America’s Low Wage Problem (and some ways to fix it)

November 26th, 2013 at 2:21 pm

The WaPo presents an important and moving piece today about the plight of low-wage workers, and the anxieties generated by their precarious living standards.  The piece features a single man without kids (JS), and my colleague Chuck Marr very effectively amplifies the piece and draws two important policy implications from it, to which I add a third:

–The US tax system actually deepens the poverty of working poor and near-poor persons like JS.  While the Earned Income Credit more than offsets other taxes of low-income working families with children, the benefit for childless adults is minimal, a maximum of about $500 a year as opposed to about $5,000 for a low-income worker with two kids.  No question, the low-income parent needs more income than those without kids, by as the WaPo story makes vividly clear—along with even a passing familiarity of what it takes to get by today—the solo adult EITC is too low and should be raised (NYC is engaged in an important pilot program that tests just such an increase).

–A higher minimum wage would help, and there’s an important wrinkle here as well that didn’t come out in the piece.  Readers who know that the national minimum wage is $7.25 an hour may wonder why JS earns $5.25.  The answer is the “tip exception” to the min wage: if you’re a tipped worker, your base wage can be as far below the minimum as $2.13 (!), but if your tips don’t get you up to $7.25 your employer must make up the difference.

Today’s subminimum is a pitiful 30% of the minimum wage, which itself is too low.  In coming weeks, I expect the Miller/Harkin minimum wage bill to be introduced in the Senate.  This proposal takes the minimum up to $10.10 in three annual increments of $0.95 and then indexes it to inflation.  It also raises the subminimum up to 70% of the minimum.  No, it’s not going anywhere, but these things have to have a long runway in our benighted times.

–Full employment must be on this list.  A key finding of our new book is that the benefits of lower unemployment disproportionately help the least well off, both in terms of higher hourly wages and more hours of work.

The WaPo story is a microcosm of America’s larger low-wage-work problem that John Schmitt underscores here.  We’ve got a larger share of low-wage work than other advanced economies, and our low-wage workers earn less, get fewer non-wage benefits, and are less likely to benefit from either collective bargaining or government support.  The steps above can help do something about that.

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4 comments in reply to "America’s Low Wage Problem (and some ways to fix it)"

  1. smith says:

    Could we not raise tax credits for the working poor, since it’s corporate welfare. Not only are you subsidizing business, but you’re subsidizing the very worst employers who pay their employees the least. You are thus also penalizing the employer who pays a decent wage and driving him out of business by unfair competition. You’re locking the economy into low-productivity jobs and not providing incentives to both business and labor to migrate to higher productivity industries. The answer is to raise the minimum wage. Yes, some jobs might disappear. If the big mac becomes too expensive, people might have to stay home and cook, perhaps insisting on a 40 hour work week or 35 (easily reachable and phased in). The flip side of this is a less profitable and smaller burger industry, so capital will find a better place to invest.

    What’s just as bad, is the tax system is progressive, but not nearly enough to either redress inequality with redistribution, or impose confiscatory rates that discourage excessive compensation in the first place.

    If you’re going to reward flipping burgers with higher wages financed from general revenue, you take away incentives to invest in education, you take away incentives for investment in more productive enterprises, you take away incentives to insist on decent wages, you take away incentives to restructure a tax system and economic system as a whole that allows growing inequality by keeping a lid on discontent, while duping liberals into thinking this is an enlightened policy. It is anything but.


  2. Kevin Rica says:

    “Reality is that which, when you stop believing in it, doesn’t go away.”

    ― Philip K. Dick

    This problem is the result of the great evil which we have brought upon our poor by the two great lies of “Immigration Reform:” 1) We have a labor shortage 2) Labor shortages are a bad thing.

    What is clear is that we have far too many people competing for far too few jobs.


    • Jared Bernstein says:

      Agree re #2 in particular (agree with #1 but it should be obvious). Labor shortages actually play a very important signalling role in economies re growing and shrinking occs and inds.


      • Kevin Rica says:

        Labor shortages are the mechanism that causes an increase in wages in a market system. No labor shortages, no general increase in wages.

        Saying that you want higher wages without labor shortages is like saying you want motherhood without sex.

        In effect, politicians argue that workers should get paid higher wages, but employers shouldn’t have pay higher wages.

        So they work at cross purposes by supporting higher minimum wages and higher immigration.


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