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Raising Wages
Helping the poor and ramifications of minimum wage mandates
by Lydia Carrico Johnson
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Tracy Baker would like someday to provide a nice home or apartment for her two daughters, ages eight and four. She’d like to enroll them in music lessons or gymnastics and have enough money to take them to a restaurant occasionally. But she can’t afford much on the $6 hourly wage she makes at a fast-food restaurant in Owensboro. Making more might help, she admits. But even when she made $7 an hour, making ends meet was difficult.
“I just want to be not struggling,” she said. “This life for me doesn’t bother me, but I just want them to have their own room.”
The Kentucky General Assembly recently considered raising the state’s minimum wage from the current $5.15 to $6 this year and $6.50 next year, but some economists say that’s not the best way to help low-income families and individuals. Poverty should be attacked from various angles, they say, including higher wages, the federal Earned Income Tax Credit and support services.
“The minimum wage is a controversial policy for two reasons,” Robert Stoker, associate professor of political science and public policy at George Washington University, said in an email interview. “It does not target poor people, because a substantial number of minimum wage workers are secondary earners in relatively affluent families, and it may decrease the number of jobs available to people who can command only the minimum wage.”
Stoker is co-author of the book “When Work is Not Enough,” (The Brookings Institution, 2006).
Who would be affected by an increase in the minimum wage in Kentucky?
James Ziliak, professor of economics at the University of Kentucky, ran an analysis in February to determine who makes at or below the minimum wage in Kentucky. The largest group is families with both spouses working, one making at or below the minimum wage and the other making more. Such families make up 28 percent of the total.
Ziliak, who is also director of the UK Center for Poverty Research, said states with higher minimum wages do have “slightly” lower poverty rates, but an increase will cause a 1.5 to 4.5 percent reduction in employment.
“One has to bear in mind the possible displacement effects of the minimum wage,” he said. “One wants to know who is going to lose those jobs.” Will it be the single mothers and fathers, or the teens?
Another question is whether raising the minimum wage tends to raise wages for everyone, a benefit for employees but a strain on employers.
In an email interview, Brookings Institute labor economist Gary Burtless said that raising the wage may spur a “trickle up” effect for those whose incomes are near the minimum wage. But few who earn much more will be affected, he said.
“If the minimum wage is only raised to $6.50, this effect will be very small for wage earners currently earning $8 an hour,” Burtless said. “It will be more noticeable among wage earners receiving $7 an hour, and possible among a few earning as much as $7.50 an hour.”
What’s happening in other states?
As of Jan. 1, 17 states and the District of Columbia had raised the wages and other states were considering it. Employers must pay whichever wage – state or federal – is higher. Results have been mixed.
At $7.63 an hour, the state of Washington’s minimum wage is the highest in the nation. It was set by a voter initiative in 1998 and is adjusted based on the consumer price index in the Seattle area, according to Don Brunell, president of the Association of Washington Businesses. Proponents for the initiative argued that businesses already were paying top dollar for minimally skilled labor, so passing it would affect few.
Problems have occurred, though, from tying the wage to the more economically robust Seattle area. As wages increase, other costs follow, such as unemployment compensation. Some businesses in more rural areas that cannot support the increases have moved across the state line to Idaho, where the minimum wage is still $5.15 an hour.
“The economics of Seattle are different from other parts of the state,” Brunell said. “The differences between us and the other parts of the state will get so dramatic, (the legislature) will have to make some changes.”
In Rhode Island, nine of the state’s 14 chambers of commerce, representing 7,300 businesses, are leading an effort to block additional increases in that state’s minimum wage, which will rise from the current $6.50 to $7.10 in March and to $7.40 in January of next year.
“When that 10 percent pay raise takes place, what about those employees who are not making minimum wage?” asked David Carlin, vice president of government affairs for the Northern Rhode Island Chamber of Commerce, which is leading the effort. “They will ask for a 10 percent pay raise.”
Pros and cons in Kentucky
Those who advocate for raising the minimum wage argue that it would help at least some low-income families with children to improve their financial circumstances, and that it is long overdue -- the federal minimum wage was last increased nine years ago.
Today, a family would have to make at least $10.33 an hour full time – 40 hours a week for 52 weeks – to afford a two-bedroom, $537-a-month apartment in Kentucky, according to the report Out of Reach 2005 from the National Low-Income Housing Coalition. On average, Kentucky renters make $9.54 an hour, the report adds, which is below the recommended wage for the two-bedroom apartment but more than the proposed increase.
