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July 29, 2006

Minimum-Wage Hike Would Hurt Low-Wage Workers

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Thanks to a determined coalition of liberal Democrats and moderate Republicans, it is all but guaranteed that, shortly after its August recess, Congress will vote on Sen. Ted Kennedy's (D.-Mass.) proposal to boost the minimum wage to $7.25 per hour, an increase of 40%.

An enduring urban legend about minimum-wage workers is that they are married adults struggling to raise children in Dickensian-style poverty. As Kennedy said in a recent Senate floor speech, "Minimum-wage workers are forced to make impossible choices between paying the rent and buying groceries, paying the heating bills or buying clothes." Their families, he said, lack health care and adequate housing. Their "daily fear" is "poverty, hunger and homelessness."

The data, however, tell a very different story. While some minimum-wage workers are primary breadwinners raising young children, the overwhelming majority are either younger workers honing their skills in entry-level positions or part-time, mostly female workers from middle-class homes supplementing their spouse's income.

  • Only 1.9 million American workers (out of a total workforce of 127.4 million) earn the minimum wage. Most (63%) are women. More than half (53%) are between the ages of 16 and 24, and an even larger percentage (58%) work part-time.
  • Upward mobility is the happy norm. Two out of three of today's minimum-wage workers will earn 10% more within a year.
  • Many are teenagers who live with their parents in middle-class homes. This explains why the average household income for minimum-wage earners is more than $40,000 a year and why only 19% (about 400,000 nationwide) fall below the poverty line.

Hobson's Choice

But what about those families that do fit Kennedy's description? Shouldn't Congress do something to help them? The short answer: It already is. Our welfare state provides the working poor generous subsidies to pay rent, buy groceries, pay heating bills, obtain health care and babysit children. All that assistance, however, brings with it a truly terrible Hobson's choice.

Studies have looked at the interaction between low-wage workers and welfare programs. Researchers have sketched out different income levels at which a hypothetical family of four qualifies for widely used welfare programs that offer cash subsidies, nutrition assistance, housing vouchers, childcare and health coverage. What happens, they wondered, when that family's income rises?

The researchers uncovered the dirty little secret of the welfare state. For example, a family of four in Kennedy's Massachusetts earning $13,000 is eligible for a theoretical maximum package of benefits totaling an additional-hold on to your hats-$31,500, bringing its total income to $44,500.

Specifically, that Massachusetts family could receive $6,500 in cash assistance from TANF, an earned income tax credit worth $4,400, $2,172 in Food Stamps, $275 worth of school lunches, $5,700 in housing vouchers, $6,000 in child-care subsidies and $6,460 in Medicaid. The unintended consequence: As a family increases its earned income, it actually falls further because of the way welfare benefits decline as incomes rise. For example, for each additional $1,000 it earns, the family could lose up to 30% of its Food Stamps and housing voucher.

Worse Off

So what about that minimum-wage earner that Kennedy and his allies want to elevate above poverty?

A family of four with an annual household income of $11,000 (equivalent to what a full-time minimum-wage job yields) could qualify for $33,000 in supplemental welfare benefits. Kennedy's plan would, assuming no loss of employment, boost that family's yearly paycheck to $15,000. But, due to the way benefits phase out as incomes rise, that family's benefit package would decline by $7,000. Thus, total annual income-earned income plus welfare benefits-would actually fall by $3,000. Surely, reducing welfare assistance to half a million working poor families isn't what the senator from Massachusetts had in mind.

The real problem, of course, resides in the destructive incentives that, a decade after the historic welfare reform of 1996, remain in place. "Indeed, in some cases," concludes Prof. Dan Shaviro of New York Law School, "the effective marginal tax rate exceeds 100%, and the price of earning extra income may be to leave one's family worse off ... The effects on work incentives and the ability to escape poverty are potentially devastating."

We shouldn't be surprised that well-intentioned schemes to improve the quality of life of low-wage workers such as raising the minimum wage run aground on the shoals of our unforgiving welfare system.

Mike Franc, who has held a number of positions on Capitol Hill, is vice president of Government Relations at The Heritage Foundation.

First appeared in Human Events Online

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