One holdover from 2014 into the new year is the cry for an increase in the minimum wage. President Obama pledged (in a December 2014 speech) to bump the minimum wage up to $9/hour nationally. Many believe that this move will help stimulate the still-sluggish economy.
Michael R. Strain, at the American Enterprise Institute, isn’t wholly against raising the minimum wage, but he’s not wholeheartedly for it, either. He thinks we are asking the wrong question. Do we need to raise the minimum wage, or do we need to increase employment?
The labor market for young and low-skill workers is in terrible shape. More than 14 percent of workers aged 16–24 are unemployed. The situation is even worse if you look only at teenagers, over 1 in 5 of whom are unemployed. The unemployment rate for high-school dropouts over the age of 24 is 10.8 percent — a two-decade high — and only 4 people out of every 10 in that group have jobs. And there are still a staggering 4.1 million unemployed workers who have been looking for a job for six months or longer, many of whom are young or low-skill.
Hundreds of thousands of low-skill workers are trying to find a job but can’t. Is it really the right time to raise the cost of hiring and make it harder for businesses to hire them? Some studies say a higher minimum wage will lower employment; some say employment will remain unchanged. Shouldn’t we err on the side of caution?
Young workers need to get their start in life. Many young workers will use their first job to gain invaluable experience — learning for the first time how to deal with a boss, coworkers, and customers; developing professional skills like punctuality, respect for authority, and courtesy; simply learning how to be a worker.
Society owes these unemployed young and low-skill workers the best shot it can give them at earning their own success in the labor market. Government should not place an obstacle in their paths. Especially with a low-skill labor market as bad as ours, the minimum wage would be exactly that.
Strain goes on to explain that expanding the Earned Income Tax Credit (EITC) would be a far more effective economic move than raising the minimum wage:
The EITC is a federal income-transfer program — structured as a refundable tax credit — for working-class families. It rewards work by supplementing earned income. For a single worker with two children in 2013, the EITC paid 40 cents for every dollar of earned income up to $13,430, providing a maximum subsidy of $5,372. (The subsidy phases out as income rises above a certain level to ensure that higher-income households are not eligible.)
The credit is a very effective anti-poverty tool because it supplements earnings and incentivizes employment. Expansions of the EITC have been very successful at encouraging work, particularly among single mothers during the 1990s. The Tax Policy Center estimates that nearly 26 million households will receive $60 billion from the EITC in 2013. The IRS estimates that in 2009 nearly 7 million people — including over 3 million children — were lifted out of poverty by the EITC.
In Boom and Bust: Financial Cycles and Human Prosperity, Alex J. Pollock argues that while economic downturns can be frightening and difficult, people living in free market economies enjoy greater health, better access to basic necessities, and better education.