Public Policy & Raising the Minimum Wage

April 2006

Do you feel badly when you learn that some people don’t make a lot of money? I know I do; especially when I learn that many don’t earn enough to support themselves or their children. That is why legislation to create a state minimum wage in Tennessee has been of interest to me.

Apparently, it’s been interesting to the union lobbyists too as they stand in the back of the committee room anxious for the legislation to pass. Why the union interest? While few, if any, union workers make minimum wage many have pay increases for themselves tied to an increase in the minimum wage.

As a legislator the temptation to try and ‘solve’ the problems of the poor can be great. However, legislating that they be paid more money requires that money to come from someone else. I believe the best public policy would not simply give low income people more money but actually help them increase their earning power.

The old adage that giving a man a fish feeds him for a day but teaching him to fish feeds him for a lifetime is a truism that legislators must not forget. The temptation to meddle in the labor market must be resisted.

About 2.7% of US workers earn minimum wage but just who are they? About 51% are students in high school and college who have the benefit of additional support from family. Many are retired persons seeking to earn a supplemental income. Some are second income earners trying to enhance the family budget. Statistically, these workers have good skills and are educated or on their way towards completing that goal; after one year, 2/3rds of all minimum wage workers earn more money.

But there is yet another group. Those we would call the truly poor; single persons, often with small children, trying to support them selves; many of them poorly educated and low skilled. Sadly, they are unable to sell their labor for anything more than minimum wage.

As policy makers, legislators must determine what if anything we should do to help these workers and if we do help them how should we do it.

If we simply give all minimum wage workers a raise we do nothing to increase the low skilled workers real earning power beyond their current skill level. We do nothing to help them become more valuable workers so that an employer is willing to pay more for their labor.

In addition, the blanket approach of just raising the minimum wage for everyone raises the wage for many who are perfectly capable of earning their way to a higher wage anyway; even the middle class kids with the after school job living at home with mom and dad.

Raising the wage also increases the supply of labor by attracting more such better skilled workers to the labor market. Working suddenly becomes preferable to leisure. These workers increase the competition for jobs that the poorly educated, low skilled worker needs very much. Employers tend to prefer the better educated and better skilled workers and the truly poor suffer by losing job opportunities.

On the demand side of labor, employers, in response to an increase in the minimum wage, are suddenly faced with higher costs. This forces them to make though decisions. Typically they leave jobs vacant, reduce hours, forgo raises, and if possible raise prices in order to pay the higher wage. All of these results cause the low skilled worker to suffer even more.

Actually, the very fact that relatively so few workers do earn minimum wage is an indication that the law of supply and demand in the labor market is working very well. The fact that some make minimum wage doesn’t indicate that we need to raise their wage - most minimum wage workers make more money inside of a year. But it does help us identify the low skilled workers, without prospects, and determine what kind of public policy may best help them.

We do several things to help the truly poor and none of them ask any one individual employer to make the sacrifice. The earned income tax credit multiplies the earnings of the poor and alleviates poverty while providing an incentive to work. Food stamps allow the seller of food to get their price while increasing the buying power of the poor. We can’t forget about private charitable organizations that supply food and clothing to those in need. Homeownership is the number one way to build personal wealth. Groups like Habitat for Humanity help low income workers become home owners through sweat equity and by eliminating interest. The state too has low interest loans for persons who qualify. Medical helps like TennCare and county health departments also lend assistance.

However, above all other helps, teaching a man to fish is the very best way to ensure escape from a lifetime of poverty. GED programs, career colleges, technical schools and traditional colleges are the best way to ensure that the earning power of a poorly educated, low skilled worker is tangibly increased.

If the union representatives in the back of the committee room had any real concern for the poor they wouldn’t be crossing their fingers hoping that the legislature employs a technique that kills jobs and hurts low skilled workers but they would want us to allow them to work, temporarily enhance what they do earn, and want us to help them get more education to ensure that the American dream is real for everyone.