins: They might not harm, they will tell you, but they won’t do much good either. That’s because wage increases that are small enough to not discourage hiring are going to be… well, small (and any increases bigger than that will disproportionally hit low-income job seekers). It’s also because only a limited percentage of the poor actually toil in minimum-wage jobs. Many of poor are unemployed or out of the workforce entirely. At the same time, many minimum-wage workers aren’t exactly destitute — like high-school students who flip burgers as part-time job. Now, I suspect there are more people in the U.S. than Canada who are trying to support their family on low wages, but the profile of typical minimum-wage worker in America isn’t too dissimilar from what you find north of the border. Fully half of those making the minimum wage or less (there are exceptions to the federal rule) in the U.S. are under the age of 25, and only 2% of full-time workers hold minimum-wage jobs, according to the Bureau of Labor Statistics.

A better way to help the poor, and help more of them, would be to bump up U.S. federal tax revenue — and it could be done without hiking rates, by simply closing loopholes and broadening the tax base — and redistribute more of that greater revenue back to low-income and middle-class families.

I suspect the Obama administration is aware of this but sees the minimum wage as a battle it can win. A majority of Americans, after all, say they’re on board with it. The good news it that it won’t be harmful, as long as the wage hike is small. And with the highest income disparity and poverty levels among rich countries, battered Uncle Sam could sure use some vitamins. The bad news is that this is all it’s going to be: A very sick man gulping down a couple of health pills. Truly helping low-income Americans is going to take much more.