Obama's Minimum Wage Increase Fallacy

In Tuesday night's (February 12, 2013) State of the Union show, er, speech, Dear Leader Barack Hussein Obama said:

We know our economy is stronger when we reward an honest day's work with honest wages. But today, a full-time worker making the minimum wage earns $14,500 a year. Even with the tax relief we've put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That's wrong. That's why, since the last time this Congress raised the minimum wage, nineteen states have chosen to bump theirs even higher.

Tonight, let's declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour. This single step would raise the incomes of millions of working families.

Obama called for raising the minimum wage to $9.00 per hour, and to index the minimum wage to inflation. Sounds great! In ObamaWorld, in a static economy where the economy will not react to a minimum wage increase, what Obama proposes would be fine. Unfortunately (or fortunately, depending on your perspective), we don't live in a static economy; rather, we live in a dynamic economy that will react to a minimum wage increase. So, with that bit of economic reality that seems to be lost on Obama's economic advisers (perhaps it's not lost -- it's the only they can sell their ideas to low-information voters), let's examine what will occur if the minimum wage is increased:

• Jobs will be lost. 10.6 percent minimum wage increase in 2009 resulted in the loss of 600,000 teen jobs in six months, even with a 4 percent economic expansion. A 10 percent minimum wage increase resulted in a 4.6 percent to 9.0 percent drop in teen employment in small businesses, and a 4.8 percent to 8.8 percent drop in hours worked by teens in the retail sector. The same study showed an increase in unemployment of 2.7 percent to 4.3 percent, and 5 percent for low-skilled employees most affected by minimum wage increases. So, the job-destroying effects of a minimum wage increase falls particularly hard on low-skilled workers. Why focus upon teen employment? Because teens comprise the bulk of minimum wage earners. And most minimum wage earner do not work full-time.

• The economy will suffer (even more, if it can). This video (at the 1:15 through 1:31 point) says that increasing the minimum wage will slow the economy because manufacturers have less to reinvest. There is a condition where raising the minimum wage -- a monopsonistic situation -- (1:41 point) can benefit the economy. But monopsonism refers to the situation in which there is only one buyer, hardly the case in the U.S. labor market (although the federal government is trying to achieve that situation). So we are left with a minimum wage increase harming the economy.

It's rather ironic that Obama chose to cite poverty of a full-time worker. That is because only about 38 percent of those earning minimum wage work full-time. That percentage was true in 2005. Can anyone cite a source that suggests a substantial percentage change since then? So, using 2005 percentages, 53 percent of those earning [minimum wage] or less per hour are between the ages of 16 and 24. Those earning the minimum wage, ages 16 to 24 years, had an average family income of over $64,200 (2005 dollars), while those over 24 had an average family income of over $33,600. Further proof that a minimum wage increase will not help the group Obama cites. Also, consider that even in 2005 dollars, average family income of minimum wage earners far exceeds the amount Obama cites, $14,500.

And, as William Dunkelberg says, "About 60 percent of the officially poor don't work, so the only thing raising the minimum wage does for them is to make it harder for them to get a job if they ever decide they want one." Dunkelberg continues, "It is estimated that less than 15 percent of the total increase in wages resulting from an increase in the minimum will go to people below the poverty line and less than a third of those receiving the minimum wage are families below the poverty line." "Don't work" means that they don't work full-time. Did Obama somehow miss this little fact?

Of those making minimum wage, 16.9 percent of those aged 16 to 24 lived at or below the poverty threshold, while 22.8 percent that were 25 or older lived in similar circumstances. Of those making minimum wage, 64.7 percent of those aged 16 to 24 had a household income above 200 percent of the poverty threshold, while 44.8 percent that were 25 or older lived in similar circumstances. These percentages are particularly damning to Obama.

