WAR AGAINST THE POOR: THE BATTLE TO INCREASE MINIMUM WAGE

Poverty Law

André Thom

December 29, 2015

ContentsINTRODUCTION1Historical Context2Effect on the Employer5Effect on the Employee9Last-Place Aversion Paradox13Possible Solutions15Conclusion19

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INTRODUCTION

The Fair Minimum Wage Act (hereinafter FLSA) of 2007 increased the federal minimum wage from $5.15 an hour in 2006 to $7.25 an hour in three stages by 2009.[footnoteRef:1] However, in reality, the federal minimum wage is $6.26 after taxes.[footnoteRef:2] Disregarding taxes, $7.25 an hour is equivalent to roughly $15,000 annually, far below the $23,500 government’s poverty threshold for a family of four.[footnoteRef:3] The FLSA also introduced the forty-hour work week, established a national minimum wage, guaranteed “time-and-a-half” for overtime in certain jobs, and prohibited most employment of minors in “oppressive child labor.”[footnoteRef:4] The debate about whether the government can alter the economic system in order to encourage the market to effectively absorb low-skilled workers was answered by the U.S. Supreme Court in 1941. In a unanimous opinion in the case U.S. v. Darby Lumber Company, the Supreme Court upheld the Constitutionality of the FLSA. In Darby, the Court held that “[T]he fixing of a minimum wage is within the legislative power and that the bare fact of its exercise is not a denial of due process under the Fifth more than under the Fourteenth Amendment.” United States v. Darby, 312 U.S. 100, 125, 61 S.Ct. 451, 462 (1941). Now that the question of whether it is within the power of the government to regulate minimum wage is answered, the debate as to what level should the government set the minimum wage is a hotly contested topic for the common citizen and 2016 Presidential Candidates alike.[footnoteRef:5] [1: Abrams, Rachel. "States’ Minimum Wages Rise, Helping Millions of Workers." The New York Times. The New York Times, 31 Dec. 2014. Web. 15 July 2015.] [2: Kane, Libby. "The Minimum Wage around the World." Business Insider. Business Insider, Inc, 06 May 2015. Web. 15 July 2015.] [3: Nader, Ralph. "Where Are the Presidential Candidates on the Minimum Wage?" The Huffington Post. TheHuffingtonPost.com, 30 June 2015. Web. 15 July 2015.] [4: Samuel, Howard D. "Troubled Passage: The Labor Movement and the Fair Labor Standards Act." Monthly Labor Review 123.12 (2000): 32-37. United States Bureau of Labor Statistics. United States Bureau of Labor Statistics., Dec. 2000. Web. 22 July 2015. .] [5: Nader, Ralph. "Where Are the Presidential Candidates on the Minimum Wage?" The Huffington Post. TheHuffingtonPost.com, 30 June 2015. Web. 15 July 2015.]

The Congressional Budget Office (hereinafter CBO) estimated in 2014 that raising the minimum wage to $10.10 and indexing it to inflation would increase the wages of 16.5 million workers in 2016, while raising it to $9.00 without indexing would affect 7.6 million.[footnoteRef:6] Among workers paid by the hour in 2013, 1.5 million were reported as earning exactly the prevailing federal minimum wage. About 1.8 million were reported as earning wages below the minimum. Together, these 3.3 million workers with wages at or below the minimum represent, respectively: 1.0% of the population, 1.6% of the labor force, 2.5% of all workers, and 4.3% of hourly workers.[footnoteRef:7] [6: "The Effects of a Minimum-Wage Increase on Employment and Family Income." Congressional Budget Office. CONGRESS OF THE UNITED STATES, 18 Feb. 2014. Web. 22 July 2015. .] [7: "Characteristics of Minimum Wage Workers." BLS Reports (2014): 1-33. Bureau of Labor Statistics. United States Department of Labor. Web. 17 July 2015. .]

This text will narrow the complexity of poverty in the U.S. to a single issue of whether raising the minimum wage has a beneficial effect on employment and poverty rates for low-income workers. It will begin with a brief look at the evolution of the minimum wage and its affects in the past. The text will then detail the effects of a minimum wage increase through the eyes of both a low-wage employee and their employer. After briefly examining the last-place aversion paradox, the text will end by postulating potential solutions that may help the working poor out of poverty.

