Raising the Minimum Wage Isn't a Magic Bullet
The idea seems wonderful: If America increases the minimum wage to $10.10, we can cut poverty in half. As The Huffington Post crowed, such an increase, from the current federal minimum of $7.25, would “drastically alter the lives of the country’s working poor.”
In fact, according to HuffPo, a $10.10 level would have pushed a whopping 58 percent of this country’s working poor out of poverty. Just like that.
But are those numbers accurate? Time to play a game of Follow the Bouncing Ball, or, in this case, follow the citation and link, to find the derivation of this figure. After all, if something so simple could essentially cure poverty for more than half of Americans, it is worth at least a few hours of research, no?
HuffPo, to be fair, didn’t make the claim itself. Rather, it cited something called the Restaurant Opportunities Centers United, which it describes as “an advocacy group focusing on the restaurant industry.” That focus, by the way, is on increasing unionization for restaurant workers.
The ROCU report cited is Realizing the Dream: How the Minimum Wage Impacts Racial Equality in the Restaurant Industry and in America. Ultimately, the report blames a low minimum wage for widespread poverty and racial inequality.
Indeed, that report claims a higher minimum wage (which, one assumes, would also equate to higher union dues) would save millions from poverty, but not 58 percent. “Nearly six million workers would be lifted out of poverty if the minimum wage were raised to $10.10 as has been proposed by Congress, of which 60 percent, or over three and a half million would be people of color,” according to the authors. There is a 58 percent figure mentioned, but it has to do with the racial makeup of restaurant workers affected: 58 percent of workers below the poverty line, according to the report, are people of color.
So, HuffPo didn’t cite ROCU correctly. To be fair, though, a chance to lift 6 million people out of poverty would be great. So, what data did ROCU crunch to come up with that figure? Well, ROCU didn’t. Instead, in footnotes to its report, it discloses it relied on “IWPR analysis of 2012 CPS-ASES.”
What is IWPR? That is the Institute for Women’s Policy Research, a liberal think tank that helped write the report with ROCU. A search on IWPR’s site shows that it has done a report on raising the minimum wage and its effect on women in the restaurant industry – citing the work of ROCU and written by a college intern. It does note that there are “studies” that show “raising the federal minimum wage – which has not changed since 2009 – to just $10.10 per hour would pull more than half of the nation’s working poor out of poverty.”
Conveniently, that post links to studies, but not the IWPR’s analysis, but rather to a brief commentary by a researcher from the Economic Policy Institute in 2011 that doesn’t mention what a higher wage will do to poverty levels.
That turns out just to be simply sloppy research on the part of the college intern. One assumes she apparently linked to the wrong report. The EPI indeed looked at the impact of a $10.10 minimum wage, but it never said how many people would rise above poverty levels as a result. Instead, it noted that a hike would raise wages for about 30 million workers, lead to $51 billion in additional wages, and actually cause gains to gross domestic product and job creation.
Those are big claims, open to and worthy of debate, but they fall short of the claims of how raising the minimum wage would dramatically alter poverty.
Truth is, claims about how minimum wages actually affect the poor are hard to back up with data. Yes, when you raise someone’s pay they make more money. But there are so many variables at work that researchers have come to different conclusions over the years. In fact, perhaps the most balanced research came from David Neumark and William Wascher, who noted in the end that higher minimum wages “increase both the probability that poor families escape poverty and the probability that previously non-poor families fall into poverty.”
Why? Well, as business owners know, there is a finite amount of money to pay workers. If you are breaking even with a staff of 10 all making $7.25 an hour, you need to reduce that same staff to seven to maintain your current budget with a wage of $10.10. So, seven of your workers do well, and bring home more to help their families. Three find themselves going deeper into poverty.
Of course, it is rarely a zero-sum game. Businesses can adjust to changes in wages beyond simply firing workers. They can raise prices, for instance, or simply lower profit forecasts, accepting higher wage costs. But they could also decide that investing in productivity is a better choice. While groups like ROCU have focused on protesting restaurant franchises over how they treat workers, the dynamics of food-service are moving beyond actual workers to off-the-shelf technology. More and more, people are sitting at tables and punching their orders into iPads. As that grows, minimum wage matters less, since there are fewer workers to receive it.
Every person should hold a job that pays all the bills. The idea of a working poor has always been an uncomfortable one for American business, since it goes against the ideal that everyone can make his own way, provided he follows his own work ethic. Comfort can and should be the fruit of your labor.
But raising the minimum wage isn’t the magic bullet some interest groups claim it to be. False rhetoric raises false hope and doesn’t feed families. Profit growth, reinvestment and innovation fuel job creation and an increase in wages, minimum or otherwise. A better policy focus on those areas has a better chance to dramatically alter poverty than the new math being peddled as scientific fact.
Ray Hennessey is the former editorial director of Entrepreneur.