Is raising the minimum wage really the best policy?

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Workers rally for a higher wage. (Photo: Saul Gonzalez)

This week, LA city council voted almost unanimously to raise the city’s minimum wage to $15 an hour by 2020. For labor activists, this was a big win. And for politicians, it signaled a commitment to getting workers out of poverty. Business owners disagreed. But surprisingly, some labor economists disagreed as well.

Is it possible that raising the minimum wage isn’t actually the best path toward helping low-income workers? KCRW talked to David Neumark, Economics Professor and Director at the Center for Economics & Public Policy at the University of California, Irvine. Neumark said that it isn’t the minimum wage that will help the close the income inequality gap, but more reliance on the Earned Income Tax Credit.

KCRW: When people think of Los Angeles and think about the industries that are here, the stuff that comes to mind might be entertainment,high tech media, perhaps aerospace; they’re not the kind of businesses that many people associate with minimum wage workers. Do we have any idea how many minimum wage workers there are either in L.A. or in Southern California? And what kind of industries they work in?

DAVID NEUMARK: Like any big city, there’s a lot of low wage jobs there’s a lot of services that get done that we don’t associate with L.A., because they kind of happen in every city: restaurants, hotels, child care, janitors, security guards — all those kind of things. I don’t know the numbers for L.A. per se, but given how big L.A. is I always operate under the assumption it’s pretty similar to the rest of the country.

Nationwide about five percent of workers are at the federal minimum. California state minimum is a bit higher, so it’s probably a little bit higher. So if you talk about small raises in the minimum, like the president’s been proposing, up to $10.10 you’re not really affecting many workers. Obviously when you talk about what the city is doing, $13.25, $14, $15 or whatever they get to, estimates are often 20 to 30 percent range, which is sizable.

KCRW: A recent study out of U.C. Berkeley says that when you adjust for inflation the bottom 20 percent of workers in California has seen their wages drop 12 percent since 1979. It seems fairly clear that it’s tougher for people in California and in L.A. to make ends meet on a minimum wage job than it used to be. Why is that? Is it that the wage hasn’t gone up enough?

DN: Well let me let me let me break out two points you made, which I think often get folded together in the policy debate in an unfortunate way. First of all inequality has gotten worse, no question about it. The economy has shifted in a lot of ways: globalization, technological change; policy has shifted and the minimum wage hasn’t gone up as much. And unions are weaker and the like. So people at the bottom are making less. So it’s certainly the case that the world has sort of gotten better for people with a lot of skills and worse for people with very low skills. And in a sense that’s the only reason we’re having this discussion. I think inequality has gone up, the president, to his credit is talking about it, and there’s a lot of debate about what to do about it. Some people don’t think it’s a problem the government to get involved with but you know as long as you think government has a role to play then asking what we can do makes a lot of sense.

The leap you made was which I think bears correcting is and therefore it’s gotten harder for people to make ends meet and the reason needs to be corrected.

So the real minimum wage has declined for sure and that along with these other changes, which are more important, has led to growing inequality and lower wages at the bottom, but we do have other policies in place now. We barely had an Earned Income Tax Credit in in 1979; it started in 1976 and was very stingy it really grew a lot in the 90s.

KCRW: Can you remind us what the Earned Income Tax Credit works?

DN: The Earned Income Tax Credit is a subsidy to your earnings – so you get nothing if you don’t work. But, if you do work and you have kids and your income is low you get a quite generous subsidy in California only from the federal government. So a single mother, let’s say with two kids, who makes a low income gets upwards of $6 thousand from the federal government. So I always cringe a little when people say we have to raise the minimum because it’s declined in real terms. And the reason is, you know we used to have one policy and now we have two. And policy number two, the EITC, has gotten very generous and if you do the math, the minimum wage delivers less because it’s declined in real terms, but the EITC delivers a lot more. Now we might still say that’s not enough. That’s a fair question. But just saying the real minimum wage has declined and therefore we need to raise it isn’t really good argument.

KCRW: So you’re saying is the minimum wage may not have gone up a lot in recent years but it’s been offset or it’s been supplemented by this Earned Income Tax Credit and that we have extra financial support for working people working families coming in from this tax credit.