Historical Context

During the early 20th Century, attempts in the United States to legislate a minimum wage at the federal level met resistance in the courts based on a “liberty of contract” principle.[footnoteRef:8] In short, the government was not prepared to interfere with employers’ right to set wages. Early state legislation dealing with a minimum wage requirement largely addressed the interests of female, immigrant, and child employees who worked in sweatshops and were not represented by unions.[footnoteRef:9] The Great Depression resulted in a 25 percent unemployment rate, which was considered compelling grounds for government intervention and the establishment of a federal minimum wage.[footnoteRef:10] The real value of the minimum wage increased rapidly after 1949 and reached its peak value in 1968.[footnoteRef:11] Its real value fell 20 percent between 1997 and 2006 and about 40 percent between 1968 and 2006.[footnoteRef:12] If the minimum wage had been indexed for inflation in 1968 to account for the rising cost of living, the minimum wage would have been around $11.50 an hour in 2006.[footnoteRef:13] In the 1950s, the minimum wage was fixed at half of average income of a production worker. Between 1949 and 1977, Congress increased the minimum wage in proportion to inflation when its real value fell below the level of income that one production worker would need to keep a family of three above or near the poverty line.[footnoteRef:14] Since the early 1980s, a full-time job paying minimum wage was sufficient to keep a single person with no children above the poverty line.[footnoteRef:15] Currently, the prevailing average wage of a production worker is about $11.95 an hour.[footnoteRef:16] Minimum wage employees were worse off in 2013 than in 1997 or 1968, though their economic status improved since the implementation of the Fair Minimum Wage Act of 2007.[footnoteRef:17] Lastly, the wage floor has not increased in proportion with the American worker’s historically high productivity levels. In fact, the minimum wage, when adjusted for inflation and cost of living, has effectively gone down over the last half-century.[footnoteRef:18] In summary, income inequality has grown substantially since the 1970s.[footnoteRef:19] [8: Gordon, Colin. "The Bare Minimum: Labor Standards and American Inequality | Dissent Magazine." Dissent Magazine. N.p., 20 Mar. 2014. Web. 18 July 2015.] [9: Herbert, Bob. "Working for a Pittance." - NYTimes.com. N.p., 03 July 2006. Web. 18 July 2015. .] [10: Levin-Waldman, Oren M., The Minimum Wage in Historical Perspective: Progressive Reformers and the Constitutional Jurisprudence of 'Liberty of Contract' (November 1998). Jerome Levy Economics Institute Working Paper No. 256. Available at SSRN: http://ssrn.com/abstract=142123 or http://dx.doi.org/10.2139/ssrn.142123.] [11: Elwell, Craig K. "Inflation And The Real Minimum Wage: A Fact Sheet." Congressional Research Service (n.d.): 1-4. Federation of American Scientists. 08 Jan. 2014. Web. 18 July 2015. .] [12: Ibid.] [13: Ibid.] [14: "U.S. Department of Labor - Wage and Hour Division (WHD) - Minimum Wage." U.S. Department of Labor - Wage and Hour Division (WHD) - Minimum Wage. N.p., n.d. Web. 18 July 2015. .] [15: Ibid.] [16: "Production Worker Salary (United States) United States Home Change Country Don't See What You Are Looking For?Get A Free Custom Salary Report »." Production Worker Salary (United States). N.p., 02 July 2015. Web. 18 July 2015. .] [17: Elwell, Craig K. "Inflation And The Real Minimum Wage: A Fact Sheet." Congressional Research Service (n.d.): 1-4. Federation of American Scientists. 08 Jan. 2014. Web. 18 July 2015. .] [18: Krieg, Gregory. "Hillary Clinton Just Set Herself Apart From Bernie Sanders on This One Critical Point." Policy.Mic. N.p., 17 July 2015. Web. 20 July 2015. .] [19: Reardon, Sean F. "The Widening Academic Achievement Gap Between the Rich and the Poor: New Evidence and Possible Explanations." Whither Opportunity? Rising Inequality, Schools, and Children’s Life Chances (2011): 1-50. Center for Education Policy Analysis. Stanford University, July 2011. Web. 19 July 2015. .]

Figure 1 Source: http://economy.money.cnn.com/2013/02/14/minimum-wage-history/

Effect on the Employer

The main federal law that sets the minimum wage is the Fair Labor Standards Act (FLSA), found at 29 U.S.C. section 201.[footnoteRef:20] Generally, businesses must abide by the FLSA if they have $500,000 or more in annual sales or if their employees do business between states.[footnoteRef:21] Federal law requires employers to pay employees a minimum hourly wage of $7.25 an hour and each state is free to impose its own minimum wage. Some cities and counties have passed “living wage” laws, which may set an even higher minimum wage.[footnoteRef:22] Some of the living wage laws apply only to companies that have contracts with the local government; while others apply more generally to all employers in the area. In cases where an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages.[footnoteRef:23] [20: "29 U.S. Code Chapter 8 - FAIR LABOR STANDARDS." 29 U.S. Code Chapter 8. Cornell University Law School, n.d. Web. 19 July 2015. .] [21: Ibid.] [22: "When Must Employers Pay the Minimum Wage? | Nolo.com." Nolo.com. N.p., n.d. Web. 19 July 2015. .] [23: "Wages." U.S. Department of Labor. N.p., n.d. Web. 05 Aug. 2015. .]

