National Economist:

Minimum Wage Increase Won't Lift People Out of Poverty

by: Lindsay Andrews

Spring 2015 Catalyst

At the PA Chamber Educational Foundation's Third Economic Forecast Summit in February, Dr. Martin Regalia—a respected economist with the U.S. Chamber of Commerce— spoke off-the-cuff about the minimum wage during a question and answer segment of the program. Calling efforts to raise the minimum wage "bad public policy," Dr. Regalia went on to explain that while minimum wage hikes are beneficial to a small number of individuals, they actually have a negative impact on the majority of affected employers and potentially millions of individuals nationwide. The PA Chamber has long advocated against government-mandated wage increases, including legislation this session for which Governor Tom Wolf has voiced support and would raise the current $7.25 minimum wage rate to $10.10 an hour. We spoke with Dr. Regalia following the summit to gain further insight on his remarks and glean his perspectives on the impact of a minimum wage hike on the overall economy.

"Loose Thinking" Among Minimum Wage Supporters

"It's true that minimum wage increases have a positive impact on some workers," Dr. Regalia reflected during a recent phone interview with Catalyst. "But it's a trade-off," he warned, "and one that produces winners and losers." The winners, of course, end up being minimum wage earners, but they often don't fit the demographic that supporters of a wage hike would have you think. In fact, of the roughly 150 million people who are in today's work force, one million of those individuals are making minimum wage in households that are at the poverty level. And the losers? They end up being a much larger group—starting with the millions of small business owners who find that with a wage hike it's no longer economically viable for them to create jobs; and the millions of entry level workers who could have applied for these jobs (and who, coincidentally, the minimum wage increase was supposed to help in the first place.)

But what about those who claim that raising the minimum wage will put more money in people's pockets to spend, thereby boosting our economy? Dr. Regalia calls this "loose thinking" because it raises prices, which decreases demand and results in a reduction in employment. "It's like trying to create perpetual motion. Yes, a minimum wage increase will create some spending but it will also take away jobs, so the net effect isn't good," he explained. "It works out for some if they get to keep their jobs, but it certainly isn't good for society overall."

The Economic Impact of a Minimum Wage Increase

At the Economic Forecast Summit, Dr. Regalia reported that our nation's current rate of economic growth hovers at a little over 2 percent and isn't expected to increase much over the next 12 months. Unfortunately, minimum wage supporters do not seem to recognize the risks to our already lackluster economy that mandated wage hikes present.

Raising the minimum wage ends up reducing hours, eliminating jobs, puts people out of work and makes it harder to get employment. This was the message last year from the nonpartisan Congressional Budget Office, which found that raising the minimum wage would cost the nation about 500,000 jobs and up to as many as a million. And a recent report by the Employment Policies Institute has echoed these findings at the state level—should Pennsylvania raise its minimum wage to $10.10 an hour, 30,000 jobs across the Commonwealth will be at stake. The most at-risk jobs end up being those at smaller businesses, since they offer more entry-level positions.

Which begs the question, why is there so much support for an effort that will end up stifling economic growth? According to Dr. Regalia, the answer is in the simplicity of an oft-repeated message in the press and by policymakers that raising the minimum wage will eliminate poverty, which makes for a good political policy but not a good economic policy.

"The fact is that there are forty five million people in poverty in this country, and they are often single, heads of their households, have children and do not work," Dr. Regalia says. "There are three million people who hold minimum wage jobs, and two-thirds of that group lives in households with incomes above the poverty threshold. So, a raise in the minimum wage really doesn't address financial problems for the majority of people in poverty; and with the increased cost of goods and services that result from a minimum wage increase it actually tends to make things worse for the economy as a whole."

"There is interconnectedness [with policies like minimum wage hikes] to the economy that folks don't take into account—and that's why we have two percent growth."

The Economic Impact of a Minimum Wage Increase

Dr. Regalia is quick to point out that the one million workers living in poverty who could benefit from a minimum wage increase should receive some help, but he's convinced that financial aid should be borne by society as a whole—not just by the business community. "There is an answer, and it's the Earned Income Tax credit," he states. "This focuses on the problem of people in poverty. It spreads the cost out over the entire taxable population and not just job creators. This is general tax revenue for the poor that would help them in a positive way—it would have no negative job effect and wouldn't be an added cost to business."

Another more effective approach—and something the PA Chamber has long championed—is encouraging the development of strong workforce development programs that give workers the tools they need to advance in their chosen field. This requires collaboration between educational institutions and employers and is part of the long-term solution to helping to close an existing jobs skills gap and inspire a new generation of talented workers. "Funding effective workforce development is a great way to help folks in poverty advance, because over time their education and training will increase their wages, impact the public good and produce better jobs," Dr. Regalia notes.

The broader benefit of sound workforce development programs and the acquisition of skills and education they help to generate will spur better careers, more generous lifetime earnings and make today's low-wage earners less vulnerable to the job loss that results from arbitrary government-mandated wage hikes.

So why aren't more lawmakers championing these types of targeted approaches to helping low-wage earners; and instead supporting mandatory hikes to entry-level wages? Dr. Regalia says the truth is that some policymakers don't believe the fairly obvious conclusion that a minimum wage hike hurts some workers while helping others, and hurts the economy overall. "They [minimum wage proponents] say an increase in the wage is a good way to create jobs," he explains, "so taken to its logical extreme, raising the wage to one hundred dollars an hour would create a lot of jobs—you'd give a lot of money to the poor and the economy would boom. But instead, we would get less investment, lower productivity and lower wages over time."

Lindsay Andrews is manager of communications for the PA Chamber.