Higher Minimum Wage Misses the Target

Washington has the nation’s highest minimum wage at $9.47 an hour and now the state legislature wants to hike it to $12. Seattle Mayor Ed Murray (D) wants to boost it to $15 to go in step with the SeaTac initiative, which voters barely approved last year.

The state’s minimum wage has been adjusted annually since 2001, based on a Seattle-area cost of living index. From 2008 through 2013, Washington’s minimum wage increased more than 14 percent.

Washington voters thought passing an initiative 14 years ago would make life better for the poor and low income families, but has it?

Stanford economics professor Thomas MaCurdy says, in effect, “not so much.”

MaCurdy, a senior fellow at the Hoover Institute, analyzed the impact when Congress raised the national minimum wage in 1996 from $4.25 to $5.15. That would be comparable to raising the current minimum wage from $7.25 to $8.80. MaCurdy says that even though the increase happened 19 years ago, the principal is the same today.

In late February, he wrote in the Wall Street Journal: “The results show the failure of minimum-wage hikes as an antipoverty policy.”

MaCurdy found that a higher minimum wage leads to higher prices, a burden that falls disproportionately on the low-income families it was intended to help.

He calls the minimum wage a “stealth tax” that hurts low-income families most. “My analysis concludes that more poor families were losers than winners from the 1996 hike in the minimum wage. Nearly one in five low-income families benefited, but all low-income families paid for the increase through higher prices.”

The higher prices, in other words, resembled a regressive value-added or sales, tax. This is sharply contrary to normal tax policy. A typical state sales tax has a uniform rate—but with necessities such as food excluded, expressly to reduce the effective tax rate for people with lower incomes.

MaCurdy credits private sector employers who raise wages on their own. For example, in Seattle, Dick’s Drive-in Restaurants has consistently provided jobs above minimum wage.

Jasmine Donovan, the granddaughter of Dick’s co-founder Dick Spady, told the Seattle Times last August: “For more than 60 years, Dick’s Drive-In has strongly supported high wages and generous benefits.

Our employees start at $10.25 an hour — well above our state’s highest-in-the-nation minimum wage — receive regular merit raises, excellent health insurance, $22,000 in scholarships over four years, child-care assistance, bonuses, paid vacations, a 401(k) retirement plan with a 50 percent employer match, paid volunteer time at local charities and other great benefits.”

Raising the base wage to $15 an hour would cost Dick’s $1.5 million which would be reflected in the price of hamburgers, fries and milk shakes.

Of course, we wouldn’t be talking about hiking the minimum wage if the economy were stronger. In a robust economy, employers compete for workers by offering higher wages and benefits. In a weak economy, wages stagnate.

Then there is the issue of unemployment.

The state reports that in January, 95 percent of the counties in Washington had unemployment rates above the national average. Almost one third of our state’s counties posted double-digit unemployment. If people can’t find a job at $9.47 per hour, how will they find work at $12 per hour?

There is a better way. Donovan proposed an alternative called a “smart wage,” which increases as employees improve their education and skills.

If we truly want to help people move up the economic ladder, isn’t it better to provide incentives that reward them for getting the education and skills they’ll need in order to succeed? The other alternative is fewer jobs and lost opportunities.