Monday, July 03, 2006

Why Minimum Wage Laws Do More Harm Than Good

My recent adventures in the blogosphere seem to have educated quite a few advocates of the minimum wage about the existence and advantages of the Earned Income Tax Credit, and yet many advocates of the minimum wage still seem to fall back upon the notion that somehow these two programs can work in tandem to fight poverty. Nothing could be further from the truth, and I am astonished that anyone would come to such a conclusion. Indeed, I took great care to point out that the minimum wage does very little to help the working poor. If anything, raising the minimum wage simply creates the illusion that something worthwhile is being done and prevents positive changes from taking place. This is not unlike giving spare change to a homeless person.

I have no illusions about being able to solve poverty, but I am more than willing to support any government program that actually helps the working poor, and I have yet to see any economist weigh in against an expansion of the Earned Income Tax Credit. Speaking as a libertarian, the EITC can be justified by virtue of the fact that it reduces entitlement spending, gives an economic boost (from the ground up) to one of the most inefficient sectors of the economy, and increases workforce participation. In striking contrast, the best that can be said about the minimum wage is that there is less and less empirical evidence to indicate that it is the big job killer that most economists believe it to be.

Can government do more to help the working poor? Probably.

Is increasing the minimum wage going to help the working poor? Definitely not.

In 1933, when the federal government introduced the first minimum wage law in the United States, no less than 500,000 black workers lost their jobs. [Citation.] These black workers were replaced by better educated, more skilled white workers. And while there is less and less empirical evidence to indicate that the minimum wage is still the big job killer that most economists believe it to be, there is no evidence whatsoever to indicate that an increase in the minimum wage will actually help the working poor.

Over two thirds of those who work for the minimum wage do not live in poverty. Rather, they are people who can be claimed as a dependent by someone who earns a pretty decent wage or salary -- i.e., the spouse or child of a primary breadwinner. In striking contrast, the working poor are often single parents who earn a great deal more than the minimum wage and many of the working poor who know about the EITC are lifted out of poverty by collecting it.

The biggest problem with the EITC is that many people who are eligible for it do not claim it. And after very careful consideration, I think that the biggest reason for this sad state of affairs is because so many people who argue in favor of raising the minimum wage do not even bother to mention the EITC. If they don't know about it, that's understandable. But when the facts are made clear, it is inexcusable to argue for an increase in the minimum wage rather than arguing for an expansion of the EITC.

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