In the 2014 State of the Union address, President Obama asked Congress to raise the national minimum wage from $7.25 to $10.10 an hour, arguing that raising the minimum wage nationwide would increase earnings for millions of workers, and boost the bottom lines of businesses across the country. [footnoteRef:24] What happens when the minimum wage goes up? In theory, a hike in the minimum wage raises the cost of low-wage workers and should make firms less likely to hire those people resulting in a rise in unemployment. However, a 2010 study from U.C. Berkeley found that increasing the minimum wage by one or two dollars doesn't appear to worsen unemployment in any noticeable way.[footnoteRef:25] When analyzing the report, one can see that employers have some options in response to a minimum wage increase that have symbiotic effects on employees. The general consensus among employers is that a minimum wage increase to $10.10 would be beneficial to their employees and is within their budgets. Again, the U.S. Department of Labor states that: [24: "Raise the Wage." The White House. The White House, n.d. Web. 19 July 2015. .] [25: Dube, Andrajit; Lester, T. William; & Reich, Michael. (2010). Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties. Institute for Research on Labor and Employment. UC Berkeley: Institute for Research on Labor and Employment. Retrieved from: http://escholarship.org/uc/item/86w5m90m.]

“A June 2014 survey found that more than 3 out of 5 small business owners support increasing the minimum wage to $10.10. Small business owners believe that a higher minimum wage would benefit business in important ways: 58% say raising the minimum wage would increase consumer purchasing power. 56% say raising the minimum wage would help the economy. In addition, 53% agree that with a higher minimum wage, businesses would benefit from lower employee turnover, increased productivity and customer satisfaction.”[footnoteRef:26] [26: "Minimum Wage Mythbusters." U.S. Department of Labor. U.S. Department of Labor, n.d. Web. 19 July 2015. .]

A higher minimum wage means that companies have to pay their low-wage workers more. Sometimes employers are willing to consistently keep their wages slightly higher than the local standard in order to attract good employees. However, not all employers use a higher minimum wage as an incentive. The employers that currently pay less than minimum wage argue that employers will simply layoff or fire employees to save costs associated with a higher minimum wage.[footnoteRef:27] However, according the U.S. Department of Labor, “A review of 64 studies on minimum wage increases found no discernable effect on employment. Additionally, more than 600 economists, seven of them Nobel Prize winners in economics, have signed onto a letter in support of raising the minimum wage to $10.10 by 2016.”[footnoteRef:28] Employers may also adapt by cutting back on benefits, hours, or training. Employers can also respond by cutting wages for other, higher-paid workers. An article from the Washington Post stated that “half of employers faced with a minimum-wage hike would delay or limit pay raises/bonuses for more experienced employees.”[footnoteRef:29] If employers choose to help low-wage workers at the expense of better-paid workers, the GDP in the short run may increase if poorer workers spend their earnings. CEOs, for example, could be compensated less. In 2012, a restaurant industry CEO made 788 times more on average than a minimum wage worker made in a year. The exorbitant CEO wages could be redistributed to minimum wage employees. [27: Dorn, James. "The Minimum Wage Delusion, And The Death Of Common Sense." Forbes. Forbes Magazine, 07 May 2013. Web. 19 July 2015. .] [28: "Minimum Wage Mythbusters." U.S. Department of Labor. U.S. Department of Labor, n.d. Web. 19 July 2015. .] [29: Plumer, Brad. "Economists Disagree on Whether the Minimum Wage Kills Jobs. Why?" Washington Post. The Washington Post, 14 Feb. 2013. Web. 19 July 2015. .]

