Introduction
The USA is now witnessing one of the highest income disparities in its history. Rich people are getting richer while poor people are getting poorer. One of the main challenges for the government is to ensure more equitable wealth distribution among the population. One of the most discussed techniques in recent years is “minimum wage”. Minimum wage in the USA is currently $7.25 per hour and a multi-year long debate between the Republicans and Democrats is going on upon the issue of increasing the minimum wage to $10.10 (Peters). This has become a major issue of political tussle between the two parties. At the core of this issue lies the basic purpose of diminishing income disparity and poverty level. Therefore, the basic question is if minimum wage has the potential to reduce poverty and make the income distribution more equitable. This paper has addressed this question by inspecting the minimum wage workers and the effect of minimum wage on unemployment and poverty and then proposed an action plan that may improve the distribution of income.
Minimum Wage: Who are Minimum Wage Workers?
Before getting into the larger discussion of minimum wage and its effectiveness in equitable income distribution, it is important to know the demography that falls under the minimum wage category of workers in the USA. As per the 2014 statistics published by the USA Bureau of Labor (BLS), 1.532 million workers earn $7.25 per hour (minimum wage) (DeSilver). Additional 1.8 million workers earn less than the minimum wage as they fall under several exemptions such as tipped employee, disabled worker and a full-time student (DeSilver). Approximately 3.3 million workers work at or below the federal minimum wage. This is 2.6% of the total wage and salaried workforce. In 1979 when BLS started gathering data, the minimum wage workers represented 7.9 % of the workforce (DeSilver).
Among 3.3 million workers working at or below minimum wage rate, 55% work in leisure and hospitality industry (Restaurants) (DeSilver). 14% work in retail and 8% in educational sector (DeSilver). Rest of the minimum wage workers are scattered among several sectors. In terms of occupation, 47% of the workforce works in food preparation and serving, 14.5% in sales and 7% in personal care services (DeSilver). Pacific region states have the lowest number of minimum wage workers as the state mandated minimum wages are higher than the federal minimum wages. In the West South and East South Central states, the percentage of minimum wage workers is highest. Although the minimum wage employees represent only 2.6% of total workforce, “near minimum wage” workers, who make more than$7.25 but less than $10.10, represent 20.6 million people or 30% of the employed workforce (excluding self-employed) (DeSilver). If the current proposed minimum wage of $10.10 is implemented, then it will impact almost 30% of the workforce (DeSilver).
50.4% of the minimum wage workers are between the age group of 16 to 24 years. 24% among those are teenagers (16 to 19 years). 77% of the minimum wage workers are white and more than half are women. 64% of the minimum wage workers are part-time workers (DeSilver).
Minimum Wage – Inequality and Poverty
Minimum wage can have a huge economic and social impact on an individual, family and society as a whole. However, whether minimum wage is an effective tool against inequality and poverty is a highly debatable topic. Even the literature and research available on this subject furnish no conclusive evidence. Before going further ahead in the discussion, it is important to see how an increase in minimum wage can help reduce poverty and inequality.
Single Parent poor families
Main proponents of minimum wage increase cite the hardships of single parent families and their day to day struggle to lead a decent lifestyle. Jack Jenkins in his paper published in the Center for American Progress argued that increase in minimum wage would reduce inequality, create a more equitable opportunity for all and give dignity to minimum wage workers (Jenkins). Jack Jenkins cited an example of a single father raising two children. A single father earning minimum wage approximately earns $14,700 a year, which is way below the federally mandated poverty threshold of $19,530. Earning $14,700 is not sufficient for getting decent and regular food for a family of three, get adequate healthcare coverage and avail housing and educational facilities (Jenkins). In fact, to make sure that their children get a decent education, the single father will often have to do overtime day after day spending a little time with their children. Increasing the minimum wage from $7.25 to $10.10 will certainly help his family overcome poverty and create a more equitable society. 25% of the minimum wage workers are raising children, so this extra money will not only help the family but also the next generation (Jenkins).
However, proponents against the raise in minimum wage cite that this is not the case. As per the statistics published by BLS, more than 50% of the minimum wage workers have family income significantly more than $19.530 (DeSilver). In fact, the average family income for such families is $50,662. Only about 25% of the families are single parent families with total family income less than $19,530 (DeSilver). Therefore, any flat increase in minimum wage will benefit 75% of the workers who are not poor as per the federal definition.