Further, again using 2005 percentages, the largest percentage of minimum wage earners have "less than a high school" education. This fact is not some deep, dark secret. The last time I checked, public schooling included high school. And public schooling did/does not directly cost (except for "cool" clothes) those being educated. Dropping out of school is a conscious choice. Yet we consumers are expected to pay higher prices to support what is a bad decision. Some economists suggest that increasing the minimum wages may actually encourage some students to drop out of high school. About half of the 3.8 million workers who make at or below the minimum wage are under 25, according to the Bureau of Labor Statistics (see table 1).

But wait, you say. Those "evil" business owners should raise wages but not prices. They have, after all, large quantities of money stashed away. This is just the "other side" of the same coin. Business owners are somehow expected to support a bad decision. Besides, how do you think those "evil" business owners got all that money? Have you ever heard of education? There are very few business owners with the last name "Kennedy."

As University of California economics professor David Neumark says, "There is no research supporting the claim that minimum wages reduce the proportion of families living in poverty."

And, as Paul Kersey of the Heritage Foundation wrote in 2004:

Well, I have good news and bad news for you. The bad news is that increasing the minimum wage will do little to improve conditions for the working poor. This is because relatively few of the recipients of such an increase are living in poverty. The good news is that the working poor do not necessarily need government help. Research shows that the 'dead-end job' is largely a myth.

This is not to say that the working poor do not have a hard road ahead of them, but for those who persevere it is a road that leads out of poverty. We should not block off that path by making low-wage jobs more scarce, which is a likely result of an increase in the minimum wage.

As Rea S. Hederman, Jr. and James Sherk wrote in 2006:

Many support raising the minimum wage because they want to help low-income Americans get ahead. But while some minimum wage-earners do live below the Poverty line, these workers are far from representative. Only one in five minimum wage-earners lives in a family that earns less than the Poverty line. Three-fifths work part-time, and a majority are under 25 years old. Minimum wage-earners' average family income is almost $50,000 per year [2005 dollars]. ... It is not surprising, then, that studies show that higher minimum wages do not reduce Poverty rates.

Minimum wage workers under 25 are typically not their family's sole breadwinner. Rather, they live in middle-class households that do not rely on their earnings. For the most part, they have not finished their schooling and are working part-time jobs. These workers represent the largest group that would directly benefit from a higher minimum wage.

As David Neumark said in 2009:

Minimum wages, like most public policies, confront us with trade-offs. An employed, low-skilled worker who keeps his job earns a slightly higher wage. But a worker who loses his job, or a labor-market entrant or unemployed worker who cannot find a new job, pays a much higher cost. Given present economic conditions, the imperative should be to create and enhance job opportunities.

If "a family with two kids that earns the minimum wage" does receive a minimum wage raise to $9.00 per hour, the family will still live below the poverty line. Assuming the minimum wage earner works 52 weeks per year (no vacation), 40 hours per week (becoming quite rare due to ObamaCare), he/she will earn $18,720 per year (do the math). Yet, Health and Human Services says that a family of four is below its 2012 poverty threshold of $23,050. To rise above that threshold, a minimum wage of $11.10 would be required. So, why did Obama not call for the minimum wage to be raised to that amount? But why stop at $11.10 per hour? While we're at it, let's raise the minimum wage to $22.20 per hour so poverty is eradicated. I'm suuuuuuuuuuuuuure prices won't rise as a result.

Are you reading (and understanding) this, all you Obama supporters? Or have y'all been taught how to suspend economic reality? Please, unlike Obama, be specific as y'all try to refute empirical evidence. Don't just provide some "feelgood" rhetoric.

Bottom line: increasing the minimum wage kills jobs, hurts the economy, and doesn't lift people out of poverty. There is only one way out of poverty: get educated and work!

But that's just my opinion.

Dr. Beatty earned a Ph.D. in quantitative management and statistics from Florida State University. He was a (very conservative) professor of quantitative management specializing in using statistics to assist/support decision-making. He has been a consultant to many small businesses and is now retired. Dr. Beatty is a veteran who served in the U.S. Army for 22 years. He blogs at rwno.limewebs.com.