Is Increasing the Minimum Wage the Way to Solve Poverty?

Late this past June, economists at the University of Washington released a study that indicated that Seattle’s minimum wage increase from $11 to $13-per-hour resulted in a cut in low-wage workers’ hours by more than 9%. The study posits that this cut in low-wage workers’ hours can be translated as a loss of 3.5 million hours worked per quarter; a $125 average decline in low-wage employees’ earnings per month and; a total of 5,000 jobs lost in Seattle.

To libertarians and conservatives, these results are not surprising: experts and activists from these political ideologies have been saying that an increase in the minimum wage would result in a decrease in employment – workers either getting hours cut or getting laid off – since its first inception in 1938, with the Fair Labor Standards Act.

Why Has There Been Opposition to the Minimum Wage? Hint: Its History is NOT Pleasant

Libertarians and conservatives have opposed the minimum wage since its inception on the basis of that it doesn’t take into consideration that: 1. Different industries have different costs (some of which are required by regulatory means), and therefore cannot afford the minimum wage without going out of business and; 2. Different states, cities and towns, and territories have different costs-of-living indices, so they need not and cannot have the same ‘minimum’ wage. Additionally, some would even argue that the minimum wage is ineffective, because it doesn’t keep up with inflation.

Moreover, libertarians and conservatives have opposed the minimum wage based on its inevitable results – which are, and always have been, similar to those of what has happened due to Seattle’s experiment with it.

The data have always shown that increasing the minimum wage prices low-skilled workers out of the market. To prove this, let’s examine a few datum points which show the results of the minimum wage.

The Fair Labor Standards Act of 1938 applied the same minimum wage of $0.63-per-hour to all States and territories, including Puerto Rico. In 1938, the average U.S. wage was $0.25-per-hour so this only affected about 300,000 workers. However, the average wage in Puerto Rico was a mere $0.12. In 1938, the New York Times reported the result that this minimum wage legislation had on Puerto Rico:“The law applied to Puerto Rico ends employment for approximately 120,000 persons It is also believed to terminated prospects for any possible further industrialization.”

If we are to fast-forward to 1979, in a study done by J.R. Kearl and other economists, it is stated that 90% of economists believe that an increase in minimum wage increases unemployment.

If economists’ research wasn’t enough, there are also several – if not many – examples of businesses in ‘low-wage’ industries trying to mitigate the effects that minimum wage legislation has on their costs, profits, and ability to stay solvent. Both McDonalds and Wendy’s have explored implementing robots to replace human capital, so that they can stay solvent and profitable if there was a national increase in minimum wage by Congress.

When libertarians and conservatives explain these data, they are often criticized for not wanting to help the poor; however, that is quite contrary from the truth. The truth is, that given the history of minimum wage increases – especially that which has happened recently in Seattle – minimum wage increase legislation has NOT helped low-skilled workers, or anyone, out of poverty. With that said, it might be advantageous to look at other methods to help low-skilled workers out of poverty.

If the Minimum Wage Doesn’t Work, What Can We Do to Defeat Unemployment?

While most libertarian and conservative economists prefer ‘market wages’ –  which are wages that are decided by the competitive forces in the market and by negotiation of the employee and employer – there has been research into other ideas. In fact, there are some alternative solutions to the minimum wage that economists have posited, all of which do not have the same detrimental effects of increasing or causing unemployment as does increasing the minimum wage.

One of the discussed alternatives is to expand the Earned Income Tax Credit (EITC). The American Enterprise Institute (AEI) writes about expanding the EITC, explaining that it helps low-wage workers have a higher tax credit which doesn’t impact employers. Since this doesn’t impact employers, employers in low-skill industries won’t have to worry about margins and therefore won’t have to lay anyone off or reduce workers’ hours.

Another solution is to decrease taxes and regulations on businesses – especially those in ‘low-wage’ service industries such as restaurants, retail, or salons. In 2012, regulation caused a loss of $4 Trillion in lost income, or $13,000 per person.

Additionally, the Congressional Budget Office (CBO) stated in 2010 that the tax cuts under George W. Bush’s administration allowed for a decrease in unemployment: in fact, the CBO found that a decrease of $1 million in taxes created 18 new jobs.

While there are many other alternatives to the minimum wage, they need not be mentioned. The point is that we ought to look at these methods, and NOT put any more effort into trying the minimum wage. Empirical evidence has shown that the minimum wage doesn’t fix the problem, but rather aggravates it. There is positive empirical evidence, however, for the alternatives that show that they would improve the labor market.

To the politicians and the supports of the minimum wage who want to battle unemployment and poverty: Let’s try the alternatives to minimum wage increases economists have mentioned. We’ve already tried increasing the minimum wage, and it hasn’t proven to work. Why not try something else?  

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