Can’t America find a better weapon to combat income inequality than raising the minimum wage? I don’t oppose the efforts of those, including President Obama, who want to raise the minimum – doing so will help some needy people – but I'll be sad if we once again resort to this hoary policy sledgehammer. Using a public subsidy instead to raise people’s take-home pay would be more just and more likely to increase employment.
The case for a higher minimum wage is simple: The poorest Americans live tough lives, and they could use a bit of extra cash. In 2012, 3.6 million people in the United States earned the federal minimum wage of $7.25 per hour or less. The number of Americans earning the minimum or less has doubled since 2006.
Increasing wages for this population also has a second benefit: A larger share of Americans will likely start looking for jobs. The country faces no greater challenge at the moment than the underemployment of our human capital. Nearly half of people who only have a high school diploma are not working, and 3.8 million Americans have been unemployed for more than 27 weeks. If better pay can entice young people who aren’t working to their full potential today to look harder for full employment, that can only be a positive.
Yet it is exactly this predicament – the millions of underemployed and unemployed Americans – that makes me wish for a smarter anti-poverty program than simply raising the minimum wage. Standard economic orthodoxy argues that companies hire fewer workers when wages rise, although there is also evidence from distinguished labor economists that there is actually little correlation when it comes to the minimum wage and employment. That said, it is younger workers who would be disproportionately hit if there were a reduction in the number of jobs – more than one-half of workers earning the minimum wage or less are between ages 16 and 24.
Still, the larger concern about raising the minimum wage is an ethical one. Every American ought to share in the cost of reducing income inequality. A higher minimum wage, however, pushes those costs on the very companies that already employ younger, less-skilled workers. Higher labor costs at Walmart and McDonald’s will likely lead to higher prices, a hit to the wallets of the very workers that minimum wage advocates want to help.
The good news is that we have had a better way to raise wages for the lowest-paid workers for more than 40 years: the earned income tax credit. An expanded earned income tax credit would demonstrably increase of the employment of less-skilled workers through public funding by all taxpayers rather than asking certain employers to carry the burden. Employment also rises with a more generous tax credit, and President Obama is right to call for its expansion.
Better yet would be an even more transparent approach: a government subsidy to businesses that hire low-wage workers. So, for instance, if Walmart paid an employee $7 per hour, the government would chip in $4 to bring that hourly wage up to $11 per hour. Firms don’t pay more, but employees earn more. Edmund Phelps, a Nobel Prize-winning economist, has argued for direct low-wage subsidies, and while implementation issues do exist, none appear to be insurmountable.
Raising the minimum wage isn’t necessarily wrongheaded. But if we want a better way to reduce inequality and raise earnings for the least fortunate Americans, targeted tax credits and government subsidies are a more creative, fair, and effective course.