Yes, Raising the Minimum Wage Helps Inequality
Today’s Charleston Daily Mail includes an editorial in response to the EARN report on income inequality and our recommendation to raise the minimum wage as a tool to combat inequality. The Daily Mail contends that raising the minimum wage is a bad idea for two reasons: one, income inequality isn’t all that bad because rich people create jobs and pay taxes; and two, raising the minimum wage hurts more people than it helps. Both of these reasons are wrong.
The editorial cites the figure that the top 1% paid 22.9% of federal income taxes in 2009, and those taxes pay for anti-poverty programs. Now it really shouldn’t come as a surprise that the top 1% pay a little over 20% of all federal income taxes, because that’s about how much of the total amount of income they earn. In 2011, 19.8% of all the income earned nationwide went to the top 1%. So their share of taxes is roughly equivalent to their share of income. And of course, the Daily Mail‘s little factoid ignores that payroll taxes, which are paid by virtually everyone who receives a paycheck, make up a third of federal revenue, and pay for the country’s major entitlement programs: Social Security, Medicare, and Medicaid.
The Daily Mail also defends the top 1% as “job creators,” which is a fundamental misunderstanding of economics. Rich people just don’t create jobs because they have money, and giving them more money won’t lead to more jobs. Jobs are created when there is an increase in demand for goods and services, and that demand comes from consumers. Businesses will only create jobs when their customers demand it, not when rich people have more money.
But the demand that creates jobs is fueled by the 99% and the middle class, and when they have more money, they do create jobs. And this is where growing inequality hurts. Consider this, the average income of the 99% would be 12.3% higher if they still earned the same share of income they earned in 1979. That is equal to about $5,239 for each person. How much more demand, and therefore jobs, would an extra $5,000 in the pockets of 99% of the workforce create? The rich just can’t generate that much demand for goods and services by themselves, but they are the ones getting that additional income.
Now onto the minimum wage. The Daily Mail cites the recent CBO report on the effects of raising the minimum wage as evidence that raising it does more harm than good. But the editorial gets several basic facts about the CBO report wrong. First the CBO report does say that raising the minimum wage to $10.10 will reduce employment by 500,000 (a reduction of only 0.3%), but that does not mean that it will cost 500,000 people their jobs, as the Daily Mail contends. There is an important distinction between costing jobs and lowering employment. As Dean Baker explains, the CBO projections imply that, instead of losing their jobs entirely, the negatively affected workers will instead work 2% less each year, because of the high levels of turnover among them. But when they do work, those at the bottom will earn 39% more, a beneficial trade-off.
It’s also worth noting that the CBO’s projections are outside the growing consensus of economists that there is no considerable employment effect from increasing the minimum wage. But ignoring that and taking the CBO report at face value, it shows that the benefits of raising the minimum wage far outweigh the negative. First, the report shows that raising the minimum wage gives a raise to over 16 million people. So, even if you assume that 500,000 people might lose their jobs, there are 33 people helped by every one person harmed.
The Daily Mail also misrepresents the CBO’s findings about how raising the minimum wage affects poverty. The editorial states, “raising the minimum wage will cost more people jobs than it will move people out of poverty,” and that raising the minimum wage to $10.10 an hour would only “boost the average family income of the officially poor by 1 percent.” Both of these points are directly contradicted by the CBO report, with the relevant passage below:
Not only is the effect on poor families’ incomes three times as high as what the Daily Mail claims it is, but the number of people lifted out of poverty is nearly twice the level of employment loss. There’s really no question about it.
To sum up, income inequality is real, and is holding down middle-class incomes. And you can’t create jobs without a strong middle class, no matter how much money the 1% has. Raising the minimum wage is one way to address income inequality and help reverse declining wages. And no matter which way you slice it, the positive impacts of raising the minimum wage far outweigh the costs.