Suppose I suggested that the government adopt an anti-poverty program with the following characteristics:
- It would spend $6 to deliver $1 to a family in poverty.
- For every adult worker in poverty assisted, it would assist two teenagers.
- Some indeterminate number of vulnerable workers would be at risk of losing their jobs.
- It would be paid for largely with a tax on food.
- It would not guarantee that a person working full-time year-round would earn income sufficient to place them above the poverty line.
This is a basic description of how the minimum wage operates. This isn't the right-wing spin on it either, points 1-3 were derived directly from a New York Times editorial this morning. There's plenty of controversy regarding the CBO's highly publicized but very rough estimates of how many jobs would disappear following a minimum wage increase, but one could glibly assume no negative effect on employment and still come to the conclusion that the minimum wage is a highly symbolic but dreadfully ineffective way to lift families out of poverty.
The minimum wage is too blunt an instrument to effectively fight poverty
The positive way to think about the minimum wage is that it attempts to ensure that any person trying to raise a family by being a full-time worker will earn enough to get by. By the CBO estimates, some 16 million workers would be affected by an increase of the minimum wage to $10.10 per hour, and some 900,000 would be lifted from poverty. Thus if the goal of the minimum wage increase were to lift families from poverty, estimates suggest it will have a 6% success rate. Flip that around, and you've got a 94% failure rate. And this is assuming no adverse impact on employment whatsoever.
In the 94% of cases where workers receive wage increases but do not experience a lift from poverty, there are two basic things going on. In most cases, the families benefitting from the wage increase aren't lifted from poverty because they weren't in poverty in the first place. Minimum wage workers are often secondary or tertiary workers in their household -- including teenagers. In some cases, however, the increase in the minimum wage would not be sufficient to escape poverty. For a full-time worker raising a family of 4, the income earned from working 2,000 hours per year at $10.10 per hour would not be sufficient to rise above the federal poverty line. Many minimum wage workers are part-time workers; even if their job continues to exist after the increase there is no guarantee they'll be able to work the same number of hours.
The minimum wage is largely a tax on food
Minimum wage workers are found across a wide range of industries, but the highest concentrations happen to be in industries tied to the production of food, based on data from the 2010 American Community Survey. More than one-tenth of minimum wage workers work in the restaurant or food service industry. Also represented in the list of top 5 industries employing minimum wage workers are grocery stores, discount and department stores, and K-12 education -- it isn't the teachers making minimum wage, but the cafeteria workers and related staff. Crop production sits just outside the top five.
A truly progressive antipoverty policy would transfer resources from the wealthy to the deserving poor. Presumably the goal of a minimum wage increase would be to transfer resources from the highly paid executives and wealthy shareholders of major corporations to their low-paid workers. To understand why this just can't work out in practice, consider the case of Wal-Mart.
Wal-Mart's most recent annual report shows that the company paid shareholders about $5.4 billion in dividends, and paid their top executives somewhere around $60 million. Suppose we zeroed out those numbers -- forced the executives to forfeit 100% of their pay, and shareholders 100% of their dividends -- and transfered the money to the company's 2.1 million domestic employees. We'd have enough to give each of them about $2,583 per year. For a full time worker, this would amount to a raise of roughly $1.29 per hour.
Wiping out the shareholders and top executives, in other words, would be sufficient to fund less than half of the proposed $2.85 increase in the federal minimum wage. Granted, the average Wal-Mart employee already earns between $12 and $13 per hour, but the basic message is clear. Minimum wage work occurs largely in low-margin industries, where there just aren't a whole lot of profits to be plundered. The real fat cats of the economy, working in knowledge industries or on Wall Street, don't employ a whole lot of minimum-wage workers.
To pay for the wage increase, then, costs would have to be passed along to consumers in the form of higher prices. Given the heavy reliance on minimum wage work at nearly all stages of the food supply chain, the higher prices would be most apparent in a family's food budget. Ask yourself, what type of family spends the highest share of its income on food? Not the wealthy.
There is a better way
The intent of the minimum wage is to raise the payoff from work for society's most vulnerable people. It effectively asks business owners to cover the costs, and requires them to spend a large amount of extra money on raising the payoff from work for a larger group of citizens who are not society's most vulnerable people. These business owners, who by the nature of their business are already serving many vulnerable people as their clientele, cover the costs in part by passing them on to their customers. They rob Paul to pay Paul.
If our goal as a society is to ensure that no person who devotes themselves to full-time work should find themselves living below the poverty line, there is an alternative strategy that is simultaneously more efficient and more progressive. It's the Earned Income Tax Credit.
I am an economist by training, so perhaps it is no surprise that I think the EITC beats the minimum wage. But the selling points of the EITC bear repeating, particularly since the drumbeat for expanding the EITC as an alternative to a minimum wage increase is not exactly deafening.
The EITC effectively multiplies earnings for families that work but don't make much money by doing so. It delivers significant amounts of cash to single parents raising a family on the basis of low-wage work, but not a penny to the teenage child of a high-income family delivering pizza for a bit of spending money.
The EITC doesn't ask business owners to bear the cost of society's goal alone, but rather spreads the burden through the full government system of taxation. If you want the wolves of Wall Street to pay for our social investment in the lives of the vulnerable, the EITC will do it but the minimum wage won't.
And from a pragmatic perspective, the will in Congress to pass an EITC expansion this year might actually exist, given the bipartisan focus on inequality this year. Do you really think the House is going to pass a minimum wage increase anytime soon?
There are criticisms of the EITC. Some employers might use the EITC as an excuse to cut wages, but coupled with the existing state and federal minimum wages it isn't really possible to do that for the workers we're ostensibly trying to help. Moreover, even if we accept estimates that only 73 cents of every dollar spent on the EITC lands in the hands of a deserving family, that surely beats the ratio we'd get with a higher minimum wage.
The minimum wage, in short, makes for good symbolism but bad policy.
[Note: the original Wal-Mart numbers I had in this post were taken from some poorly annotated figures I jotted down a few weeks ago. Walmart reports paying $1.59 in dividends per share in fiscal 2013, with a total of about 3.374 billion shares outstanding. So that's returing quite a bit less than the $100 billion I originally cited, which would have made for a much greater windfall per worker if redistributed.]