At this year’s State of the Union Address, President Barack Obama made headlines by asking Congress to raise the federal minimum wage from $7.25 an hour to $10.10.
It was a bold move by the president, as minimum wage has always been a political hornets’ nest. Liberals have argued that workers need to earn a living wage, whereas hardcore conservatives question the need for minimum wage laws at all.
As far as the statistics go, in 2012, the Bureau of Labor Statistics reported that 1.6 million Americans earned the prevailing federal minimum wage of $7.25. A person who works full-time at that salary makes roughly $14,500 a year, which is slightly above the US’s poverty level of $11,670.
If that person is supporting at least one other person, their salary falls below the poverty level of $15,730 for a two-person household.
Obama’s proposal appears to be stalled in Congress. However, since that time, four prominent solutions to address minimum wage have arisen. They are:
Solution One: Raise It
Obama and many other liberals’ solution is pretty simple: raise the federal minimum wage to $10.10 an hour. Their argument is that if a person works full-time, they should be able to support themselves.
“Americans overwhelmingly agree that no one who works full time should have to raise their family in poverty,” Obama said at his State of the Union Address. “It is good for the economy and it is good for America.”
Obama has since increased the minimum wage for federal contractors to at least $10.10 via executive order. But the question is, is it good for the economy?
A report by the non-partisan Congressional Budget Office stated that if the minimum wage was increased to $10.10, it would lift 900,000 people out of poverty but potentially cost around 500,000 jobs.
Solution Two: Do Nothing
Meanwhile, conservative and libertarian groups point to the second half of the previous sentence: increasing the minimum wage would increase unemployment. If the cost of labor goes up, companies will hire less people and it will increase the incentive to automatize certain positions, they argue.
The Cato Institute, an influential libertarian think tank, has released its own report on the consequences of raising the minimum wage. The report argued that an increase in the minimum wage would hurt poor people because there would be fewer jobs and customers would pay higher prices.
“Seventy years of empirical research generally finds that the higher the minimum wage increase is relative to the competitive wage level, the greater the loss in employment opportunities,” the report read. “A decision to increase the minimum wage is not cost-free; someone has to pay for it, the research shows that low-skill youth pay for it by losing their jobs, while customers may also pay for with higher prices.”
Third Solution: Tax Subsidies
There has been a third solution proposed that aims to give low-wage people more money without increasing the minimum wage. Rep. Paul Ryan suggested a plan that would increase the amount of the ETIC workers would get.
This plan would essentially give low-paid workers a subsidy come tax time. The program already exists for workers who have children, but Ryan suggests giving it for workers without children.
The drawback is that some have argued that American taxpayers would subsidize low-paid workers, rather than forcing the companies that are benefitting from the low-paid labor to pay more. Additionally, the plan would cost $60 billion a year, for a country that is already $17 trillion in debt.
Fourth Solution: The PRO Wage
Douglas Holtz-Eakin, the former director of the Congressional Budget Office and John McCain’s former chief economic policy advisor, has released his own solution to addressing the minimum wage called the Poverty Reduction Opportunity (PRO) Wage.
Holtz-Eakin’s PRO Wage plan is for the government to subsidize the difference between what workers make and what the government believes should be a minimum salary. So, for example, if the government determines workers should make at least $11 an hour but an employee has a job that pays only $7 an hour, that low-paid worker would get $4-an-hour subsidy.
One question if this would lead to a drastic cut in wages for low-earning workers, with employees getting the rest from the government. Holtz-Eakin argued on his website that market forces would still be at work.
“Wouldn’t enacting the PRO wage cause employers to cut wages and implicitly capture the subsidy?” Holtz-Eakin wrote on his website. “Perhaps, but employers always have an incentive to pay lower wages. They do not because competition for workers and their skills makes it unprofitable to do so. That is why so few workers today earn the minimum wage. The same competitive dynamics would remain in place if the PRO wage were adopted.”
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