Kerry's Poverty Prevention Plan Proves Problematic (say that fast five times)
                                                                    -Kimani Jefferson

 

On June 18th, Democratic Presidential Candidate John Kerry announced his plan to increase minimum wage by 36 percent, to $7.00 an hour. The plan was put forward as an attempt to aide Americans who are now living in poverty, especially women who are the primary money winners in the family. "If a president can go out and fight for four years to provide over a trillion in tax cuts to the wealthiest people in America, we can fight for a few months to raise the minimum wage for the poorest people in America," Kerry told an audience at Northern Virginia Community College.
As with all liberal ideas, it sounds good; but what will be the net effect of this idea in general, and specifically on the black community? Well, it seems that the old adage remains true: the devil is in the details.

In a study recently released by the Employment Policies Institute (EPI), Kerry’s contention that the increase would alleviate poverty among the working poor was put to the test...and failed. Specifically, the findings were (1) the majority of workers living in poor families have wage rates higher than $7.00 per hour and would not be helped by the wage increase, and (2) workers earning the minimum wage are more likely to live in families with incomes three times the poverty line than in poor families.

This isn’t to say that an increase in minimum wage wouldn’t help some people. Eileen Appelbaum, a Rutgers University labor economist who supports the proposal, said raising the minimum wage by $1.85 would translate into more than $3,800 a year in additional income for a minimum-wage earner. Kerry's campaign asserted that 7.4 million people who make less than $7 an hour would directly benefit, while 8.2 million more who make $7 to $8 an hour are likely to benefit as low-wage workers are pushed higher on the pay scale. While the wage hike would bring $3,800 a year in additional funds for a minimum wage earner, less people would be making minimum wage. In fact, less people would be working, and those who do work will more than likely have their hours reduced. Simply, we must remember one thing about business: profit, something employers don’t forget about. History has proven that employers won’t stand idle, and that Kerry’s numbers don’t stand up to reason.

According to another study by Bruce Bartlett, economic expert and senior fellow for the Dallas-based National Center for Policy Analysis, there are other negative consequences to the wage hike, other than being ineffective towards alleviating the working poor:

Based on demographic studies of past minimum wage hikes:

According to EPI’s research, the effect on the black community would be particularly acute. “Evidence by Burkhauser, Couch, and Wittenburg (2000) suggests that young African Americans, young non-high school graduates, and teenagers are most likely to lose their jobs as a result of a minimum wage hike. A 10 percent increase in the minimum wage causes an 8.5 percent decline in the employment of African Americans (aged 16-24).”

The main problem with Kerry’s contention is an improper assumption. The working poor are not poor because of minimum wage. In fact, “70.7 percent of workers living in poor families [already] earn wage rates greater than $7.00 per hour,” according to EPI. Using a sample of workers aged 16 to 64 and income-to-needs ratios of that group, the study showed that the two main reasons workers live in poor families are (1) they work less than full-time, and/or (2) their family size is too large for their hourly wage rate to pull them above the poverty line.

In the end, over 60 percent of the benefits would go to families with incomes twice the poverty line or more. So, what’s the answer?

 

The study contends that the Earned Income Tax Credit (EITC) is a far better policy tool for aiding low wage workers in poor families.

               For every dollar in wages earned by a low-income family with two 
               children, the federal government provides a tax credit of 40 cents.
               Workers with one child have an effective minimum wage of $6.90 per hour
               (the $5.15 per hour minimum wage plus an additional 34 percent credit of
               $1.75) and workers with two or more children have an effective minimum
               wage of $7.21 per hour (the $5.15 minimum wage plus an additional 40
               percent credit of $2.06).

Additionally, contrary to an increase in minimum wage, employers don’t directly pay for the EITC, causing no reduction in demand for low-skill workers. Also, whereas the minimum wage hike would help only those making minimum wage, the EITC would also help those in low-income families who make over $7.00 an hour 

So, we are again back to the difference between sounding good, and effectiveness. We should have learned from the well-intentioned and failed liberal programs of the sixties that intention doesn’t guarantee outcome. We live in a society where there are many theories regarding social and economic policy. Unfortunately, the realm of theory is ceteris paribus. It would be great to think that we could just look at numbers as they are, form ideas, and merely extrapolate conclusions from them. Kerry’s conclusions regarding who would benefit from a wage hike do precisely this. It is a clumsy and dangerous proposition for the working poor. Let’s choose to remain in the real world. Protecting workers from poverty is a great idea. Protecting themselves from poverty is a better one. But in the meantime, expanding the EITC is the best way to aide the working poor without hurting small business (which would hurt the working poor). Some are convinced that the wage hike will work. Well, to use Mark Twain’s words quoted in the EPI study, “The trouble with the world is not that people know too little, but that they know so many things that ain’t so.”  

 Ó Copyright 2004 Kimani Jefferson

Kimani Jefferson is a member of the Project 21 National Advisory Council. Comments may be sent to Jefferson@willingtofight.com