Furthermore, companies could raise their prices and pass increased costs onto the consumer in response to a minimum wage increase. A major literature review by the University of Leicester in 2006 found that a 10 percent hike in the minimum wage leads, on average, to a 4 percent increase in prices at companies affected by the change.[footnoteRef:30] Companies could settle for fewer profits rather than lay off employees. Yet, most employers cannot simply raise prices to cover the higher minimum wage, particularly in the competitive services sector. And if they do increase prices, consumers will buy less or have less money to spend on other things, meaning fewer jobs on net. Moreover, if the minimum wage cuts into profits, there will be less capital investment and job growth will slow. Another option is for businesses to require higher productivity out of their employees by requiring better attendance and asking employees to complete extra duties. In addition, companies might save money from a minimum wage increase because of less employee turnover. If employees stay on the job longer, employers save on the cost of screening, training, and vacancies. [30: Giavazzi, Francesco, and Michael F. Mcmahon. "The Household E Ffects of Government Spending." SSRN Journal SSRN Electronic Journal (2006): 1-38. University of Leicester. University of Leicester, May 2006. Web. 19 July 2015. .]

Finally, raising a State’s minimum wage may force employers to pay more in taxes. Some payroll taxes are tied to the amount an employer pays in wages.[footnoteRef:31] For some small businesses, a minimum wage increase of only $1 adds an extra 10.5 percent to their payroll tax expense.[footnoteRef:32] The more businesses pay their workers, the more they pay in taxes. Increasing payroll taxes that fund Social Security and Medicare creates an incentive for local, State, and Federal agencies to support laws increasing the minimum wage.[footnoteRef:33] [31: Lobosco, Katie. "The Hidden Costs of a Minimum Wage Hike." CNNMoney. Cable News Network, 22 Jan. 2014. Web. 05 Aug. 2015. .] [32: Ibid.] [33: O'Sullivan, Arthur, and Steven M. Sheffrin. Economics: Principles in Action. Needham, MA: Prentice Hall, 2003. Print.]

Which option should an employer choose? There is no one right answer that every business will use in the same way in response to an increased minimum wage. Each of the employer’s possible responses to a minimum wage increase is beneficial to both the employer and employee depending on a complex set of circumstances that economists cannot fully capture or explain. Businesses will have to individually choose the most advantageous option based on factors including, but not limited to their workforce ability, standard industry incentives, and existing costs. Although the $15 minimums bring wages up to more than double the federal minimum wage of $7.25 an hour in cities like Seattle, policymakers built-in a gradual phase-in in each case to minimize the disruption to companies’ balance sheets. Economists who support raising the minimum wage agree that gradual steps are necessary, but the delay forces low-wage workers to wait years before they can actually benefit from the increase.

Effect on the Employee

The jobs that are most likely to be directly affected by the minimum wage are the ones that pay a wage close to the minimum. The typical minimum wage worker is not a high-school student earning weekend pocket money. According to the U.S. Department of Labor, “88% of those who would benefit from a federal minimum wage increase are age 20 or older, and 55% are women.”[footnoteRef:34] A substantial increase in the federal minimum wage is likely to have broad effects, with some studies predicting that it could boost the wages of nearly 30 percent of the American workforce.[footnoteRef:35] The CBO estimated that raising the national minimum wage to $10.10 an hour from $7.25 would lift 900,000 people out of poverty.[footnoteRef:36] However, some argue that $10.10 is too low.[footnoteRef:37] [34: "Minimum Wage Mythbusters." U.S. Department of Labor. U.S. Department of Labor, n.d. Web. 19 July 2015. .] [35: Wihbey, John. "Effects of Raising the Minimum Wage: Research and Key Lessons - Journalist's Resource." Journalists Resource. Harvard Kennedy School's Shorenstein Center and the Carnegie-Knight Initiative - See More At: Http://journalistsresource.org/studies/economics/inequality/the-effects-of-raising-the-minimum-wage#sthash.KteVt6gs.dpuf, 20 Feb. 2014. Web. 17 July 2015. .] [36: Reich, Robert. "We Should Raise the Minimum Wage: Reich." CNBC. N.p., 27 Apr. 2015. Web. 19 July 2015. .] [37: Eidelson, Josh. "Federal Contract Workers Tell Obama: $10.10 Isn't Enough." Bloomberg.com. Bloomberg, 11 June 2014. Web. 20 July 2015. .]