“We’d like (the minimum wage) to be more than $6 or $6.50, but we need to head in the right direction,” said Ed Monahan, executive director of the Catholic Conference of Kentucky, which is pushing for the increase. “We believe that people should have the ability to work for a wage that allows them to have the basic necessities of life.”
A recent Gallup poll says 82 percent of Americans favor an increase in the federal $5.15 minimum wage; inflation has eroded today’s wage, many argue. To have the same purchasing power as it did in 1968, the federal minimum wage would have to be $9.05 an hour, according to the Let Justice Roll Campaign, an organization calling for an increase.
Those who question a raise in Kentucky’s minimum wage, on the other hand, say an increase could hurt the people it’s supposed to help.
Let Justice Roll Campaign
An increase “may well benefit a few, but more will see their jobs disappear,” according to Jim Waters, director of policy and communication at the Bluegrass Institute, which he describes as a “free-market think tank.” He cited a report that appeared in the Southern Economic Journal that says teenage employment drops by 5.7 percent with every 10 percent increase in the minimum wage.
The Kentucky Chamber of Commerce opposes the issue as well. Chamber President Dave Adkisson, the former mayor of Owensboro, said many Kentucky businesses already pay more than the current minimum wage anyway, adding that the chamber is “philosophically” opposed to the proposal because it places additional mandates on business.
“If they are forced to raise wages, they will simply have to reduce in some other areas,” Adkisson said.
Ziliak, the UK economist, said wages are best set by what the market demands. If profits are up, then businesses will be forced to raise wages to attract and retain employees.
“If the market demands it, then businesses can afford it,” Ziliak said.
Is there a better way?
Some economists say the Earned Income Tax Credit is a better way to lift low-income workers from poverty, because it targets families with the greatest needs while at the same time encourages them to work.
By claiming the EITC, low-income families may receive thousands of dollars in the form of a tax refund, enough to save for a down payment on a house or pay for more education to prepare for a higher-wage job.
For instance, families earning at or less than $35,458 in 2005 can be refunded as much as $4,300, based on household income and family size. The more people work, the more they earn until they reach an income level that makes them ineligible.
“That feature makes the EITC unique among redistributive programs in the United States,” Stoker said in an email.
EITC is more effective at reducing poverty than any other social program, according to the Brookings Institute, and it can boost local economies.
Locally, the Owensboro-Daviess County Asset-Building Coalition last year offered free tax-help sites for low-income families and encouraged them to apply for the EITC. About 200 families did so, claiming $274,000 in credits. Because families typically spend EITC refunds in their local communities, the coalition estimated that the $274,000 in credits generated $390,000 in economic activity (because of an economic multiplier effect).
In its 30th year, the federal EITC was implemented during the Nixon era to ensure income to the poorest of Americans and greatly expanded during the Clinton administration. It has grown from $1.25 billion in 1975 to $37 billion in 2004. On average, one of every five Kentuckians claims the credit.
States have the option of implementing their own tax credit as well, and 17 have done so, though Kentucky is not among them. States may use federal Temporary Assistance for Needy Families (TANF) dollars for the credit; however, in some states, the credit is used only to reduce the tax burden and does not result in refunds.
But even with the credit, the poorest of poor can still be left in poverty due to the stagnation of the federal minimum wage. Full-time minimum-wage work plus the credit would have placed a family of three $107 above the poverty level in 1975. Today, that same family would be $1,000 below poverty level, according to the Brookings Institute
Burtless said raising both may help those who earn the lowest wages and who are trying to support children.
“I do not think I would say the same thing if the minimum wage were as high (relative to the average U.S. wage) as it was back in, say, 1980 or 1970. At that point, improvements in the EITC were much more helpful to low-wage parents.”
One thing is for certain – the debate won’t go away. That’s because there are too many families such as Sherry Durbin’s who are living in poverty on what they earn today.
Durbin already makes $6.50 an hour as a cashier at McDonald’s in Owensboro and can’t afford to keep meat, eggs, bread and milk in her house. The single mother of a teen has an associate’s degree in accounting but still is unable to find a higher-paying job.
“Owensboro is just shutting its doors to me, like I’m useless,” she said. “I feel degraded and embarrassed."