Tuesday, January 28, 2014

The math behind the minimum wage

Just a reminder, I'm not political on this blog.  This is not about the politics of the minimum wage, I'm talking about the math and economics behind the minimum wage.  If you feel your blood starting to boil when reading this, just click www.google.com and type in "happy kittens".  :)

The President has made headlines today previewing a plan to increase the Federal Minimum wage for federal contractors from $7.25 to $10.10 with further increases tied the rate of inflation.

On the surface this seems logical if you are trying address the issue of poverty among the working poor.  Adding nearly $3 per hour to a the paycheck of someone working 40 hours per week puts an extra $120 in their pocket that they can spend and when 70% of the US economy is consumer driven, this should spur more job growth and help our working poor pull themselves up by their bootstraps.

Or does it?

There's a bit of a debate among economists right now on the issue of the minimum wage.  On one hand you have a number of economists that have run models predicting that hours cut and jobs lost will be minimal if the rate is raised and the increase will serve to help the poor.

On the other hand is a powerful bit of actual data collection which seems to fly in the face of conventional wisdom about the minimum wage.  This is a little hard to believe at first so I'll cut directly from the academic paper (when the paper was written in 2010 the proposal was to increase the Federal Minimum wage to $9.50).....

"Only 11.3% of workers who will gain from an increase in the federal minimum wage to $9.50 per hour live in poor households, an even smaller share than was the case with the last federal minimum wage increase (15.8%). Of those who will gain 63.2% are second or third earners living in households with incomes twice the poverty line, and 42.3% live in households with incomes three times the poverty line, well above $50,233, the income of the median household in 2007."

That last line is really important: nearly 2/3rds of the people who will benefit from the hike of the minimum wage already live in a household with an income twice the poverty line and over 40% live in households with income with incomes 3x the poverty line and even above the median US income.

What this suggests is that the bulk of the increase in minimum wage will go to people working a second or third job and who already (while clearly working their tail off) are not "poor" according to the government. 

This is really troubling because it doesn't fit the political narrative of "We must do more for our working poor".  Now the reality is that from an economic standpoint increasing the wages of these second and third earners probably does MORE to stimulate the economy than increasing the wages of the actual poor because more of this increase will be incremental income that is disposable. 

However, saying "We'd like to spur growth at Walmart and other retailers by increasing the incomes of households making $45,000/year" doesn't have the same populist ring to it.

I hope that someone gets a chance to ask the President about this data at some point because I would be interested to hear the White House position.  Do they not believe that the bulk of the increase will go to families above the poverty line or do they really just want to stimulate consumer purchasing and they don't care who does that spending?

If you're still mad at me you can always go back to the kitten pictures.


Unknown said...

I recently wrote an article about how an increase in the minimum wage rate increases unemployment. You can read it here: http://wp.me/p3N9zD-4e

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