A Rational Approach to a National Minimum Wage


In my last post I endorsed raising Nebraska’s minimum wage from $7.25/hour to $9.00/hour because Nebraska’s unemployment rate is only 3.6% and so a minimum wage boost is unlikely to put very many people out of work.  I also stated opposition to President Obama’s proposal for a raise in the national minimum wage to $10.10/hour because it would likely put at least 500,000 people out of work.
CaptureA recent article in National Affairs by Charles Lane, “A Grand Bargain on the Minimum Wage,”suggests an approach to end a perennial controversy over how to set a minimum wage at the national level.  It is based on the following observations:

  • Increasing the minimum wage has broad public support. A recent Gallop poll found that 76% of Americans support an increase to $9.00/hour.
  • However, just 4% of minimum-wage workers are single parents. Only 11.3% of workers who would benefit from an increase in the minimum wage come from poor households. The majority of minimum-wage workers do not live in poverty.
  • A more efficient, better targeted support program for the working poor is the Earned Income Tax Credit which provides a refundable tax credit as high as $6,143 for an adult worker with three children.
  • Since 1959 the average income for a full time worker earning the minimum wage has equaled two-thirds of the poverty line for a family of four. The current poverty line for such a family is $23,850. This equates to a minimum wage set at $8.00/hour.
  • Another option would be to set the minimum wage at 45% of today’s average private sector wage of $20/hour. This would make it $9.00/hour. The CBO has estimated that a $9.00/hour minimum wage would put “only” 100,000 people out of work.
  • Once a new minimum wage level is determined, it should be automatically adjusted for inflation using the Consumer Price Index.
  • The EITC is not cheap; it currently gives $63 billion in benefits to 27 million workers. However the EITC’s improper-payments rate regularly exceeds 20% per year.
  • An expansion of the EITC to single, childless workers could be paid for by tightening up EITC’s payment methods.

All of these considerations suggest a way forward to end a long-standing political controversy in a productive manner. The national minimum wage should be raised to somewhere between $8.00 and $9.00/hour and then indexed to the CPI.  At the same time the EITC should be tightened up and expanded to single, childless adults.  Such a program combines fairness with a strong work incentive and should have broad appeal.

Let’s Raise Nebraska’s Minimum-Wage but Not the Whole Country’s


In his State of the Union address last January, President Obama proposed raising the national minimum wage to $10.10 per hour from its current level of $7.25 per hour. The Congressional Budget Office has estimated that this would raise the wages of 16.5 million workers but also put at least 500,000 out of work. At a time of high unemployment, with an estimated 24 million people either unemployed or underemployed, this would be a bad tradeoff.
CaptureThe Wall Street Journal reports, “Some Republicans Back State Minimum-Wage Increases,” that five states, including Nebraska where I live, have minimum-wage proposals on the ballot this year. In Nebraska the minimum-wage would increase in two steps to $9.00/hour from $7.25.  Nebraska’s unemployment rate is currently 3.6%, and it is estimated that there are only 27,000 people in the state being paid the minimum wage.  In other words, Nebraska actually has a labor shortage and it is unlikely that a mild increase in the minimum wage will put very many people out of work.
Capture2A minimum wage contributes to fairness but not to growth.  Both are important but growth is the more important of the two.  A minimum-wage increase in Nebraska will increase fairness without hurting economic growth and so I support this.
At the national level, an increase in the minimum wage would increase fairness but also hurt economic growth (by causing substantial unemployment) and so I oppose it.