Increasing the federal minimum wage to $15 may help the working poor get out of poverty where the cost of living is the highest in the nation. For example, the cost of living in Seattle, Washington is currently 24 percent higher than the national average. Seattle raised its minimum wage to $15 incrementally over several years from $9.32.[footnoteRef:38] Researchers in Seattle examined employment rates in 200 pairs of adjacent counties lying on opposite sides of state borders, each with different minimum wages, and found no statistically significant increase in unemployment in the higher-minimum counties, even after four years.[footnoteRef:39] The researchers also discovered that employee turnover was lower where the minimum wage was higher.[footnoteRef:40] In New York, state officials increased the minimum wage to $15, representing a raise of more than 70 percent for workers earning the state’s current minimum wage of $8.75 an hour.[footnoteRef:41] And the trend to increase the minimum wage is spreading; Los Angeles will raise its minimum to $15 for all workers by 2021 and the University of California system will raise the minimum wage for its workers to $15 by 2017.[footnoteRef:42] [38: Reich, Robert. "We Should Raise the Minimum Wage: Reich." CNBC. N.p., 27 Apr. 2015. Web. 19 July 2015. .] [39: Ibid.] [40: Ibid.] [41: Mcgeehan, Patrick. "New York Plans $15-an-Hour Minimum Wage for Fast Food Workers." The New York Times. The New York Times, 22 July 2015. Web. 5 Aug. 2015.] [42: DeSilver, Drew. "The Real Value of a $15 Minimum Wage Depends on Where You Live." Pew Research Center RSS. N.p., 03 Aug. 2015. Web. 05 Aug. 2015.]

However, $15 an hour should not be a national model because different economies need different levels. In some parts of the country, where the cost of living is relatively expensive, a $15 minimum wage might put more money into the pockets of workers while eliminating jobs in low-cost parts of the country. For example, a national $15 minimum would yield “$17.08 worth of purchasing power in Macon, Georgia, but only $12.26 in New York City, once the differing price levels in the two cities are taken into account.”[footnoteRef:43] Trying to change the prevailing wage rather than just the bottom of the income distribution is likely to cause massive job losses. $15 an hour may be too high for the entire nation, but raising the minimum to 50 percent of median may be less damaging to communities where the dollar is stronger. [footnoteRef:44] However Increasing the Minimum Wage [43: Ibid.] [44: Worstall, Tim. "LA's $15 Minimum Wage Isn't Going To Work: It's Just Too High." Forbes. Forbes Magazine, 29 May 2015. Web. 20 July 2015. .]

Between 13 and 27 million workers (or 10–20 percent of the workforce) received a raise when the Fair Minimum Wage Act was fully implemented in 2009 (Pratsch & Sheth, 1999; Economic Policy Institute, 2007). In other words, 33 percent of the American workforce earned less than $7.25 an hour in 2006 (Uchitelle, 2006). About 15-20 percent more women and ethnic minorities than white males benefited from this pending raise (Economic Policy Institute, 2007). The vast majority of minimum-wage workers occupy the service sector, which tends to be very stable. McDonald's and Burger King will not likely relocate to another state or nation if the minimum wage increases locally or nationally (Porter, 2007).

statistical evidence shows that a substantial increase in the minimum wage triggered relatively consistent patterns of unemployment among the least-skilled workers. The patterns are described as “perversity thesis” in which a social policy meant to help poor workers accidentally has the opposite effect for some of them. Two researchers found that at about one to five year intervals, the effects from a 90 percent raise in the minimum wage in 1947 resulted in about 15,500 jobs losses; the increase in 1972 resulted in 90,000 job losses; and after 1974, 120,000 long-term job losses can be linked with increases to the minimum wage.[footnoteRef:45] Furthermore, some proponents of the minimum wage argue that the mean effect of the minimum wage on jobs for low-skilled workers is close to zero.[footnoteRef:46] Some researchers found that when New York State increased the minimum wage in 2006 from $5.15 to $6.75 per hour, there was a “20.2 to 21.8 percent reduction in the employment of younger less-educated individuals,” with the greatest impact on 16-to-24 year olds.[footnoteRef:47] One way to explain this phenomena is that the employers surveyed for the research decided on the option of firing their least-skilled workers, while keeping high-skilled workers, to compensate for the minimum wage. In this scenario, a higher minimum (other things constant) will decrease employment opportunities for the least-skilled workers. Workers who retain their jobs will be higher productivity workers—not low-wage workers in low-income families. [45: Wolfson, P. J. & Belman, D. (2003). The minimum wage: consequences for prices and quantities in low-wage labor markets. Tuck School of Business Working Paper No. 03-20. Retrieved June 18, 2008 from http://www.ssrn.com/abstract=406640] [46: Dorn, James. "The Minimum Wage Delusion, And The Death Of Common Sense." Forbes. Forbes Magazine, 07 May 2013. Web. 17 July 2015. .] [47: Ibid.]

