While lawmakers across the country debate proposals to increase state minimum wage rates, proponents have turned their attention toward ballot measures that might kill two birds with one stone: putting voters on the record as supporting minimum wage increases as well as getting out the vote for Democrat candidates.
According to the National Conference of State Legislatures, 34 states introduced minimum wage increases during the 2014 session. Ten states—Connecticut, Delaware, Hawaii, Maryland, Massachusetts, Michigan, Minnesota, Rhode Island, Vermont, and West Virginia—enacted increases during the 2014 session. Another five states – Alaska, Arkansas, Illinois (a nonbinding ballot question), Nebraska, and South Dakota – are placing propositions on their November ballots asking voters to approve increases in their state’s minimum wage.
Although supporters of minimum wage increases say they protect workers from exploitation by employers and reduce poverty, opponents question both the effectiveness and the true intent of the proposals, calling them election-year gimmicks.
Using the minimum wage as a political football or “get out the vote” tool is a shortsighted move that could damage a state’s economy. A minimum wage hike can increase unemployment and, ironically, poverty, by forcing businesses to make adjustments elsewhere to offset the increased costs of mandatory wage hikes.
Employers may respond to the increased labor costs by letting workers go, reducing hiring, cutting employees’ work hours, diminishing employees’ fringe benefits, raising prices to consumers, and lowering dividends to investors. The unemployment created by these laws has an especially strong effect on young and unskilled workers. Thus minimum wage laws end up hurting the very people they were supposedly intended to help.
Minimum wage laws also tend to increase prices, notes Mark Wilson of the Cato Institute in a 2012 review of more than 20 minimum wage studies looking at price effects: “a 10 percent increase in the U.S. minimum wage raises food prices by up to 4 percent.” Similarly, a 2007 study from the Federal Reserve Bank of Chicago found restaurant prices increased in response to minimum wage hikes.
Evidence shows imposing minimum wage increases is not an effective way to address poverty and often has the opposite effect by creating barriers to entry for workers with less skill and education. In a 2010 study, economists at Cornell University and American University found no reduction in poverty in the 28 states that raised their minimum wage between 2003 and 2007. A 2007 study by economists at the University of California-Irvine and the Federal Reserve Board found 85 percent of the studies they considered credible demonstrate minimum wage laws cause job losses for less-skilled employees.
There are alternatives to minimum wage laws that can help low-income families move out of poverty. The Earned Income Tax Credit (EITC), the nation’s largest poverty reduction program, is a refundable tax credit for lower-income working individuals and families based on income level and number of dependents. The EITC is designed to increase employment, stimulate spending throughout the economy, offset the burden of Social Security taxes, and encourage existing workers to stay employed. It covers a large group of low-income families, and several studies have found it is far more effective than the minimum wage. Twenty-five states and the District of Columbia have state-level earned-income tax credit programs.
Increasing the legal minimum wage is not an effective method of addressing poverty; it harms workers by creating barriers to entry for less-skilled and less-educated people while increasing the cost of products and services. Lawmakers and voters should reject this bad public policy and instead consider creating or expanding state-level earned-income tax credits.