One of the more memorable proposals President Obama made in his State of the Union address was his plan to increase the federal minimum wage by a whopping 24 percent, from $7.25 to $9 an hour.
“A family with two kids that earns the minimum wage still lives below the poverty line,” Obama said in the Feb. 12 address. “That’s wrong. Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full time should have to live in poverty, and raise the federal minimum wage to $9 an hour. This single step would raise the incomes of millions of working families.”
It sounds simple enough: on the surface, increasing the minimum wage appears to equal more money for poor families. But some economists have serious reservations about the wisdom of such a move and believe that, in the end, it will harm working-class Americans more than it will help them.
Manfred Keil, Associate Professor at the Robert Day School of Economics and Finance at Claremont McKenna College, has done extensive research on the effects of the minimum wage on the labor market. In 2001, he coauthored a paper entitled “Minimum Wages and Unemployment” that was published as a part of the Labour Markets Programme of the Centre for Economic Performance at the London School of Economics and Political Science.
“In my research, I have shown by looking at variations between states that employment of teenagers goes down significantly if the minimum wage is raised,” Keil said in an interview with the Claremont Independent. “Increasing the minimum wage does hurt teenage employment.”
Keil notes that there is a minor decrease in employment among 20-24 year olds and virtually no effect on adults over 24 years old when the minimum wage is raised. Rather, he believes that the minimum wage hurts most acutely the group most in need of support: poor, disadvantaged and low-skilled 16-19 year olds who require on-the-job training.
President Obama’s central justification for increasing the minimum wage is keeping families who rely on minimum wage salaries out of poverty; however, Keil argues that such families are rare.
“People who are receiving minimum wages are typically not the heads of households—these are typically waiters, waitresses or [people in] the fast food industry and so forth—they are typically dependents,” Keil said. “So, Obama’s argument for raising the minimum wage that he brought up in the State of the Union address was interesting.”
Keil also questions the timing of President Obama’s proposal, because increasing the minimum wage is not generally even considered during macroeconomic recessions or anemic, low-growth recoveries like the one now underway. National minimum wage adjustments are more typical in periods of robust economic growth and low unemployment, when an increase in the cost of labor is less likely to result in layoffs and businesses can tolerate hiring and retaining more expensive entry-level workers.
“I was stunned when President Obama brought this up,” Keil said. “To me, to be raising the minimum wage should not happen until national unemployment is to a level of perhaps five percent, and that’s not going to happen in the near future. So to even talk now about increasing minimum wages, that to me was a real surprise in that speech.”
Professor Keil is not alone in his misgivings about both the conceptual merits and macroeconomic timing of the President’s minimum wage proposal. The National Federation of Independent Business (NFIB), which represents the interests of small businesses, released a statement shortly after the State of the Union Address that was dismissive of the President’s proposal.
“A government mandate such as this would need to be completely absorbed by small business owners, who are already operating on razor-thin margins,” NFIB/Florida Executive Director Bill Herrle said in the statement. “Small firms cannot pay a worker more than the value the worker brings to the firm. Raising the minimum wage denies more low skilled workers the opportunity to get a job and receive ‘on the job’ training.”
On the other hand, some groups, such as the American Federation of Labor and Congress of Industrial Organizations (AFL–CIO), the nation’s largest labor union, came to the President’s defense.
“President Obama rightly put rising wages and good jobs as his top priority [in his State of the Union address], and we fully support him,” AFL-CIO President Richard Trumka said in a statement following the President’s speech. “We applaud the President for expressing support for raising the minimum wage and tying it to the cost of living.”
Those supporting minimum wage increases often point to higher minimum wages in other developed economies— from Canada to Australia to France—and contend that minimum wages in the U.S. have not kept up with increases in the productivity growth of American workers.
The federal minimum wage represents a floor for hourly wages, but states may exceed it, and several have. The President’s proposal would do nothing in one state—Washington— where the minimum wage is already $9.19 an hour. The minimum wage in California is currently $8 an hour.
Like many of the policies advanced by the President in his State of the Union speech, his minimum wage proposal is unlikely to get very far in the current Congress and will probably be rejected by the Republican-controlled House of Representatives.