Would Raising the Minimum Wage Really Help the Economy?

Raising the minimum wage has become one of the most fashionable political issues around. Voters in Alaska, Nebraska, Arkansas, and South Dakota all approved ballot initiatives increasing the base wage in their states. Voters in Illinois approved a non-binding measure asking their state’s legislature to initiate a minimum wage of $10 an hour.

Increasing the minimum wage, which is set at $7.25 an hour by federal law, is popular and morally just, but it is good for the economy? Actually that depends upon whom you ask; there are two prevailing macroeconomic theories on such wage increases.

Keynesians (liberal economists who follow the theories of John Maynard Keynes), would argue that it would boost the economy by giving people more money to spend. Monetarists (free market economists) would argue that higher minimum wages would hurt the economy by decreasing the number of jobs.

The truth, of course, is that both sides are right and wrong. The Keynesian argument that giving people more money to spend will boost the economy is correct. It would increase retail sales and sales tax revenues. The problem with that argument is that the number of jobs would have to stay the same or increase. If employers could not pay the additional wages, the economy would not be boosted.

The monetarist argument that it would eliminate jobs is also correct, but one has to ask how jobs that pay very low wages would help the economy. If the people working for minimum wage don’t make enough to support themselves, how does that benefit anybody?

One problem with the minimum wage is that those that receive it often rely upon government benefits such as welfare, public housing, Medicaid, and food stamps. In other words, the taxpayer is effectively picking up part of the employers’ costs.

How an Increased Minimum Wage Could Hurt Social Security and Medicare

The situation actually gets more complex because raising the minimum wage might not boost or decrease the number of jobs. It might push more employees into the black or shadow economy. Instead of paying the higher wage, more employers might start paying workers under the table in cash or let people work off the books for tips.

It also gives employers a strong incentive to hire illegal immigrants, who work off the books. Businesses can also get around the minimum wage by classifying workers as independent contractors that are not employees and not subject to minimum wage laws.

That could be a huge problem because those working off the books and independent contractors do not pay the Medicare and Social Security taxes. That means less money for Medicare and Social Security, both of which are facing huge shortfalls in the years ahead.

The income tax makes this situation worse because, in our present economy, the working poor have a strong incentive to work off the books. A person working off the books for cash is likely to receive more money because he or she is not paying the salary tax. That person is also in a better position to receive government benefits such as Medicaid, Social Security Disability, Unemployment Insurance, the earned income tax credit, and food stamps because his or her reported income is lower.

This situation is already being made worse by Obamacare, which mandates that businesses that employ more than 50 people provide health insurance to full-time workers. That gives employers a strong incentive not to hire and an even stronger incentive not to hire full-time workers.

There’s also the problem of the uneven wages in different states. In Nebraska, the minimum wage will rise to $9 an hour in 2016, but it will stay at the federal rate in neighboring Colorado. That gives businesses a strong incentive to locate to Colorado instead of Nebraska.

Why the Minimum Wage Might Not Lift Anybody out of Poverty

Nor would the increased wage necessarily raise people out of poverty. A working mother with two kids that earned Nebraska’s increased minimum wage of $9 an hour would make $17,280 a year if she worked full time (40 hours a week). That woman would still be below the federal poverty level. The U.S. Department of Health and Human Services has set the poverty level for a family of three at $19,790 a year.

It looks as if the increased minimum wage might not raise anybody out of poverty and could backfire by driving more Americans into the black economy. Perhaps we should be looking into other alternatives, such as eliminating wage and salary taxes for those making under a certain amount of money a year or setting up a real national health insurance system so employers would not have to bear that cost.

One thing is for certain though; the increased minimum wage is not going to solve the problems of poverty or income equality in America. We need more creative thinking and new ideas, not tired old solutions more appropriate for the last century.