Oppose the Minimum Wage Illusion
By Anthony Vitarelli
From a strategic perspective, Senate Democrats have been savvy recently in their attempts to add minimum wage amendments to numerous bills that have received votes in the Senate. A higher minimum wage polls exceptionally well throughout the entire country. In late 2005, PollingReport.com reported that over 83 percent of Americans favor an increased minimum wage, and almost 80 percent of Americans would be more likely to vote for a Congressional candidate who favored minimum wage hikes. Politically, there are not many better issues for Democrats to support.
Unfortunately, raising the minimum wage is simply bad policy.
If the price of labor (the wage rate) is artificially inflated by a government mandate, employers will be compelled to reduce the total hours of labor they demand. Such a government mandate necessitates market inefficiency. That is, the total value of production from the new market condition will be less than at the pre-minimum wage level. Moreover, minimum wage laws necessarily increase unemployment as businesses substitute away from the suddenly more expensive labor.
Clinton Secretary of Labor Bob Reich is an avowed supporter of a $7/hour minimum wage. He declares that “the minimum wage is also a moral statement about the minimum value of work in our society.” While Reich’s is a claim that has some merit, he ignores the aggregate employment trade-offs associated with a higher minimum wage. Surely, most citizens would support keeping employment levels constant with simultaneous increases in the lowest wages, but that scenario is simply impossible.
On the other hand, Reich generally asserts correctly that a nation’s policies on employment serve as a moral testament as to a government’s commitment to its people. In that spirit, the government should pursue more results-oriented measures of lifting people from poverty. Notably, the most effective measure in recent years to support economic growth, while continuing to promote hard work, has been the Earned Income Tax Credit. This legislation rewards those who work full-time jobs by refunding payroll taxes up to certain income levels. Additionally, the EITC encourage hard work by increasing the benefit stream as hours of employment increase at first, leveling off in the mid-range, and tapering toward the end of the eligible income levels.
Moreover, since the EITC signifies real income and often lifts families above the poverty line, America’s EITC program also reduces entitlement spending by shrinking those rolls. At its core, though, the EITC spurs economic growth by returning money to those who are most likely to spend it. That is, a family earning $30,000 per year that receives $2,000 in EITC benefits has a far higher marginal propensity to spend than a millionaire who receives a similarly proportional tax credit. These types of programs that induce consumer spending have a multiplicative impact on local economies, which often spurs additional demand for labor, further reducing unemployment.
From a political perspective, though, macroeconomists comprise a relatively small voting block. Democrats need to make a positive case for serious programs that generate economic growth and can truly lift families from poverty, rather than “sound bite” programs like increasing the minimum wage. A theme in this regard, as Democrats move forward toward November, should center upon the concept of “investing in the American people.” Democrats should not resign themselves to the false conclusion that they cannot win with sensible policy.
Programs like the EITC that increase incentives for hard work can resonate not only with low-wage workers but also the businesses who seek to employ them. Additionally, Democrats should link a proposed expansion of the EITC to other workforce development programs such as increased funding for job training and vocational education. Democrats can make the empirical arguments that the money invested in such programs has a far greater return in the economic long-run.
With a reasonable series of proposals in this vein, Democrats can shed their legacy of being the party of government hand-outs and taxing-and-spending. Step one requires having the courage to move beyond the comfort of sound bites to the seriousness of sound policy.
