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Minimum wage increase hurts the poor

Erik Dorn, Opinion Writer
February 27, 2013
Filed under Opinion

The State of the Union address is the president’s annual opportunity to explain his plan of action for the next year to the citizens of the U.S. Unfortunately, Obama’s speech droned on for about an hour and was so broad it was hard to take anything from it.

While watching the address, it was honestly hard to care about what he was saying. It sounded exactly like every other speech he has given while in office — a lot of promises and rhetoric without a real plan.

However, there was one item that caught my interest. It’s one of the most talked about subjects in his address. Obama wants to raise the minimum wage to $9 an hour and tie it to the cost of living.

“Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty and raise the federal minimum wage to $9 an hour,” Obama said.  “This single step would raise the incomes of millions of working families. It could mean the difference between groceries or the food bank, rent or eviction and scraping by or finally getting ahead.”

That sounds really good and is even a policy Gov. Mitt Romney shares with the president. According to Pew Charitable Trust, an independent nonprofit organization, 42 percent of children born to parents on the bottom rungs of the income ladder will stay there. So raising the minimum wage seems like a great idea, but what are the ramifications and will it actually help those in poverty?

According to the Employment Policies Institute, there isn’t empirical evidence that supports the claim Obama is making. Multiple studies demonstrated little to no relationship between a higher minimum wage and reductions in poverty.

There are two factors economists have identified from the study. First, 54.7 percent of poor and less-educated individuals between the ages of 16 and 64 do not work. Thus, many of the people who policy makers are trying to help won’t benefit because they’re not working.

Second, a large number of minimum wage earners are not living in poor families. Nearly 87 percent of the wage earners who benefitted from the 40 percent increase in the minimum wage between 2007 and 2009 were not poor, according to a new study by Joseph Sabia from San Diego State University and Robert Nielsen from the University of Georgia.

Along with being poorly targeted, raising the minimum wage will reduce employment. According to the Institute for the Study of Labor and the EPI, even though raising minimum wage aims to improve the economic well-being of the working poor, it can have the unintended consequence of reducing demand for the least-skilled employees and the disadvantaged individuals, including the disabled, youth, immigrants and minorities.

The damaging effects of a minimum wage increase were seen between 2007 and 2009 in American Samoa. The effects were so bad on the island’s economy Obama signed a bill into law that postponed the minimum wage increases scheduled for 2010 and 2011. In fact, concern over the scheduled 2012 increase of 50 cents compelled Gov. Togiola Tulafono to testify before Congress.

“We are watching our economy burn down,” Tulafono said. “We know what to do to stop it. We need to bring the aggressive wage costs decreed by the federal government under control. Our job market is being torched. Our businesses are being depressed.  Our hope for growth has been driven away.”

That’s obviously an extreme case on an island with an economy much smaller than one in the U.S., but the premise is the same. Raising the minimum wage will not help the economy or help bring those in poverty out. It will just continue to hurt the already stifled economy.

The one thing that did help those who were in poverty was the Earned Income Tax Credit. The EITC is a benefit for working people who have low to moderate income. It reduces the amount of tax they owe and may also give them a refund if they meet the qualifications.

According to the EPI, each one percent increase in a state supplement to the federal EITC reduces poverty rates by one percent. It also provides an incentive to seek employment, since the credit can only be claimed on earned income. Obama’s proposed increase in minimum wage wouldn’t do any of these things.

It’s clear increasing the minimum wage is a poor way to reduce hardship. An expansion of the EITC is a much better way to reduce poverty.