Raising minimum wage could force millions into unemployment

Raising minimum wage could force millions into unemployment

In this campaign season, politicians across the country (including the presumptive Democratic presidential candidate and perhaps even the Republican one) have called for raising the minimum wage.

Not just marginally, as in the past, but all the way to US$15 (S$20.30) an hour, more than double the current national level of US$7.25.

Even elected officials and candidates in states with higher minimum wages like New York have jumped on the US$15-an-hour bandwagon.

Their justification: "You can't support a family on the current minimum wage."

What the advocates fail to acknowledge is that minimum wage workers with families to support are already eligible to receive a financial boost under a national programme called the earned income tax credit.

This programme, instituted in 1975 and expanded since then, paid benefits to 27.5 million low-income workers in 2014. (That same year, only three million workers fell to or below the federal minimum wage, so the credit also helped millions of other low-wage workers.)

Technically, such payments are classified as "refundable tax credits", paid to qualifying workers when they file their annual income tax returns.

Take, as an example, a single mother in New York supporting herself and two children, earning US$9 an hour (the current state minimum) and working 2,000 hours a year.

She is entitled to an annual income supplement of up to US$5,572, which would bring her combined income to US$23,572, the equivalent of earning US$11.79 an hour.

If she had three children, the earned income tax credit would further raise her total income by as much as US$697, to US$24,269, equal to an hourly wage of US$12.13. (These income supplements will be larger in future years because the tax credit is indexed to inflation.)

If her household had other sources of income, the credit would be proportionately less; or if she had no dependants at all and was under 25, she would be ineligible.

That is the beauty of the tax credit; it helps low-skilled workers in proportion to their household need, taking pressure off the minimum wage as the only guarantor of a "living wage".

The credit thus performs a crucial function in a national labour market where one size most definitely does not fit all, a labour market that is enormously varied by region, by employers' needs, by workers' skills and by the potential for jobs to be replaced by technology.

By allowing wages to reflect local economic and industry conditions, the earned income tax credit makes it possible for all unskilled workers to have jobs - including those not eligible for the credit, like teenagers, single young adults or semi-retired older people, who would otherwise be priced out of the labour market by an unrealistically high minimum wage.

There is, however, one crucial aspect of the tax credit: You have to be working to receive it.

Economists disagree as to how many low-income jobs will be lost when the minimum wage is raised, but many concur that if it is pushed too high - as compared with a region's current prevailing wage - there will be job losses, and they might be considerable.

One of the more conservative estimates, issued by the Congressional Budget Office in 2014, projected that 500,000 jobs could be lost if the federal minimum wage were raised to US$10.10 (the level then recommended by President Barack Obama), though it acknowledged the losses could be lower.

By my estimation, based on a model of the national labour market developed by Dr Jonathan Meer of Texas A&M University and Dr Jeremy West of the Massachusetts Institute of Technology, raising the minimum wage to US$15 could reduce the total number of jobs nationally by three million to five million.

Regardless of the magnitude of job cuts caused by a minimum wage increase, all the workers who lost jobs as a result would be ineligible for the earned income tax credit. In most states they would receive unemployment insurance for up to 26 weeks at a level well below their former earnings; after that, their income would fall to zero.

And if the local minimum wage was now too high to justify hiring of low or marginally skilled workers, their chances for re-employment would be slimmer.

To the extent that advocates of outsize minimum-wage increases succeed - as they already have in some states and localities - they are likely to visit grievous harm on some of the very individuals and families they claim to be helping.

By blithely discounting the economic realities of the labour market in many parts of the country, the proponents of such increases risk putting millions of Americans in low-skilled jobs out of work, thus making them ineligible for the tax credit and possibly in danger of destitution.

Rather than playing a kind of economic Russian roulette with the least secure workers, these advocates should try to make the tax credit more effective.

The credit happens to be an income-support programme with bipartisan backing.

The President and members of Congress from both parties, including House Speaker Paul Ryan, have proposed reforms that would extend eligibility to childless individuals over 21 and raise stipend levels.

Another reform being suggested would distribute some or all of the income supplement in an eligible person's pay cheque rather than as a lump sum at the end of the tax year.

Joining in such initiatives to strengthen the programme is by far the best way to help America's low-wage workers.


This article was first published on July 7, 2016.
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