Corporate profits are approaching record highs. Some Fortune 500 executive salaries are almost astronomical. The 1 percent is getting richer, and the real income for a household at the 50th percentile is actually dropping. The minimum wage in this country would be the lowest among industrialized nations if it weren’t for Mexico. Certainly the minimum wage is embarrassingly low. Even the Pope believes so.
Surely we have to raise the minimum wage substantially. Perhaps not. If our goal is to provide a living wage to working households, there are better policies to accomplish that goal.
Our first problem is to determine the income necessary to ensure households and children don’t live in poverty. The poverty level is not the best guide. The U.S. determined a measure of poverty in the 1960s that corresponded to a sufficient income so that no more than one-third of income could support an adequate diet. This threshold was correspondingly larger for large families. And, it is adjusted annually for the cost of food.
An alternate measure is based on a family’s income relative to other incomes in the country.
Both measures are imperfect. If rent, energy costs, insurance, sales and property taxes, and other essential components of spending rise faster than food costs, a low-income household is pinched more than the dietary threshold would suggest. And, if a rising tide indeed lifts all boats, a measure tied to relative incomes may keep a family in relative poverty even once they can meet nutrition needs.
In fact, a family considered poverty-stricken in the U.S. may be considered to be affluent in the eyes of families in other countries. Or, a family at the poverty threshold and living in one region of the country may live much more comfortably than a family at the threshold in another region of the country. More work needs to be done to determine how much a family needs to survive.
Do we also insist families make wise consumption decisions, purchase healthy foods and avoid what others might consider luxuries? These are thorny issues that invoke the inevitable value judgements, as John Kenneth Galbraith noted when he said that poverty is defined not by basic needs but by community norms.
If a compassionate nation wants an economic tool that ensures every family can survive and their children can thrive, is raising the minimum wage the best way?
Economics is the study of narrowly crafted incentives. For instance, an earned income tax credit (EITC) helps raise low-income families up toward the poverty threshold in a way crafted to take into account family size, other sources of income and their property, income or sales tax-burden.
The EITC also requires a family to participate in the workforce and the tax system rather than hide income in the underground economy. It has helped families and the economy as a whole perhaps more than just about any other socioeconomic policy. If the tool does not help enough to lift families out of poverty, it ought to be expanded further.
Other assistance programs either have high administration costs, if done well, or lower administration costs if we tolerate fraud and abuse. The greater the entitlement, the lower is the incentive to work and the greater is the incentive to commit the frauds our district attorney is ferreting out, or to work under the table, as some unscrupulous workers prefer. Instead, an EITC encourages work and offers a helping hand up rather than simply a handout.
Raising the minimum wage won’t provide the living income hardworking households deserve. It would mostly raise entry wages for young workers who do not support a household, and would also decrease employment. A higher minimum wage would increase prices as employers pass their costs to consumers and employees alike. Higher prices would necessitate further rounds of wage increases, followed by price increases, followed by wage increases etc. We would be chasing a moving target and facing higher inflation to boot.
The EITC is the best way to provide a living income for our households. It also makes common sense for our economy without suffering the trappings of less effective tools. A higher dividends tax could pay for it.
Colin Read chairs the finance and economics faculty at SUNY Plattsburgh and has published a dozen books on global finance and economics.