What is the goal of a minimum wage hike?
- Gretchen Tegeler is president of the Taxpayers Association of Central Iowa.
The Polk County Supervisors appear poised to follow the lead of Linn and Johnson counties in raising the minimum wage from $7.25 per hour. The change, to $10.75 per hour, would take effect on Jan. 1, 2019; the idea being the Iowa Legislature would have an opportunity to act first by raising the rate statewide.
But what is the goal of a minimum wage hike? Because the Polk County task force began its work based on the assumption there would be an increase (the only question being how much), there never was a discussion of goals, or whether a minimum wage hike is the best way to accomplish them. It’s a relevant discussion, even if the Polk County Supervisors don’t have the power to implement other options. Certainly if the Iowa Legislature eventually feels compelled to act, the discussion is essential.
So what is the underlying goal of minimum wage discussions, and what does the research indicate?
If the goal is to reduce poverty, or the incidence of families living in poverty, a minimum wage increase is indeed a blunt instrument, and there is a better tool.
According to data cited in a December 2015 paper by the Federal Reserve Bank of San Francisco, “a sizable share of the benefits from raising the minimum wage would not go to poor families. In fact, if wages were simply raised to $10.10 with no changes to number of jobs or hours, only 18 percent of the total increase in incomes would go to poor families, based on 2010-2014 data.” (1)
According to the paper, this is because:
- Many nonelderly poor families (57 percent) have no workers;
- Some workers are poor because of low hours, not low wages; for example 36 percent have hourly wages above $12; and
- Many low-wage workers, such as teens, are not in poor families.
The paper goes on to point out that 49 percent of the benefits would go to families that have incomes below twice the poverty line. Some 32 percent would go to families in the low-income range, but with with incomes at least three times the poverty line.
Others, including the San Francisco Federal Reserve paper and a Feb. 6, 2016 Des Moines Register guest opinion written by Steve Hensley (2), suggest a better approach for reducing poverty would be to increase the earned income tax credit (EITC).
A full-time minimum wage worker in Iowa with two children already receives checks from the state and federal governments that together raise family income above the poverty level. The EITC could be increased and potentially expanded to include single-individual households. Because our state and federal tax systems are progressive, these costs would be borne by higher income taxpayers. And all of the benefit would go to the target population.
In contrast, many business owners who employ minimum wage workers are operating close to the margin. They are not well positioned to finance an income redistribution program, especially when so little of the benefit is actually reducing poverty and so much is actually going to higher income families.
If the Iowa Legislature does believe that government should do more to move people out of poverty, let’s hope they begin with the end in mind, and fairly evaluate all options.
- Federal Reserve Bank of San Francisco, FRBSF Economic Letter 2015-38, “Reducing Poverty via Minimum Wages, Alternatives,” December 28, 2015. https://www.frbsf.org/economic-research/publications/economic-letter/2015/december/reducing-poverty-via-minimum-wages-tax-credit/
- Hensley, Steve, “Explore tax credits before making minimum wage hike,” Des Moines Register Feb. 6, 2016, p. A13. https://desmoinesregister.newspapers.com/image/152312547
Correction: An error in the date and the amount of the minimum wage in this blog when it was first published has been corrected.