The White House counters these argument by using research conducted by the Council of Economic Advisers (hereinafter CEA) finding that “Raising the federal minimum wage would not only benefit more than 28 million workers across the country, but 19 million workers from all types of households would see a direct increase in their wages.”[footnoteRef:48] Today, the real value of the minimum wage has fallen by nearly one-third since its peak in 1968.[footnoteRef:49] Adjusted for inflation, the value of $14,500 a year full-time minimum wage has fallen by a third from its peak. According to CEA estimates, about 28 million workers would benefit from an increase of the minimum wage – with more than 19 million earning less than $10.10 and benefiting directly, and an additional 9 million low-wage workers benefitting from the “ripple effect” of an increase.[footnoteRef:50] [48: "Raise the Wage." The White House. The White House, n.d. Web. 19 July 2015. .] [49: "A YEAR OF ACTION: PROGRESS REPORT ON RAISING THE MINIMUM WAGE." (2014): 1-12. The White House. Executive Office of the President, 12 Aug. 2014. Web. 21 July 2015. .] [50: "The Economic Case for Raising the Minimum Wage." The Economic Case for Raising the Minimum Wage (2014): 1-12. Council of Economic Advisers. Council of Economic Advisers, 12 Feb. 2014. Web. 21 July 2015. .]

Breaking down the figures into demographics, women account for 55 percent of all workers who would benefit from a minimum wage increase from $7.25 to $10.10.[footnoteRef:51] These women account for 72 percent of workers in mostly occupations relying on tips who would benefit from the increase.[footnoteRef:52] Only 12 percent of workers benefiting from a minimum wage increase are teenagers and the remainder of the beneficiaries include a wide cross section of families with children, couples, and others.[footnoteRef:53] Because low-wage workers are most likely to spend the additional money they earn, increasing their wages would help to increase aggregate demand and strengthen the economy today. For example, economists at the Federal Reserve Bank of Chicago released a study finding that raising the minimum wage would raise growth by 0.3 of a percentage point in the short run.[footnoteRef:54] Looking at the past few decades and noticing a trend of increased cost of living and the resulting increases in the minimum wage, is there a more permanent solution that won’t require economists to reignite the debate of the federal minimum wage every few decades? First, we have to look at why the issue isn’t simply the 1 percent versus the 99 percent because, surprisingly, many low-income voters disagree with raising the minimum wage. [51: Ibid.] [52: Ibid.] [53: Ibid.] [54: Furman, Jason, and Betsey Stevenson. "Congressional Budget Office Report Finds Minimum Wage Lifts Wages for 16.5 Million Workers." The White House. The White House, 18 Feb. 2014. Web. 21 July 2015. .]

Last-Place Aversion Paradox

In an era of bank bailouts, rising poverty, and the top 1 percent control as much as 35 percent of the total wealth in America, movements to reconsider the allocation of wealth are growing significantly. Some studies suggests that people exhibit a fundamental dislike for being near or in last place, a phenomena called “last-place aversion.” This fear can lead people near the bottom of the income distribution to oppose redistribution because it might allow people at the very bottom to catch up with them or surpass them. The result is the recurring tendency of lower-income Americans to vote against their own economic interests. Erroneous beliefs about the current degree of wealth inequality coupled with a focus on ensuring that those at the bottom stay at the bottom, create strong opposition to redistributive policies.

In “Last-Place Aversion”: Evidence and Redistributive Implications*, published by The Quarterly Journal of Economics, evidence showed that individuals are “last-place averse.” [footnoteRef:55] The researchers found that participants chose opportunities with the possibility of removing them from the last place that they rejected when randomly placed in different parts of the distribution. Specifically, they participated in a modified-dictator game showing that those randomly placed in second-to-last place are the more likely to give financial support to the person one rank above them instead of the person one rank below.[footnoteRef:56] The theory of last-place aversion suggests that low-income individuals might oppose redistribution because it could divergently help the group beneath them. To show this, researchers used survey data to discover that individuals making just above the minimum wage were the most likely to oppose its increase. Similarly, those above poverty but below median-income were also unlikely support redistribution. [55: Ilyana Kuziemko, Ryan Buell, Taly Reich, and Michael I. Norton“Last-Place Aversion”: Evidence and Redistributive Implications*The Quarterly Journal of Economics first published online November 13, 2013 doi:10.1093/qje/qjt035.] [56: Ibid.]

