Thursday, February 14, 2013

The Truth About the Minimum Wage, Unions and the Earned Income Tax Credit (EITC)

President Obama wants to raise the minimum wage to $9 per hour. He says more jobs and less poverty will be the result. But he's dead wrong about that.

 Over many years, numerous studies have demonstrated that raising the minimum wage never has the intended effect of improving living standards among the lower earners in society and in fact often contributes to fewer jobs and higher unemployment.

On the other hand, the EITC does have a favorable impact on reducing poverty while not unfavorably impacting employment. So why did the President propose a hike in the minimum wage instead of an increase in the EITC?

Because the unions, aka big labor, prefer higher higher minimum wages in order to increase their leverage with employers for raising the pay of union members who already earn more than the minimum wage. Raising the minimum wage also makes non-union employers easier for unions to organize.

Let's examine some facts.

Minimum Expectations describes the historical impact of minimum wage hikes on the unemployment rates of blacks:

"There is something sadly ironic about watching the nation's first black president call for an increase in the federal minimum wage during his State of the Union address Tuesday.

Minimum-wage laws date to the 1930s, and supporters in Congress at the time were explicit about using them to stop blacks from displacing whites in the labor force by working for less money. Milton Friedman regarded the minimum wage as "one of the most, if not the most, anti-black laws on the statute books.". . .

Prior to the passage of minimum-wage laws—and in an era of open and rampant racial discrimination in the U.S.—the unemployment rate for black men was much lower than it is now and similar to that of whites in the same age group.

Today, unemployment stands at 7.9% overall but is 13.8% among blacks (versus 7% among whites), 14.5% among black men (versus 7.2% among white men) and 37.8% among black teens (versus 20.8% among white teens). Yet Mr. Obama has proposed increasing the minimum wage by 24% to $9 an hour to placate his union supporters who want less competition for their members. A higher minimum wage might lift earnings for existing workers—provided they keep their jobs—but it also reduces job opportunities for millions of people out of work.

Out of political expediency, Mr. Obama is putting the interests of Big Labor ahead of the urban poor. He's hardly the first politician to do so, and the reality is that Republican and Democratic presidents alike have raised the minimum wage. It's also true that Mr. Obama is president of the entire country, not just its black inhabitants. But is it too much to ask that he not support policies, however well-intentioned by current advocates, that were anti-black in origin and have a long history of depressing black employment?"

Perhaps even more informative is what's said about the EITC in The $9 Minimum Wage That Already Exists:

"On Tuesday night, President Obama used his State of the Union address to call for a 24% increase in the federal minimum wage, to $9 an hour from its current $7.25. He left out an important detail: For many low-wage employees, single parents in particular, the minimum wage is already above $9 an hour.

That is because of the Earned Income Tax Credit, which boosts wages for workers at the bottom of the pay scale without putting their jobs or incomes at risk—which is one consequence of hiking the minimum wage. If Mr. Obama is dead set on using the government to boost wages, the EITC is the place to start, as the evidence suggests that minimum wage increases have no appreciable impact on poverty. . . .

Republicans have supported this tax credit because eligibility is based on working and earning income. Democrats hail the EITC because it's refundable, meaning that a low-wage family without any tax liability nevertheless can file a tax return and get a check from the government. In a state such as New York, a single parent raising two children on the minimum wage would see their annual wage of $15,080 jump to $21,886 with the EITC, for an effective hourly wage of $10.52.

Compared with the EITC, government-mandated minimum wage increases have major flaws. One is targeting: According to the Census Bureau, 60% of people living below the poverty line didn't work last year. They don't need a raise; they need a job, period. And among those who do work and earn the minimum wage, researchers at Cornell and American University have found that the vast majority live in households above the poverty line.

This partially explains why numerous studies have found no relationship between a higher minimum wage and lower poverty rates—because, unlike the EITC, the benefits generally aren't accruing to those in poverty.

Another reason a higher minimum wage doesn't reduce poverty rates is that a hike in hourly pay doesn't necessarily translate to an annual income bump. If employers faced with suddenly higher labor costs reduce hours or employment, take-home pay will decline. . . .

A 2007 study . . . found that a higher Earned Income Tax Credit can boost the wages and employment of single mothers. But the employment of single mothers dropped by 6% for each 10% hike in the minimum wage.

The president can choose to expand or improve the Earned Income Tax Credit and thus have a measurable impact on poverty rates. Or he can hike the minimum wage. This might win him support among his labor-union allies. It won't do any good for the low-income unemployed, and it will add to their numbers."

Summing Up

Unions like higher minimum wages.

Poor people are vastly better off with a higher EITC.

 Do you wonder why the President in the State of the Union Address didn't reference the EITC when discussing the need to reduce poverty and increase employment in the United States?

Or do you understand that it's all about politics and placating the President's union allies?

If so, then you get it.

Pass it on.

Thanks. Bob.

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