DN: Exactly and for working families, it’s very important. If you don’t have kids you get almost nothing, if you don’t have kids and that’s kind of generally true of policy in the U.S. right. Single male – you’re on your own.  But if you have kids it’s quite generous. So when I see the stories about how you can’t support a family on the minimum wage, I can say that’s probably true, but you don’t support a family on the minimum wage. Because if you’re just a minimum wage worker and you’re supporting a family and you’ve got kids you’re definitely getting an EITC payment and it might be quite big and we’ve moved to that policy. To some extent we still have both of course but we’ve shifted to sort of making the EITC a bigger part of our income supplement policies if you want to call it that because it has a really good effects.

One is it encourages employment where the minimum wage discourages appointment. And there’s incontrovertible evidence that employment goes up when the EITC gets more generous, and the second is, it targets low-income families. One of the big problems of the minimum wage is it goes to any low-wage worker, whether that low-wage worker is a teen in a middle class family, a spouse of a person who makes a lot of money, or as of course sometimes happens, a poor head of family. But the EITC is based solely on family income it’s done through the tax systems administered by the I.R.S. and it goes largely to low-income families and nothing goes to high income families.

KCRW: Is there also an issue that people are stuck longer in minimum wage jobs than they used to be are we not creating as many what would be considered high quality blue collar jobs as we used to?

DN: Well it’s certainly the case that part of the kind of increased inequality and the decline at the lower end is of higher paying jobs for people with lower skills. I won’t say they’ve quite disappeared but there’s a lot fewer of them. So it’s certainly harder for let’s say someone with just a high school education to earn a higher income. That’s a long-term change. That’s from the ‘50s. That’s not something in the last 10 years. Manufacturing employment as a share of the economy has been in steady decline for a long time, you know there’s probably not much we can do about that, that’s globalization. I mean some kind of production make a lot more sense in other countries. It’s also not clear the minimum wage is a good response to that, but that’s certainly true.

I’m of the philosophy that government should address the inequality question. My view is this is something we need to address. And every Western society, through a lot of tools, tries to ensure that people and moreover families have some minimally acceptable standard of living, however they define that right. But we all do this through health insurance, minimum wage, things like the EITC and housing assistance. So we do play a role in this and I think the question is what’s the best way to do it, not whether we should be doing it or not.

KCRW: So suppose we make you the economic czar for the city of Los Angeles and we say, ok we want you to fix this issue. How would you go about doing it? Would you raise the minimum wage or would you say you know there’s a better way?

DN: I would not raise the minimum wage. The state minimum wage is going up, it is going up again, the federal minimum wage maybe will go up even a little higher than the state minimum wage and I worry about the minimum wage in general because of the dis-employment effects.

The inherent difficulty of the minimum wage, and really everybody on all sides of the debate agrees on this, is they target the poor or low income very ineffectively. And that’s for two reasons, first of all a lot of poor families have no workers. Nationwide the majority of poor families with working age adults have no workers. And secondly, a lot of low-wage workers are not poor families. I mean nationally teenagers are one quarter of the minimum wage workforce and sixteen to twenty four year olds are about one half of the minimum wage workforce. So you know my kid had a job in high school it would be a minimum wage job because most high schoolers have no skills. But obviously there’s no reason employers who make less than me should be paying a higher wage to my daughter, it doesn’t serve any distributional purpose.

KCRW: So what is what would be a more effective way or ways of going about and helping low-income families?

DN: Labor economists talk about how do we solve this problem of inequality. I mean there’s the Holy Grail as I call it out there— higher skills. We’ve been trying to improve schools for decades and we’re probably making marginal improvements. Dropout rates are declining a little bit. That’s a really hard problem, but obviously the ideal is people have high enough skills that we don’t need to be worrying about government intervention. But given that we’re not going to get there and given that even if we improve schooling that doesn’t help a forty-year-old. I think the state should have an EITC I think the evidence on the earned income tax credit is pretty overwhelming. They increase employment, they reduce poverty, they get more income into the hands of low-income families, and they’re targeted very well. A city could also open an income tax credit. New York City has an earned income tax credit, as do some other cities now they have an income tax so it’s easier to do of course. But policies that try to get more incomes into the hands of specifically low-income families are in a sense the best way to address the problem of income inequality.

Politicians are much more comfortable or they find it much easier to raise the minimum wage than to create an earned income tax credit, because you don’t raise taxes to finance and a minimum wage. You just say you got to take care of it – pass the mandate on to employers. EITC obviously requires tax revenue, but you know I’m not speaking from the point of what’s the easiest thing for a politician to do. I’m speaking of what from the point of view of what makes the most sense in terms of in terms of good policy.