Last-place aversion can be depicted in simple terms that describe why even those that may benefit from increased wages do not support a higher minimum wage. For example, imagine creating an artificial income distribution by giving individuals different sums of money and showing them their “rank separated by $1. Give them an extra $2; requiring them to give the $2 to either the person directly below or directly above them in the distribution. If the donor gives $2 to the person below them, the beneficiary of lower rank will gain a rank ahead of the donor. Most people will give to the person below them because the alternative is to give $2 to a beneficiary who already has more money than the donor. People in second-to-last-place, however, who would fall to last-place when giving the money to the person below them, are the least likely to donate to the lower ranks. An explanation of those in second-to-last-place denying those at the very bottom to surpass them is that they have a strong desire to avoid last-place and instead choose to give the money to a wealthier rank. If Americans behave like those in the rank of second-to-last-place, then it could be challenging to unite those in the bottom of the income distribution to support redistribution.

Last-place aversion is evident when people near the bottom of the distribution focus their attention on keeping those below them down, rather than on redistributing wealth from those at the top. Rather than simplifying the population into two groups, the top 1 percent and the bottom 99 percent, researchers and the public should pay close attention to each income level when discussing redistribution and inequality. The minimum wage is not a panacea for poverty because not only do some display the last-place aversion paradox, but most employers are not redirecting the added cost in the right direction, and for selfish reasons.

Possible Solutions

2016 Presidential hopeful, Hillary Clinton, believes a $15 minimum wage would be damaging to businesses in rural areas, where a dollar doesn’t mean the same thing as it might in more expensive places like New York or California.[footnoteRef:57] Clinton raises a fair argument that raising the minimum wage may be economically problematic if all 50 states are assigned a uniform wage increase. One should also not stop with the short-run effects of the minimum wage but trace out the longer-run effects on the number of jobs and unemployment rates for affected workers. Alternative approaches to increasing the minimum wage for the purposes of combating poverty include expanded tax credits (which exist in the form of the Earned Income Tax Credit for low-income workers with two or more children), direct or indirect subsidies to workers, and subsidies to employers. Another is to adjust wages based on regional cost of living, and then to index those levels to inflation going forward. All of these approaches transfer more of the burden for relieving poverty from the private sector to public resources than minimum wage alone. [57: Krieg, Gregory. "Hillary Clinton Just Set Herself Apart From Bernie Sanders on This One Critical Point." Policy.Mic. Mic Network Inc., 17 July 2015. Web. 22 July 2015. .]

According to the U.S. Internal Revenue System, the federal earned income tax credit or earned income credit (EITC or EIC) is:

“[A] refundable tax credit for low- to moderate-income working individuals and couples—particularly those with children. The EITC is a refundable tax credit. This means taxpayers may get money back, even if they have no tax withheld. Nationwide last year, over 27 million eligible individuals and families received more than $63 billion in EITC. The amount of EITC benefit depends on a recipient’s income and number of children.”[footnoteRef:58] [58: "Earned Income Tax Credit; Do I Qualify?" Internal Revenue Service. Internal Revenue Service, 04 Jan. 2014. Web. 22 July 2015. .]

In a perfect world, the best anti-poverty program is economic freedom that expands workers’ choices and allows entrepreneurs to freely hire labor without the government dictating the terms of the exchange, except to prevent fraud and violence. When the government increases the minimum wage above the prevailing market wage for low-skilled workers, firms have an incentive to substitute labor-saving techniques that include destroying jobs for low-productivity workers. An alternative option that may be more beneficial is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers. Payments to eligible workers diminish as their earnings increase. But there is no disincentive effect: A gain in wages always produces a gain in overall income. The process is simple: You file a tax return, and the government sends you a check. In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment. However, the existing EITC needs improvement. Fraud is a big problem; penalties for it should be stiffened. There should be widespread publicity that workers can receive free and convenient filing help. An annual payment is now the rule; monthly installments would make more sense, since they would discourage people from taking out loans while waiting for their refunds to come through. Dollar amounts should be increased, particularly for those earning the least. First of all, raising the minimum wage can increase motivation. Workers are motivated directly by feeling they are receiving a fair wage. Higher wages can increase employee morale, which raises productivity. In addition, higher wages help workers maintain better physical and mental health, allowing them to be more productive at work. Economic research from the University of Georgia found that an expansion in the EITC was associated with a boost in earnings and employment for single mothers.[footnoteRef:59] [59: Sabia, Joseph J. "The Impact of Minimum Wage Increases on Single Mothers." Employment Policies Institute. Employment Policies Institute, Sept. 2007. Web. 22 July 2015. .]

