Minimum Wage, Maximum Dissent

Given the reactions that President Obama got after he proposed raising the minimum wage to $9 an hour in his State of the Union address, he must have felt a little like comedian Rodney Dangerfield. He just didn't get any respect.

And that was from the left and the right. Those on the conservative side criticized the increase as a job killer and harmful to small business. Those on the progressive side criticized the increase as insufficient and too small to be meaningful.

From the right, House Speaker John Boehner said, "When you raise the price of employment, guess what happens? You get less of it." From the left, consumer advocate Ralph Nader proclaimed that the proposed increase was "too little, too late." Senator Tom Harkin (D-IA) announced that he was going to advance legislation calling for an increase up to $10.10 over three years.

Which side is correct? We think neither and what is required is a blended approach that initiates a meaningful change process. Let's examine why, beginning with the research regarding the impact of minimum wages.

As might be expected there are research papers that support both sides of the argument. David Neumark of the University of California at Berkley and William Wascher of the Federal Reserve say the wages reduce employment primarily for the young and low-skilled workers.

Arindrajit Dube of the University of Michigan and John Schmitt of the Center for Economic and Policy Research see little to no effect from a modest wage increase. Schmitt notes in his paper:

"Economists have conducted hundreds of studies of the employment impact of the minimum wage. Summarizing those studies would be a daunting task, but two recent meta-studies analyzing the research conducted since the early 1990's conclude that the minimum wage has little or no discernible effect on the employment prospect of low-wage workers."

As we look at the advocates for both sides, in our opinion, the risk reward ratio tilts toward doing something rather than nothing. That's because we continue in a relatively jobless recovery characterized by under-employment and wage stagnation for many of those who are employed.

Moreover, research done by the National Employment Law Project in 2012 shows that the majority of the jobs that were lost as a result of the great recession were in the middle range of wages ($13.84 to $21.13 per hour) but the majority of the jobs that have been created since the recovery began are in lower wage jobs ($7.69 to $13.83 per hour). Unions in the past have been instrumental in ensuring "good" wages and increases for their members have lost both their members and bargaining power. Finally, and most important for us, wages historically have been around 50 percent of GDP. They have been on a steep decline since 2001 and hit a record low of 43.5 percent in 2011.

Together these data provide compelling evidence that something needs to be done. There are two basic proposals which have been advanced to deal with the current situation. One is to increase the minimum wage. The other is to ensure the effective application and expansion of the earned income tax credit (EITC).

The EITC proponents see it as an approach that is working currently and does not interfere with market place dynamics. The EITC, which was started during the Ford administration, is reported to have lifted millions out of poverty. It allows the eligible taxpayers to get a refund check on taxes they have paid. Over the years, it has enjoyed support from both sides of the aisle.

Democrats have endorsed the EITC because it benefits those most in need. Republicans support it because it causes people to work for the credits they receive and also benefits employers indirectly by serving as a subsidy to the hourly wage they pay to workers who receive EITC payments.

Shortly after President Obama's proposed increase to the minimum wage, Charles Lane of The Washington Post wrote a column suggesting that these tax credits were a "better deal than the minimum wage." In that column, Lane proposed leaving the minimum wage as is at $7.25 per hour, but indexing it going forward and indexing the EITC as well.

Christina Romer, former chairperson of President Obama's Council of Economic Advisors, also expressed a preference for an enhanced EITC over the minimum wage increase in an op-ed piece in The New York Times in April. Part of Ms. Romer's rationale was that the minimum wage increase would benefit about 13 million workers resulting in an average "increase in annual income of $3,500."

According to Ms. Romer's the total increase from the minimum wage would "only be about $50 billion" and would "translate into only about an additional $10 billion to 20 billion in consumer purchases." She observes, "That's not much in a $15 trillion economy."

She is correct. But those increases will mean something to those individuals who get them. And, to paraphrase an old saying, "a billion here a billion there. Sooner or later it adds up to real money." We would go further to say that in an economy that has been so lethargic - every billion helps.

The Economic Policy Institute (EPI) has done a study that indicates that raising the federal minimum wage to $9.80 per hour by July 1, 2014, would raise wages for 28 million as opposed to 15 million that would be reached by the $9 per hour figure. According to the EPI, this would raise nearly $40 billion in additional wages, provide about a $25 billion boost to the economy, and create approximately 100,000 jobs in the phase-in period.

In our opinion, the choice between an enhanced EITC and an increased minimum wage is a false one. That's because they reach two different target groups.

That's the point that Jared Bernstein cogently made in a Huffington Post blog. In that blog he noted the EITC is a "wage subsidy for low wage earners in low-income households." In contrast, the minimum wage increase reaches a much broader group of the working poor and lower-middle class that would not qualify for the ETIC.

Those distinctions caused Bernstein to assert "...we need both policies. They're complements, not substitutes."

We agree with Bernstein's perspective. This should not be either/or. It should be both/and. We recommend adapting an EITC and a minimum wage of at least $9 per hour with both indexed to inflation.

America has been tilting toward an economy that benefits primarily the 1 percent. For America to work we need an economy that benefits the 100 percent. Combining an enhanced EITC and minimum wage moves us in that direction.

It expands the size and depth of the economic pool. That is in everyone's best interest. About that there should be no dissent.