Creshonda Smith

RUNNING HEAD: MINIMUM WAGE ANALYSIS Creshonda Curry Minimum Wage Analysis 24 March 2013 SWK 7631 This analysis pertains to an article entitled, “The Business of Minimum Wage”, by Christina D. Romer. This article was published March 2, 2013 in the New York Times. In summary, the article raises several questions and challenges consumers to really understand the benefits and downfalls of a higher minimum wage system. According to the article, President Obama’s proposal for a higher minimum wage, $9/hr, appears to be more popular amongst the general public than the economists. Basic economics shows that competition between employers for workers can be very effective at preventing businesses from developing a monopoly. More specifically it states, “Robust competition is a powerful force helping to ensure that workers are paid what they contribute to their employers’ bottom lines”. It also outlines how minimum wage leads to more efficient levels of production and employment. Romer discusses how most arguments for instituting a higher minimum wage are based on fairness and redistribution. A higher minimum wage lowers labor turnover, which raises productivity and labor demand. In turn, it could also truly harm the disadvantaged because it’s possible that higher productivity also rises because the higher minimum attracts more efficient workers to the labor pool such as those from affluent backgrounds. The key to making this program work, according to the article, would be successful redistribution of a higher minimum wage to the poor. Therefore, a job may be the most beneficial thing for a struggling family as opposed to the higher minimum wage. For example, the earned income tax credit, a reward for working, benefits only goes to those in low-income families because it is based solely on income. Therefore, it is apparent as to where the money is being distributed when it is dispersed. The article goes on further to discuss the macroeconomics argument that states how low-income families spend a larger portion of their income than wealthier families do. Therefore, if an increase in minimum wage successfully redistributes some income to the poor, it could increase overall consumer spending-, which could stimulate employment and output growth. However, the author also negates this fact by mentioning that the increase in spending between the wealthy and the poor is likely to only translate to an additional $10 to $20 billion, which is relatively small in respect to the $15 trillion economy, thereby making the effects in this area relatively small. Lastly, the author makes it known that there are other systems available, that may be a better solution than raising minimum wage which isn’t exactly clear cut as of now. The social welfare problem that this article addresses is poverty and the policy that relates to it is the minimum wage program. The author frames the problem as a question of where the higher income will be redistributed once the minimum wage is raised. Will it be redistributed primarily to low-income families since that is the targeted population? Or will it go to wealthier families who may begin taking these jobs that are typically held by low-income workers because they are now more appealing? As an anti poverty initiative, is a higher minimum wage truly the best proposal/solution? Its really a question as to what are some solutions readily available that already have the research to support it and are ready to be utilized. The major underlying ideas in this article are that economic analysis raises questions about whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty, and also, a critical analysis of the pros and cons for a higher minimum wage in regards to the effects it has on consumers and low income families, which is the targeted population. The underlying ideological perspective in this argument is that there are many pros and cons that both support and go against the President’s proposal, overall, there are better solutions available. For example, a more generous earned income tax credit would provide more support for the working poor and would be pro-business simultaneously. Also, a pre kindergarten education, which the president proposes to make universal has been shown in rigorous studies to strengthen families and reduce poverty and crime. The way in which consumers could be potentially impacted is supported by recent research. The available data suggests that roughly half the workers likely to be affected by the $9/hr level proposed by the President are in families earning less than $40,000 a year. So while raising the minimum wage from the current $7.25 budget an hour may not be particularly well targeted as an anti-poverty proposal, its not badly targeted either. There’s a related issue as to whether some low-income workers will lose their jobs when businesses have to pay a higher minimum wage as well. A bulk of the empirical analysis finds that the overall adverse employment effects are small however. In addition to this, consumers of services may in turn have to pay higher prices for the higher wages (these people typically have lower incomes). The articles implications for policy and practice conclude that more money should be spent on different measures that are more well thought through and have already been researched and implemented. I agree that a higher earned income tax credit, or an alternative solution that specifically address those who are in low income families would be a better solution that a higher minimum wage. This makes sure without any doubt that the goal of the proposal, to assist families struggling financially, is adequately met. It also keeps the economy growing because it is a reward system for working. Research to support this theory state that the belief that minimum-wage legislation helps the working poor is one reason for its continued popular support. The authors of the article track the household incomes of low-wage workers and find that a radical transformation has occurred in the half century since the passage of the original minimum-wage law. Today most low-wage workers live in households well above the poverty line. Hence, those living in poverty will get only about 11 percent of the gains from the higher minimum-wage increase proposed in the Kennedy-Hawkins Bill. Low-wage workers in families with incomes three or more times the poverty line will get nearly 40 percent. Thus it is not clear that increases in the minimum wage make good policy even if no jobs are lost as a result (Burkhauser, R. V. and Finegan, T. A., 1989). Another article published evaluates the effects of the earned income tax credit (EITC) on poor families. Exploiting state-level variation in EITCs, we find that the EITC helps families rise above poverty-level earnings. This occurs by inducing labor market entry in families that initially do not have an adult in the workforce. Evidence based on the federal EITC is less supportive of a positive impact of the EITC on poor families. Finally, the results suggest that for the range of policy changes typical of recent history in the U.S., the EITC is more beneficial for poor families than is the minimum wage (Neumark, D., Wascher, W, 2000). Works Cited Burkhauser, R. V. and Finegan, T. A. (1989), The minimum wage and the poor: The end of a relationship. J. Pol. Anal. Manage., 8: 53–71. doi: 10.2307/- Neumark, David, and William Wascher. "Using the EITC to Help Poor Families: New Evidence and a Comparison with the Minimum Wage." NBER 7599 (2000): n. page. National Bureau of Economic Research. Web. 25 Mar. 2013.