Income inequality has been a central theme of Barack Obama’s second-term agenda. “We gather here knowing that there are millions of Americans whose hard work and dedication have not yet been rewarded,” President Obama said in his 2013 State of the Union address. “Our economy is adding jobs – but too many people still can’t find full-time employment. Corporate profits have rocketed to all-time highs – but for more than a decade, wages and incomes have barely budged.”
Opposition to raising the minimum wage hinges on three arguments, each of which proceed in almost complete ignorance of empirical analyses.
First, opponents argue that increasing the minimum wage kills jobs. Several academic studies, however, have demonstrated that raising the minimum wage does not have a negative effect on employment. In fact, modest increases in the minimum wage leads to little or no employment response.
Second, opponents argue that increasing the minimum wage hurts small businesses. However, 66 percent of low-wage workers actually work for large corporations with over 100 employees. Of the 50 largest employers of low-wage workers, more than 90% were profitable and three-quarters of them had revenue greater than they did before the Great Recession.
Third, opponents argue that increasing the minimum wage only benefits teenagers, and that raising the minimum wage hurts teenager’s ability to gain work experience. Nearly 90 percent of minimum wage workers, however, are 20 years old or older. In addition, “more than a third (35.8 percent) are married, and over a quarter (28.0) are parents.”
Such opposition, therefore, is often simply a case of what Nobel laureate economist Paul Krugman calls “zombie economic ideas.” According to Krugman, “a zombie idea is a proposition that has been thoroughly refuted by analysis and evidence, and should be dead – but won’t stay dead because it serves a political purpose, appeals to prejudices, or both.”
While many opponents of raising the minimum wage would have you believe otherwise, the truth of the matter is that raising the minimum wage reduces income inequality and is good for the economy.
Increasing the minimum wage leads, in most cases, to a higher minimum wage. Someone working full time, year round at the current federal minimum wage ($7.25 per hour) will make just $14,500 this year. Raising the minimum wage to $9.80 per hour would mean that these workers, who have essentially no power to bargain for higher wages, will get higher wages (a $5,100 annual boost).
The extra earnings can go a long way towards helping pay rent or other basic necessities, and would significantly reduce income inequality by pushing up the incomes of the poor. A 2008 paper by economists Robert J. Gordon and Ian Dew-Becker also found that minimum wages have significant empirical impacts on income inequality.
Admittedly, the economic consequences of minimum wage increases are difficult to predict. But there is good reason to believe that a high minimum boosts the economy by shifting income towards people who consume more of what they earn. The logic here is simple: low-wage workers typically need to spend any additional money they make to support themselves and their families – and that means money that goes right back into the economy, stimulating the economy and the labor market.
The empirical evidence bears that prediction out. Research indicates that for every $1 added to the minimum wage, low-wage worker households spent an additional $2,800 the following year. The effect that this increased spending has on the economy is not trivial. According to the Economic Policy Institute (EPI), increasing the minimum wage to $9.80 would generate about $25 billion in additional economic activity – even after accounting for additional business expenses related to raising the minimum wage – and around 100,000 jobs.
This, at its base, is the case for a minimum wage hike.
There are, however, better ways to accomplish this same goal. The Making Work Pay Tax Credit, for example, provided a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns in 2009 and 2010. The tax credit was well targeted at low- and moderate-income households – according to the Citizens for Tax Justice (CTJ), if the Making Work Pay tax cut was revived in 2013, 50.3 percent of the benefits would go to the bottom three-fifths of Americans, while 22.2 percent of the benefits would go to the richest fifth of Americans. In addition, the tax credit, like the Earned Income Tax Credit and the Child Tax Credit, had the advantage of benefitting more than just minimum or near-minimum wage workers, and spread its cost broadly rather than concentrating it on businesses.
Democrats who want to address income inequality would be much better served by pushing for policies like the Making Work Pay Tax Credit rather than the minimum wage. But by killing ideas like the Making Work Pay Tax Credit, Republicans have backed themselves into a corner, and a very unpopular one at that. According to the most recent Gallup polling, in a hypothetical referendum, more than three-quarters of Americans (76%) say they would vote for raising the minimum wage.
As Ezra Klein noted, “There’s a lesson in here for Republicans. When they kill the Obama administration’s more technical proposals but don’t propose an alternative way to solve the underlying problem, they end up getting backed into a corner by his more populist proposals. That basically happened in the tax debate, where they refused to cut a big deal that included tax reform and so got stuck with a tax increase that simply raised rates. It’s likely to happen here, too.”
**Featured Image Credit: Denis Bocquet on Flickr