Wealth inequality and massive disparities in the income distribution have made the idea of the American Dream little more than a quickly fading fantasy for many of the country’s poorest citizens. A year-long pandemic has only exacerbated these issues, and many impoverished families and low wage workers have been faced with increasingly grave financial struggles. A rare bipartisan effort hopes to alleviate the strain, but it has produced no legislation capable of restoring the once obtainable American Dream. As a result, many have expressed support for President Biden’s plan to raise the federal minimum wage to $15 by 2025.
One supporter of this proposal is Senator Bernie Sanders, who tweeted that raising the minimum wage to $15 would “benefit 32 million workers and would give low wage workers an extra $3,300 a year”. Thousands of posts across varying social media platforms, both from other politicians and from average users, convey similar sentiments. Overall, the consensus, at least according to the public, appears to be that raising the minimum wage will offer a lifeline to impoverished families and low wage workers. The truth, however, is a lot more complicated.
Unfortunately, the benefits of raising the minimum wage are vastly overshadowed by the long term economic consequences, most of which fall on the shoulders of America’s poor – the very people proponents of the wage increase aim to help.
First, it is important to understand that many low wage workers are not impoverished. For example, in 2019, only 30% of low wage workers belonged to families earning below 150% of the poverty line. This is in part due to the fact that many low wage workers are teenagers who do not necessarily belong to impoverished families. Additionally, although families in poverty do earn less wages, low hours are also a large contributor to low household income. The result of these factors is that while increasing the minimum wage would benefit some impoverished families, many of the workers that would receive extra earnings are people who are already in financially secure positions without the wage increase, making it an “inefficient redistributional policy.”
Another glaring inefficiency of this policy is its impact on both job growth and small businesses. One study conducted by Dr. Arindrajit Dube, a professor of economics at the University of Massachusetts, Amherst, and a research associate at the National Bureau of Economic Research, contends that the impact on employment would be “fairly small”. However, the Congressional Budget Office estimates that raising the minimum wage could result in a loss of up to 1.4 million jobs. While the exact number of jobs that will be lost varies widely across studies, even Dube acknowledges that there is “some point at which a high minimum wage would reduce employment,” which would certainly have a negative economic impact.
Even more concerning is the Congressional Budget Office’s projection that half of the estimated 1.4 million newly unemployed workers are likely to fall out of the workforce entirely, and that total family income, on average, will decrease slightly. As a result, owners of many small businesses will have no choice but to close. Most small businesses already scrape by with thin margins due to the highly competitive nature of their environments, and a rise in the minimum wage would likely reduce their profits to the point where shutting down is the only option.
The role of small businesses in the U.S. economy cannot be overstated. For starters, they drive growth and innovation. Major corporations might make more revenue, but small businesses introduce competition into the market through various methods, whether by offering competitive prices or by developing new technology or services. Airbnb, for example, started as a small local business used by the three founders to make extra money for rent. This year, Airbnb’s IPO opened at $146 per share and ended the day with a market cap of $86.5 billion. This success story is one of many, but if the minimum wage is increased, it will become one of precious few.
Even if small businesses weren’t essential to the economy at large, hindering their growth poses grave consequences to minorities and immigrants. As of May 2019, there were 1,075,575 minority-owned businesses in the U.S., 99.9% of which were classified as small businesses. In light of the pandemic, that number has decreased, and if the minimum wage is raised, it will continue to drop. After all, minority-owned business have historically faced more hurdles on their paths to success than their white-owned counterparts, including less access to financial capital and consumer markets, as well as racial discrimination. Furthermore, the revenue generated by minority-owned small businesses goes a long way toward closing the racial wealth gap, a prospect that will move from difficult to impossible if the barrier to entry for entrepreneurship increases.
Still, even after we acknowledge the potential fallout from raising the minimum wage, it seems there is no choice but to do it anyways. After all, many lawmakers believe that this opportunity to help Americans in poverty is too good to pass up, no matter what the cost. But what if there was another way?
As it turns out, there is. If we combine a more moderate minimum wage increase with an expansion of the Earned Income Tax Credit (EITC), we can help those in need without crippling our economy in the long run. The EITC effectively acts as a wage subsidy by providing tax credits to low income individuals, especially those with children, on a dollar-for-dollar basis. Put simply, the EITC reduces the amount of taxes for qualifying individuals, and it also allows for individuals whose tax credits exceed their tax liabilities to become eligible for a refund.
The main advantage of the EITC is that it provides aid solely to those who need it most. Whereas an increase in the minimum wage would benefit many workers belonging to higher income families, the EITC benefits only impoverished families, with “almost all the credit going to households in the bottom three quintiles of the income distribution.” Additionally, the EITC has been shown to increase the number of single mothers in the workforce, results in better health and education outcomes for its recipients, including children, and stimulates the local economy through its recipients’ spending and the resulting economic activity.
Critics of the EITC point out that its current allocation system disproportionately benefits low income families rather than childless workers, but an expansion of the program would allow for more credits to be given to individuals. Furthermore, expanding the program would also expand its ability to encourage individuals to join the workforce, a stark contrast to the drops in employment one would expect to see with a large increase in the minimum wage.
At its core, the American Dream is an idealistic vision for society – one that should be accessible to everyone, not just those with inherited economic resources. If the U.S. truly wants to help its impoverished, it will invest in programs that provide both enough economic support for them to live and also a pathway to achieving individual economic sovereignty.
Categories: Domestic Affairs