Minimizing poverty takes more than a Ted Kennedy solution and hope

Congress must recognize that little of the money from a minimum wage hike would help the people who need it.

Darren Bernard

It’s the economy, stupid. Now if only lawmakers knew something about it. For what feels like the 100th time in five years, Sen. Ted Kennedy, D-Mass., is ready to propose a substantial hike in the national minimum wage. The 40 percent increase, from $5.15 to $7.25 over two years, would be the first in eight years, giving, as he so compassionately puts it on his Web site, a low-income family “a year of groceries, a year and a half of heat and electricity, more than nine months of rent, or the full two-year tuition for a community college degree.”

Like nearly all of his fellow Democrats, Sen. Kennedy believes a higher minimum wage is the best mechanism to reduce U.S. poverty. Around 90 percent of national adults think the $5.15 floor needs to be raised. Former North Carolina Senator John Edwards thinks the current national minimum wage is a “national embarrassment.” New York Times columnist Bob Herbert calls it “scandalous.” More accurately, the Wall Street Journal calls it “false compassion.”

It is unlikely Kennedy’s new proposal will pass in the Senate. But responsible lawmakers are on record as being opposed to the idea because they know it does more harm than good.

It’s Economics 1001. Hiking the wage price floor would raise the market rate for labor abnormally high, causing businesses to hike pay for minimum-wage workers and workers between the old and new rates. Small businesses with thin profits cannot afford to pay out labor expenses at the rate “living wage” advocates and some Democrats propose. This means vulnerable companies face three scenarios: go bankrupt, downsize their work force, or, most favorably, stop growing. Each of these possibilities cuts jobs.

Growing scientific literature supports this thesis. As a rule, minimum-wage hikes increase unemployment and undermine small businesses. According to a recent study conducted by the Employment Policies Institute, Mr. Kennedy’s new plan would add tens of billions of dollars of extra salary costs to upstart, low-income companies. The Journal of Economic Literature reports that teen unemployment typically jumps 2 percent for every 10 percent hike in the minimum wage.

Conflicting evidence has been mostly rejected as unreliable, but the message hasn’t been fully received in the states. With the U.S. Congress unwilling to lift the national minimum wage, many states and local municipalities have done it themselves.

Since President Clinton signed legislation that allowed states to set minimum-wage requirements above national levels, 17 states have acted to beef up wage minimums, including Minnesota. More than 120 cities have passed similar “living wage” standards, with some cities foolishly enacting superfluous $12 or $13 minimums. After losing enormous amounts of external investment to lower wage areas, many of these cities have repealed their hikes.

For the most part, U.S. voters are still in love with the idea of a higher and higher and higher wage price floor. We’ve been tricked into believing minimum-wage jobs are dominantly occupied by single-parent families with five kids to feed. Sen. John Kerry, D.-Mass., peddled Oliver Twist stories of despair and hardship all last year, carefully avoiding a single statistic.

Wage price floors don’t even do much to help the people they’re supposed to. As of 2003, the EPI reports that fewer than one in five minimum-wage employees live in so-called poor households. In 2003, says the EPI, fewer than one in 10 “low-wage employees were heading a poor household.”

Little of the money gained from a minimum-wage hike would end up in the hands of poor parents – only 12.7 percent, to be exact. Only 3.8 percent would go to poor single mothers, and even less, 3.7 percent, would line the pockets of poor black families. The lion’s share of the money from raising the minimum wage would go to families with incomes two, three, or four times above the poverty line. The national unemployment rate would be a sure bet for, “up.”

The idea of fighting poverty appeals to the left and the right, but so far neither side has approached the problem with a creative solution. A lot of think tanks suggest using tax credits to directly target low-income, family-providing workers. Because teenagers especially benefit from a high minimum wage, responsible legislatures around the world – the United Kingdom for example – vary their minimum wage requirements with respect to the age of workers.

There are a lot of solutions available to tackle poverty. But sweeping “living wages” or higher minimum wages aren’t among them. Nobody likes the idea of a single mother working at McDonald’s 14 hours a day to feed her three children. Raising the minimum wage by 40 percent could very well change that mother’s income from “barely enough,” to “nothing at all.”

Darren Bernard welcomes comments at [email protected]