One of the flaws in this arguments is that more than 50% of the minimum wage workers have a family income significantly higher than $19,530. Formby, Bishop, and Kim in their paper on Employment Policies Institute argued minimum wage is ineffective as a poverty eradication tool. As per their paper, 54.7% of the poor people in the USA are unemployed. Therefore, any increase in minimum wage rate is ineffective as it creates no poverty eradication solution for poor unemployed people (Formby, Bishop, and Kim). Their condition remains same even after a hike in minimum wage. Sabia and Nielsen suggested that introducing measures such as Earned Income Tax Credit (EITC) is more effective way to increase income for the poor than increasing minimum wage. EITC provides benefit based on actual family income and therefore is more effective for the intended poor people (Sabia and Nielsen). However, this still does not provide any benefit to any unemployed poor people. However, Sabia and Nielsen argued that EITC benefits will encourage many unemployed to join the workforce. However, so far there is no empirical evidence available that it is actually the case.
Effect on Unemployment
One of the measures of prosperity and reducing poverty is the unemployment rate. A decreasing unemployment rate is not only healthy for an economy but also helps in reducing poverty as it increases the overall family income. One of the major topics for research has been the rise in minimum wage and its impact on the unemployment rate.
Michael Saltsman in his paper “The impact of a $9.80 Federal Minimum Wage” provided evidence from the 2009 minimum wage hike that after the wage hike at least 467,500 jobs were lost from the economy as employers retrenched workforce and increased employee efficiency to compensate for the increased wage (Saltsman). He further suggested that an increase in minimum wage from $7.25 to $9.80 would result in job losses around 768,600. He also cited several kinds of literature from the 1990s and 2000s that showed a direct adverse impact of hike in minimum wage on unemployment (Saltsman).
Lester, Madland and Odum in their study published in the Center for American Progress Action Fund found totally opposite results. As federal minimum wage hike is infrequent, therefore, the data for analysis is no available. Lester, Madland and Odum used minimum wage hike data for each state and tracked unemployment data for those states after one year of minimum wage rate hike. They found that in 53% of the cases (47 out of 91 cases), the unemployment rate actually decreased after a minimum wage rate hike (Lester, Madland and Odum). They suggested that a hike in minimum wage increases the disposable income in the economy, thereby pushing up the demand for goods and services. The excess demand compensates for the loss associated with increased salary. This, in turn, creates more jobs in the economy than the potential cutback in jobs (Lester, Madland and Odum).
However, different researchers till date have used different subset of data and found completely contradictory results. There is no conclusive evidence so far that an increase in minimum wage can actually escalate unemployment as used by lobbyists against minimum wage hike.
Most of the basic numbers related to the minimum wage earners’ demographic and occupational profile are taken from Pew Research Center. Pew Research Center is a non-partisan and non-profit research organization based out of Washington DC. It publishes research results on social issues, public opinion and demographic trends. Pew Research Center is known for not taking any explicit policy position. Most of the base data analyzed in the Pew Research comes from BLS. Therefore, chances of any partisan or author bias are non-existent.
Two published papers, one by Jack Jenkins and other by Williams, Madland and Odum are used for establishing arguments that support that the increase in minimum wage will help in reducing poverty and inequality. Both these papers are published in the Center for American Progress Action Fund (CAP). CAP is a progressive public policy research organization. CAP is known for its liberal viewpoint. CAP’s Chief Executive Officer, Neera Tanden, and many writers associated with CAP are directly associated with Democratic Party. Therefore, there is a high probability that any article published in CAP has a democratic policy bias. As it is well known that Democratic Party favors and advocates for the increase in minimum wage, it makes sense that both the writers support the fact that minimum wage helps in reducing inequality and poverty.
Two papers cited, one by Formby, Bishop and Kim and another by Saltsman, which supported the fact that minimum wage is an ineffective tool to eradicate poverty and reduce inequality are both published by the Employment Policies Institute (EPI). EPI like CAP is a non-profit research and advocacy group based out of Washington DC. EPI publishes research on entry level employment. Michael Saltsman is a known lobbyist in Washington D.C and is known to have a Republican bias. He is the research director of EPI. Therefore, any research published in EPI seems to support Republican ideas and therefore, has a conservative bias. Sabia and Nielson’s research is also cited in the paper that projected EITC as a better tool to eradicate poverty than minimum wage hike. This paper is published in EPI, so the authors also show a conservative bias where their comparison between minimum wage and EITC is incomplete. However, it cannot be denied that with all the bias, their observation that EITC is a more effective tool for dealing with poverty is supported by most of the economists.
