Some Thoughts on Obama’s $9 an Hour Minimum-Wage Proposal

by Patrick Brennan

That seems likely to be the most controversial proposal of the night. The president explained:

We know our economy is stronger when we reward an honest day’s work with honest wages.  But today, a full-time worker making the minimum wage earns $14,500 a year.  Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line.  That’s wrong.  That’s why, since the last time this Congress raised the minimum wage, nineteen states have chosen to bump theirs even higher.

Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.  This single step would raise the incomes of millions of working families.  It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead.  For businesses across the country, it would mean customers with more money in their pockets.  In fact, working folks shouldn’t have to wait year after year for the minimum wage to go up while CEO pay has never been higher.  So here’s an idea that Governor Romney and I actually agreed on last year: let’s tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.

Of course, most obviously, President Obama is engaging in a good bit of doublespeak by asserting that he and his presidential opponent Mitt Romney “agree” on indexing the minimum wage to inflation — Romney didn’t propose raising it too, so they’re operating from remarkably different baselines. Unrelatedly, as many have already noted, during his 2008 campaign, the president actually proposed raising the rate to $9.50 an hour.

Classical economics suggests that raising the minimum wage, by increasing the price floor on labor, will reduce employment — killing jobs, that is. Further, the change should cause employers, now paying a higher price for labor, to discriminate more in favor of skilled and experienced workers and against those without those characteristics. The general empirical consensus has usually been that raising the minimum wage (and its existence, full stop) probably decreases employment slightly — and there is a wide consensus among economists (as wide as almost any issue) that a minimum wage increases unemployment among teenagers and unskilled workers.

But the head of President Obama’s Council of Economic Advisers, Alan Krueger, authored one of the most famous and controversial studies of minimum-wage laws, which found that increases in the minimum wage have almost no effect on employment levels. Krueger and his co-author, David Card, looked at New Jersey and Pennsylvania restaurant employment when the Garden State raised its minimum wage. There are also a number of objections to the classical model of minimum-wage pricing.

It’s also important to note that the president’s depiction of a “family with two kids” as the prototypical example of a minimum-wage-earning household is kind of problematic. Like he said, a two-parent, two-child household with just one worker earning the minimum wage plus the Earned Income Tax Credit would still end up below the poverty line (about $23,000 — they’d be earning, given that the EITC is worth about $5,000 for them, around $19,000). But if both parents are working — surely a necessity in those economic circumstances — the two earners in the family would earn well above the poverty level, contrary to what the president suggests. But it is also important to remember that many of these minimum-wage families with two or three kids will be below the poverty level — because they’re headed not by two parents, but by a single person, usually a hard-working mother. That national tragedy did earn an oh-so-brief mention tonight, on which Bradford Wilcox comments above.

Further, while many working parents do indeed raise families on the minimum wage, minimum-wage earners aren’t necessarily the main face of working families in America, as the president seemed to suggest. As the BLS explains, there are about 3.8 million hourly workers in America earning at or below the federal minimum wage, but they tend to skew quite young:

Although workers under age 25 represented only about one-fifth of hourly-paid workers, they made up about half of those paid the Federal minimum wage or less. Among employed teenagers paid by the hour, about 23 percent earned the minimum wage or less, compared with about 3 percent of workers age 25 and over.

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