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The Mythology of the Minimum Wage

11/25/2013 06:27 pm ET | Updated Jan 25, 2014

Raise the minimum wage and combat poverty! That sounds like a great idea, but... not so fast. As it turns out, increasing the minimum wage actually hurts the working poor, is a windfall for affluent families, and raises the barriers facing the unemployed. There is growing evidence that increasing the minimum wage hampers employment for low-skilled workers who need the most help and experience.

According to the Employment Policy Institute's Michael Saltsman, the majority of minimum wage employers are not large corporations with thousands of employees. Instead, the majority of minimum wage earners work for a local small business, with 40 percent having fewer than 50 employees. Most of these employees work part time--so they can take classes, take care of their families or supplement other income. Take the restaurant industry as an example, nearly 80 percent of restaurant workers that earn the federal minimum wage work part-time.

When faced with higher labor costs per hour, these small businesses have to make tough choices, and the decision to comply tends to impact low-skilled employees the most. In a recent study, Sabia, Burkhauser, and Hansen (2012) conclude that New York State's minimum wage increase from $5.15 to $6.75 in 2006 reduced employment by over 20 percent for the least skilled and least educated people in the workforce. The very audience that could use a raise will ultimately be put out of work entirely.

The minimum wage also impedes job creation, as demonstrated by a recent American Action Forum analysis. Employers forced to pay more per hour for labor, makes it impossible for them to expand their workforce and make new hires. California's recent minimum wage increase to $10 per hour will result in a loss of almost 200,000 new jobs. If every state followed suit, more than 2.3 million jobs could disappear nationwide. With 11.3 million unemployed people currently looking for work, driving a wedge between no paycheck and any paycheck is irresponsible.

Who exactly does the minimum wage help? Those who need help the least. According to Current Population Survey data, 80 percent of minimum wage earners are not in poverty. In addition, teens and young adults make up 46.3 percent of all minimum wage earners. Unfortunately, for those who still live with their parents (more than one-third of all minimum wage earners), their average family incomes are over $100,000. It's hard to see how increasing the minimum wage would combat income inequality when close to half of the beneficiaries are in the top 20 percent of earners.

Meanwhile, the working poor remain left behind. Since so few people in poverty actually earn at or near the minimum wage, very few would benefit from an increase. For instance, only 6.3 percent of all wage and salary workers in poverty earned the minimum age in 2011. As a result, economists Joseph Sabia and Richard Burkhauser (2010) conclude that only 10.5 percent of the net benefits of a federal minimum wage increase to $9.50 would go to those in poverty.

A more effective way to help those in need is for policymakers to work on improving programs that have a track record of success, such as the earned income tax credit (EITC). The EITC has proven to be very effective at moving Americans from out of work to having a job. The EITC is also more effective at targeting those in poor households because it is based on income and not just wages. In the end, the EITC benefits 56.1 percent of workers in poverty.

A strong social safety net is one of the most important things a nation can provide its people, but an increase in the minimum wage should not be part of the strategy. Redistributing income from those who need it the most--the job seekers--to those who need it the least-- job holders in high income households expands the income divide and is a counterproductive anti-poverty policy.