“It is not easy for men to rise whose qualities are thwarted by poverty.”
– Juvenal
For as long as I can remember, raising the federal minimum wage has been an issue.
After all, the federal minimum wage is $7.25 an hour. And a full-time job at $7.25 an hour is only $15,080 a year. It’s pretty tough to support a family on that. So it’s not surprising that dozens of polls show that 60% of Americans support a higher minimum wage.
But is that really the answer to poverty in this country?
In fact, there’s considerable evidence that it would exacerbate the problem.
The Argument Against a “Solution” to Poverty That Most Americans Support
The argument in favor of a higher minimum wage is that it will not only lift people from poverty but also reduce unemployment and create a stronger economy. And the logic that supports those claims can be persuasive. But there’s a flip side.
Employee wages weigh heavily on businesses. Especially small businesses. And the effects are seen more and more as states adopt higher minimums.
* In December 2017, New York City’s minimum wage rose from $11 to $13. Less than a year later, as a direct result of this raise, Union Square’s iconic restaurant, The Coffee Shop, was forced to close. 150 employees were out of work.
* In California, a study found that with each $1 increase in base wages for tipped employees, there was a 14% increase in Bay Area restaurant closures.
* In Maine, where the minimum wage is scheduled to go from $7.50 to $12 (a 60% increase) by 2021, a retirement home that had been in operation for over 45 years is closing its doors. 122 staff members now have to find employment elsewhere.
But one of the fastest-growing consequences of higher wages is the expedited shift to automation.
It started in the mid-1970s with the advent of self-service gas stations. Now, over the past decade, we’ve seen Blockbuster replaced by Redbox and Netflix. We’ve seen parking and toll road attendants replaced by self-service machines. And we’ve seen a rapid growth in self-service checkouts and airport ticket agents working side-by-side with check-in kiosks. McDonald’s is aiming to have a self-service kiosk added to every one of its locations by 2020. And other fast-food chains, too, including Panera and Chili’s, are beginning to embrace automation.
As Andy Puzder, the former CEO of Carl’s Jr., explains, “If you’re making labor more expensive, and automation less expensive – this is not rocket science.”
A Government-Sponsored Solution That Might Actually Work
Most government solutions to wealth and income inequality have had undesirable consequences – creating cultures of entitlement and dependency. It’s difficult to look objectively at data about the “War on Poverty” without concluding that it has only made matters worse.
That said, it seems entirely sensible to believe that narrowing the income gap is a good goal for everyone – the poor, the middle class, and even the rich. Educational and work initiatives make some sense. It’s just that – so far, at least – the federal programs we’ve invested in have proven useless or counterproductive.
But there is one federal program that may be an exception to this dispiriting rule. It’s a program that had been around since the 1970s: the Earned Income Tax Credit. The EITC is a tax credit based on a fixed percentage for each dollar earned (up to the maximum). It has a proven track record. And it’s been supported by numerous economists.
A New Hampshire University survey, for example, found that 71% of the economists polled considered the EITC to be a very efficient way to address the income needs of poor families. (Only 5% of the group believed that an increase to a $15 per hour minimum wage would be effective.) And a study by economists Joseph Sabia and Robert Nielsen found that a 1% drop in state poverty rates was associated with each 1% increase in a state’s EITC.
How does it work?
While the maximum credit depends on income, marital status and the number of children in the household are factors. In some cases, it can amount to almost 40% of a worker’s base annual salary. Plus, the income minimums are raised every year. This means that even if someone didn’t qualify for the EITC in the past, they may qualify in the future.
But despite its obvious benefits, only 20% of those who qualify claim it.
The government doesn’t advertise it, so most people don’t know about it. And even those who do know about it tend to ignore it. They assume they’re not eligible… or they have no idea how to file. (It’s not that hard. The IRS has a very helpful tool called the EITC Assistant.)
Still, since 2017, nearly8.9 million Americans have been brought above the poverty line by taking advantage of the EITC.
I’m sure there’s plenty about the EITC that I haven’t read about. And maybe some of that is bad news. But from what I’ve read so far, it appears to be a win-win outcome that raising wages can’t seem to provide.
