Opinion: Let’s Raise the Minimum Wage

Here’s a way to do it that should satisfy liberals and conservatives.

Benefits of raising the minimum wage

NPR aired a compelling story in July about the minimum wage. Some of the key points included:

• The people making minimum wage have borne the brunt of our bad economy.
• A minimum wage worker working 40 hours per week makes less than $15,000 a year. Right at the poverty level for a family of two.
• Raising the minimum wage would immediately inject cash into the consumer spending sector because these workers spend most of what they earn. This is fuel our economy needs right now.
• The minimum wage has not kept pace with inflation. The current minimum wage of $7.25 is significantly lower than the $10.00/hour value it had in 1968.

Senator Tom Harkin has proposed a bill to raise the minimum to $9.88 per hour. He estimates that this would mean a raise for 28 million Americans, and add $25 Billion to our GDP. According to the NPR story, Harkin claims that “If my proposal went through, a $15,000 a year worker will make $20,000 a year,” he says. “You know $5,000 a year is significant to someone in that category. [It] may not get them out of poverty, but it makes life better.”

The downside

The downside is what you’d expect, namely that the cost for this raise would have to be covered by the companies who employ the minimum wage earners, and it means they’d have to cut something else. Business owners complain that they can’t afford it, that they’d be unable to hire more workers, or that they may even have to let some people go.

A Principle: Who should get that extra dollar?

Before I introduce my proposal, consider this question: Suppose a small company had an extra dollar. Is it better for that dollar to go to the government (as tax) or to a minimum wage worker (as income)?

If the dollar went to the government it will eventually make its way into our economy to be spent on all those things the government does, including programs to help those in poverty. But the path is not efficient. Along the way it will compensate the government workers who manage those programs, and they make well above minimum wage. Why not give that dollar directly to a person in poverty, who is working and contributing to the economy? 

The plan

You have probably guessed where I’m going. The idea is essentially to provide businesses with a tax credit equivalent to the amount they spend to increase the wages of their workers in minimum wage jobs. The details would take some effort to work out, but I imagine it would include requirements like:

• The tax credit would only apply to hourly workers in job categories that include minimum wage workers.
• The credit would only accrue up to some maximum, say $10.00/hour.

Benefits

This plan would enable companies to immediately improve the pay for their minimum wage workers.  It would likely improve the quality of their workforce as well because it would reduce the pressure on these workers to take on additional jobs. The plan would also distribute about $28B annually to folks who will likely spend it immediately, boosting GDP directly.

Costs

Based on the numbers outlined in the NPR story linked to above, this plan would reduce federal tax revenue by about $28B out of a total of $2,500B, or about 1.5%. Presumably, these costs would be made up for quickly in terms of improved GDP.

Is it a “tax cut” or “wealth redistribution?”

One last thought: Some might view this plan as a “tax cut for corporations.” But keep in mind that companies will only be able to leverage this tax cut if they pay their minimum wage workers more.

The plan could also be viewed as a stimulus/wealth re-distribution plan where the beneficiaries are those who are: a) Working and producing, and b) at the poverty line. I can’t imagine a better target for such dollars.