Analysis
Based on the above discussion, it is clear that eradication of poverty is a separate problem than creating equality in the society. It is clear that minimum wage is not an effective tool for a reduction of poverty, primarily because those considered to be poor under the federal definition are unemployed. More than 50% of the poor population in the USA is unemployed (DSilver). Therefore, any increase in minimum wage has no impact on the poor population as they do not have a job. Therefore, as a blanket initiative of increasing the minimum wage will certainly help a few families and individuals to get out of poor social conditions. Additionally, the wealth distribution will also not reduce income inequality. Almost 57% of the families where one person earns minimum wage has a total family income more than two times of $19,530 (Federal Poverty Line) (DeSilver). Therefore, a large percentage of the wealth will actually be distributed from rich corporate houses to families who are not poor as a result of an increase in minimum wage. Poor will continue to become poor.
EITC, on the other hand, is more effective against poverty. EITC benefits are distributed based on family income. Therefore, families with the lowest income and with multiple dependents will be benefitted more than families with higher income and fewer dependents. EITC is extremely effective for the poorest wage earners. However, EITC has no direct impact on poor people who are unemployed. Having said that, EITC may encourage poor people to seek for jobs to avail more benefits. This will certainly decrease unemployment. One of the main problems with implementation of EITC is huge funding requirement by the government. Current EITC implementation is costing the government more than $58 billion every year, which is only second to healthcare and Medicaid expenditure. Any expansion of EITC will create more financial burden on the government which is already under huge debt.
Recommendation and Conclusion
Eradication of poverty and income equality are two major challenges in the USA. Minimum wage is one tool used by the government to reduce poverty and create a more equitable society. However, minimum wage benefits only a fraction of the intended audience as most of the poor people are unemployed. EITC is found to be a better solution to increase effective income by providing tax credits based on family income. EITC also encourages unemployed people to join the workforce and avail these benefits. A hybrid model with both expansion of EITC and increase in minimum wage will help the most. Expansion of EITC will help the lowest income group within the workforce and will also encourage more unemployed people to join the workforce. Once the unemployment rate goes down, an increase in minimum wage will be more effective in reducing poverty and creating a society with more income equality.
Works Cited
Formby, J.P., Bishop, J.A. and Kim, Hoseong. What’s Best At Reducing Poverty? An Examination of the Effectiveness of the 2007 Minimum Wage Increase. Employment Policies Institute. Mar. 2010. Web. 4 May 2016. <https://www.epionline.org/studies/r124/>
Sabia, J. and Nielsen, R. Can Raising the Minimum Wage Reduce Poverty and Hardship? Employment Policies Institute. Apr. 2012. Web. 4 May 2016. <https://www.epionline.org/studies/can-raising-the-minimum-wage-reduce-poverty-and-hardship/>
Saltsman, M. The Impact of a $9.80 Federal Minimum Wage. Employment Policies Institute. Apr. 2012. Web. 4 May 2016. <https://www.epionline.org/wp-content/uploads/2014/07/EPI_TheImpactof980FederalMinimumWage.pdf>
Peters, J. 2 Parties Place Political Focus on Inequality. New York Times. 8 Jan. 2014. Web. 4 May 2016. <http://www.nytimes.com/2014/01/09/us/politics/republicans-move-to-reclaim-poverty-fighting-mantle.html?hpw&rref=politics&_r=1>
DeSilver, Drew. 5 facts about the minimum wage. Pew Research Center. 23 Jul. 2015. Web. 4 May 2016. <http://www.pewresearch.org/fact-tank/2015/07/23/5-facts-about-the-minimum-wage/>
DeSilver, Drew. Who makes minimum wage? Pew Research Center. 8 Sep. 2014. Web. 4 May 2016. < http://www.pewresearch.org/fact-tank/2014/09/08/who-makes-minimum-wage/>
Jenkins, J. Real Family Values: Raising the Federal Minimum Wage. Center for American Progress. 10 Dec. 2013. Web. 4 May 2016. <https://www.americanprogress.org/issues/religion/report/2013/12/10/80780/real-family-values-raising-the-federal-minimum-wage/>
Lester, W.T. , Madland, D., and Odum, J. Raising the Minimum Wage Would Help, Not Hurt, Our Economy. Center for American Progress. 3 Dec. 2013. Web. 4 May 2016. <https://www.americanprogressaction.org/issues/labor/news/2013/12/03/80222/raising-the-minimum-wage-would-help-not-hurt-our-economy/>
