Poverty and the Minimum Wage


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One of the big issues for Democrats when they take over in January will be an increase in the minimum wage. The current Federal Minimum Wage is $5.15/hour, but that rate has been eclipsed in 18 states that have a higher minimum wage than the the federal governments requires.

The chart below compares the poverty line (blue) for a single person of working age with the minimum wage (pink).

As you can see, the periodic adjustments to the minimum wage have worked to keep the income of a worker working 40 hours a week above the poverty line (as determined by the census bureau.)

Using current figures and the average growth in the poverty line over the past five years, the chart is extended to forecast to 2015. It shows that if the minimum wage is not increased before 2008, the minimum wage will fall below the poverty line.

There are some arguments that the minimum wage can increase poverty by way of increasing unemployment. It is said that an increase in wage costs leads to employers either cutting back on hiring or even letting some people go. If you compare the times that the minimum wage has increased with spikes in unemployment, the results are mixed: There is often an increase in unemployment after an increase in the minimum wage. However, this was not the case during the last increase; in fact, the economy was soaring.

I believe the risk of increased unemployment has been marginalized by the kinds of employment that minimum wage workers are hired to perform. It may be that during past periods where increases in the minimum wage caused a spike in unemployment it was due to those workers being paid to do assembly/factory work. An increase in labor costs in that sector would cause employers to possibly look elsewhere to locate their manufacturing. We've seen that migration occur over the past few decades with much of the products Americans consume being manufactured in East Asia. I think much of the minimum wage is now being paid to service-sector/retail employees. These jobs cannot be relocated.

In any case, the argument that if you pay people a living wage for a hard-day's work, will cause others to lose their job, is an argument of misdirection. Which is better: keeping everyone a slave to their job by not paying them enough to get by, or paying everyone who is employed a living wage?

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Read More About:   Business | Minimum Wage | United States