Some critics argue that the EITC is a government subsidy that allows employers to pay lower wages. The EITC provides substantial income support without the side effects of a minimum wage increase. However, for every study supporting this thesis, there appears to be an equal and opposite study rejecting it. Perhaps the choice between an enhanced EITC and an increased minimum wage is a false one because the minimum wage and EITC are policies that reach two different target groups. The EITC is also described as a “wage subsidy for low-wage earners in low-income households.”[footnoteRef:60] In contrast, a minimum wage increase would reach a much broader group of working poor and lower-middle class that would not qualify for the EITC. To solve the issue of who the target group, it makes sense to extend the coverage of the EITC beyond its current focus on low-income families to low-income wage earners in general. It is in no way sufficient, however, to address the circumstances confronting the low wage worker if there is not a funding increase proportionate with the increased number of program participants. The Center for Priority Based Budgeting (CPBB) has been advocating for the EITC and an adequate minimum wage as “twin pillars of an effective make-work-pay strategy since the 1990’s.” A combination of enhancing or expanding the EITC and increasing the minimum wage may be the best of both worlds. What is needed is a blended solution that meets the myriad and differing conditions of low income families and low wage workers of all types. That blended solution is a meaningful increase to the minimum wage and a measurably enhanced and expanded EITC. [60: Islam, Frank, and Ed Crego. "A False Choice: Earned Income Tax Credit or Minimum Wage Increase." TheHuffingtonPost.com. The Huffington Post, 24 Mar. 2014. Web. 22 July 2015. .Ibid.]

While both the EITC and minimum wages need to be adjusted, so does the culture of the C-level suit of companies. In the U.S., the average CEO earns more than 350 times what the average worker does.[footnoteRef:61] A recent story from the Huffington Post ran a story about a CEO cutting his $1 million salary to give his lowest-paid workers a raise. That CEO is Dan Price who willingly took a $930,000 pay cut.[footnoteRef:62] When he listened to a friend describe her struggles with rising rent prices, Price realized he had to do something for his own employees. Price, the founder and CEO of Gravity Payments in Seattle, decided to raise the minimum salary at his 120-person payment processing company to $70,000.[footnoteRef:63] The average pay of his employees was $48,000 per year, which affected 70 workers, 30 of whom saw their salaries double. Most of the money for these raises came from cutting Price’s salary from $1 million to $70,000 and the remaining balance from the $2.2 million the company expected to earn that year. In the article, Price stated: “But once the company’s profit is back to the $2.2 million level, my pay will go back. So that’s good motivation.” Price sees the pay raises as an investment and a “[C]apitalist solution to a social problem.” In theory, workers motivated by higher salaries will ultimately attract more business and handle clients better. However, employers like Price must be careful to avoid unfairly raising the pay of new hires while the longest-serving staff members receive small or no raises. A fairer plan than Price’s is to give newer employees smaller increases, along with the chance to earn a more substantial raise with more experience. If implemented properly, these changes can have an extremely beneficial impact for employers, employees, and the government. [61: Ferdman, Roberto A. "The Pay Gap between CEOs and Workers Is Much Worse than You Realize." Washington Post. The Washington Post, 25 Sept. 2014. Web. 22 July 2015. ] [62: Kaufman, Alexander C. "CEO Slashes $1 Million Salary To Give Lowest-Paid Workers A Raise." The Huffington Post. TheHuffingtonPost.com, 14 Apr. 2014. Web. 22 July 2015. .] [63: Ibid.]

Conclusion

The minimum wage battle currently underway tends to narrowly focus on those workers making exactly the minimum wage. This approach misses a large number of low-wage workers whose wages would likely be raised through a ripple effect resulting from an increase in the minimum wage. As our economy continues to recover, a minimum wage increase could provide a much-needed boost to the earnings of low-wage workers. A significant 35 million workers from across the country could see their wages rise if the minimum wage were increased, allowing them to earn a better livelihood and lead more economically secure lives. However, finding simple trends, especially those that are highly sensitive to the time period analyzed, and then drawing policy conclusions is scientifically illegitimate. Using such a method makes it far too easy to cherry-pick from the data those numbers that support a preferred policy.

The mixed data does little to settle the debate on whether raising the minimum wage impacts employment. Some economists argue that increases have little or no ill effects on hiring and therefore will boost household income and spending. Others say raising the wage floor kills jobs and hurts unskilled and low-paid workers, the very people they’re meant to help. A combination of enhancing or expanding the EITC and increasing the minimum wage may be the best solution that meets the myriad and differing conditions of low income families and low wage workers of all types. Lastly, low-skilled workers are getting paid too little and high-skilled workers are getting paid too much. This pay divergence points to ethical corruption by those in charge. While the government needs to make adjustments with the EITC and minimum wage, it is also time for our executive leaders to set an example an act ethically by adjusting their compensation with respect to their lowest employees.