Justin Haskins | January 16, 2015
More than 3.1 million workers across the nation received a late Christmas gift on Jan. 1, when minimum wages were increased in 21 states. Although the mandated wage hike was welcomed by many workers, they will soon find that their new pay raise will cause more harm than help.
It’s understandable why voters supported increasing the minimum wage. Living on $7.25 per hour—the federal requirement for minimum wages—is an exceptionally difficult endeavor, and it’s hard to imagine a family with children thriving with such little income, even if parents are working 40 hours per week or more. However, behind all of the compassionate slogans and well-intentioned protests rests a reality that sharply cuts through the many myths surrounding minimum wage increases: economics and common sense.
Contrary to claims made by advocates of the mandated increases, raising wages by less than one dollar will do little to curb poverty. In Colorado, for instance, wages increased 23 cents to $8.23, but that only means full-time workers earning the minimum wage will see roughly $9.20 (before taxes) more per week than they currently receive now and about $478 more per year, assuming the worker works all 52 weeks.
If current trends for inflation and the consumer price index continue at rates comparable to the past three years, those minimum wage increases will evaporate by the end of 2016—and this assumes the minimum wage hike will have no effect on prices in Colorado.
Ultimately, minimum wage laws do little to help impoverished workers, and basic economics explains why. When any market sees an increase in dollars available, prices for common goods and services, such as gasoline and groceries, inevitably go up. The reason for this is simple: If consumers have more money to spend, businesses will charge more money in the hopes of earning a greater profit.
For example, a small store in Colorado, where the state’s minimum wage increased 23 cents to $8.23, may employ 10 workers earning a minimum wage and working an average of 40 hours per week. With the passage of the new minimum wage, the store owner now has to pay his or her workers a total of $92 more per week than in 2014. The easiest way for a business owner to come up with the difference is to raise prices, which leads to increased costs for all consumers across the market.
Many business owners, however, are already charging what they believe to be the highest prices possible to stay competitive, which means owners must either take a profit loss themselves or reduce employee hours. Myriad businesses are even compelled to lay workers off.
Minimum wage proponents argue that such sacrifices may be necessary in order to keep an entire class of workers who can’t survive on a minimum wage from falling into poverty, but this myth fails to consider the many taxpayer-subsidized benefits minimum wage earners already receive.
At the federal level alone, full-time minimum wage workers with any number of children are eligible for both the Earned Income Tax Credit (EITC)—$496 in 2014—and the Child Tax Credit (CTC), which combined with the federal minimum wage of $7.25 equals or exceeds the poverty level for all conceivable family combinations. This effectively means that no one working full-time on a minimum wage in the United States is actually in poverty according to the federal government, and the taxpayer aid they receive dwarfs the minute benefits minimum wage workers gain from increased pay.
Although voters’ desire to increase the minimum wage was based on an altruistic hope that the government mandate would lift thousands of Americans out of poverty, the reality is that no full-time minimum wage workers are in poverty by the federal government’s own standards, and even if they were, artificially raising the minimum wage will do little to improve their lives.