Opinion and Economic Analysis

HICKS: Let's try a $25 minimum wage to end poverty

February 16, 2013

Among President Obama’s recommendations in his most recent State of the Union address was an increase in the federal minimum wage from its current $7.25 to $9 an hour. This is not the first time he has done so. In 2008, then-Sen. Obama called for the minimum wage to rise to $9.50. I am not sure what transpired over the past five years to lead him to lower his target, so I’ll just mark it up to bad memory. Still, thinking about the economics of the matter is useful.

As the president noted, no one should doubt that raising a family while earning minimum wage is a hard business; perhaps that is why almost nobody does it.

In fact, only about 1 percent of adult workers actually earn the minimum wage (another 1 percent or so are wait staff, earning tips). Indeed, for every one minimum-wage adult worker, 10 work in the shadow economy, outside the view of tax collectors.

As difficult as it may be for many folks to understand, labor markets are subject to the laws of supply and demand. The inability to find a job above the minimum wage means the market does not value your skills at that level. For an adult worker, this is a damning market assessment of one’s labor value.

Still, nearly 8 million Americans have fallen into this category since Obama proposed the $9.50 minimum wage. Labor markets are imperfect, to be sure, but minimum-wage laws do nothing to improve them.

Research on the matter is not clear—and for good reason. While the federal laws treat all labor markets alike, they are not. The market wage for an unskilled worker is a lot lower in Hartford City or Cannelton, for example, than in Manhattan or San Francisco. So raising minimum wage might have devastating employment effects in some places and go unnoticed in others.

The research I have done suggests it is primarily young workers who lose jobs when the minimum wage increases, but it is a far from settled matter. Obama’s chief economist has published some of the most interesting and controversial work in this area, including the only empirical study (of the Philadelphia area), which suggests employment actually increases. There are too many studies that conclude otherwise to review here.

For the most part, the minimum-wage debate is political kabuki theater. It is a way to pretend to help the poor without having to face the actual problems of failing schools and failing families, which would upset all sorts of political donors.

Perhaps we don’t need to heed economists on the matter. Instead, we could simply try a policy experiment: In lieu of the $9-per-hour minimum Obama wants, we should require all businesses to pay all employees $25 an hour.

If the president is right, that should end poverty. If he is not, we can focus on real issues slowing our economy and hurting the poor.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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