Income Inequality and the Minimum Wage

Yesterday, the Congressional Budget Office released a report that estimated the effects of an increase in the minimum wage.   There were two scenarios:  Raising the minimum wage to $10.10 an hour by 2016 and then adjusting annually for inflation, or raising the minimum wage to $9.00 an hour by 2016 with no adjustments for inflation.

The media has reported on the more aggressive first option, which the CBO predicts would lift 900,000 people out of poverty by 2016.  Of course, they also predict that 500,000 jobs would be eliminated, but this poses no real concern to those who advocate for a “living wage” at any cost.  After all, it will reduce income inequality, they say, and allow workers to make ends meet.

But I would venture to guess that few people bother to read the CBO report.  If they did, they would realize that the minimum wage is not all it is cracked up to be when it comes to equalizing living standards among households.  Consider the $10.10 option:

  • Indeed, the CBO reports that 900,000 people (of the estimated 45 million) who are now below the Federal Poverty Level would be above it by 2016.  These individuals would accrue about $5 billion in real income; the average family income would increase by about 2.8 percent.
  • But families whose income is between one and three times the Federal Poverty Level would receive even more, about $12 billion on net.  An additional $2 billion would accrue to families whose income is between three and six times the Federal Poverty Level.  A family in these categories would seen an average increase in their income of 2.1 percent.  (By the way, a family of four that is at 300 percent of the FPL earns $70,650.  At 600 percent of the FPL their income would be $141,300.)
  • Real incomes would decrease by about 0.4 percent for families earning six or more times the Federal Poverty Level due to transitional unemployment and reduced business profits. (That will teach those six-figure income households, eh?)

So for equality lovers, a minimum age increase would ostensibly narrow the gap between the working poor and high income earners.  But did I mention that the majority of these dollars would go to families not living in poverty at all?

Also consider the fact that if 500,000 jobs are lost (and CBO estimates it could be less than that or as many as 1 million), the minimum wage as the great equalizer would be mitigated by this number of new jobless people earning zero annual income. I personally have a more optimistic outlook on the jobs number.  I believe that some of the 500,000 lost jobs will eventually become high-skilled, technical jobs.  Why?  Because industries such as hospitality, fast food and retail, that previously relied on lower-skilled workers will turn to automation.  It will require highly skilled engineers, software designers and programmers to produce and service robots and computers that make French fries, check guests in at a hotel, and take your dry cleaning.  If you think I am off my rocker, look around at all of the services where the friendly, smiling face has been replaced by the cold, steel machine with the monotone voice.

And what will all of this do to help the low-skilled worker and mitigate income inequality?  Not a dang thing.












Comments (15)

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  1. Lloyd says:

    Yep, the media is really eating up this report and enjoying it! The focus should be on the 500,000 critical jobs that people in poverty will lose with their wages going up and their employer unable to pay the increased wage.

  2. Kristen S says:

    Raising the minimum wage would only lift out of poverty 2 percent of the people living under that condition. It clearly shows that raising the minimum wage is not the solution that the nation’s poor need. 2 percent is a negligible amount that won’t make anyone happy.

    • James M. says:

      For people making the poverty limit, 2% is basically just one more extra week of work in compensation. Sounds like an awful lot for such little payoff.

  3. Fred F says:

    If the increase in minimum wage is accomplishing something completely opposite to what its advocates desired. Instead of narrowing inequality it is widening it. If only 2 percent of those living under the poverty line will be lifted, while those earning between one and three times that limit, their incomes will increase jointly by $12 billion dollars. This means that the poor will be poorer in comparison. The problem is that the preachers of equality are naïve. They assume that income is a great equalizer, ignoring that there is more to poverty than simple income.

    • Thomas says:

      The policy makers who advocated this have very narrow thinking. If you pay people more money, there will be less poverty. It is not as simple as that.

  4. Matthew says:

    “look around at all of the services where the friendly, smiling face has been replaced by the cold, steel machine with the monotone voice.”

    When I go to fast food or retail places, I am generally not met with smiling faces, but with irritated or bored employees with short verbal responses. I think I would take the “cold, steel machine” over the cold person.

  5. Bill B. says:

    “After all, it will reduce income inequality, they say, and allow workers to make ends meet”

    Because too many people are working too hard to make ends meet. I don’t think raising the minimum wage to $10.10 means what the government think it means.

  6. Sam G says:

    Other than the elimination of jobs, what are the negative consequences of raising the minimum wage? I mean, those who oppose an increase in minimum wage argue that the increase will harm the economy. In your post it seems as if everything is positive: all real incomes increase (except for the very top that decreases by an insignificant amount), poverty will be reduced and the jobs will not suffer as much. What are the negative consequences if any? Aren’t they included in the report?

    • Pam says:

      Maybe my sarcasm was lost on my readers here. But the post is full of negative consequences on the minimum wage: only 900,000 people would be lifted out of the 45 million currently in poverty. Most of the dollars would accrue to families already way above the poverty level, further exacerbating income inequality. Income inequality would not be mitigated due to the loss of 500,000 jobs. Low-skilled workers would not be qualified to fill the jobs that do become available in the event of automation.

  7. Scott P says:

    I am not a fan of equality, I believe it is important the development of a capitalist society. If there were no rewards for hard work, no one would work hard. If taking risks was not compensated, no one would take them. So I think that it is a positive thing that increasing the minimum wage doesn’t alter inequality. In fact it is a good thing that only a small percentage of the poor will overcome poverty. It proves that hard work can lift you from any adversity. If those 900,000 could do it many more can. I am on board with the increase in minimum wage; it appears as if it can improve our society.

    • Pam says:

      If you are a fan of hard work, how does a minimum wage improve society when I don’t have to increase my skill level in order to increase my wage?

      • Scott P says:

        An increase in minimum wage will increase competition among workers. There will be fewer jobs available for a particular skill level, and more people applying for them. It will ultimately force workers to improve their skill set in order to remain competitive in the job market.

        • Pam says:

          Perhaps, if you assume that people negatively impacted by the minimum wage will choose that route. They may do so, or they may look to transfer benefits so they do not have to put forth the effort. But that begs the question, should government have the role of distorting the labor market? Most attempts at government manipulation of the job market (i.e. college aid, green jobs subsidies, no-bid contracts, etc.) has resulted in epic fail.

          • Burt W says:

            Pam, I really disagree with you and anyone who opposes raising the FMW. Also, the government has done some very good things for the labor market (i.e. safer regulations, labor laws about children, etc.) Since 1968 the minimum wage was about 2.5 times what today’s is when you calculate for inflation. So, even approving to $15 an hour is not equal to 1968 wages. The sooner wages are lifted to a very fair FMW wage and not in stages by X years the better, because the current rate is destroying our country and it’s people. Anyone can twist numbers and words to fit their point of view, like yours. How much would the tax revenue increase at $15? Anything less is Slave Labor, just like unpaid internships.

            • Pam says:

              If your argument is that raising the minimum wage raises tax revenue, why stop at $15 an hour? Why not raise it to $25 an hour, or even $50 an hour, so that everybody can earn a decent living and perhaps we would have enough tax revenue to reduce annual deficits?

              As far as “slave labor,” it is hard to equate an unpaid internship, or any paid job for that matter, as slave labor when both are voluntary. Slave labor in an historic context usually involved forced servitude.

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