The Minimum-Wage Stealth Tax on the Poor

When a fast-food business is forced to raise pay, it also raises prices. Guess who gets hit worst by the increase.

By Thomas MaCurdy, WSJ. He is an economics professor at Stanford. Excerpts:

"One problem is that only about 5% of families have children and are supported by low-wage earnings; another is that higher minimum wages cause some workers to lose their jobs. Advocates of a higher minimum wage argue that the number of workers who gain far exceeds those who lose. Whatever the credibility of this calculus, there is yet another problem: If someone’s income is arbitrarily increased thanks to a legislatively mandated wage increase, someone else must pay for it.

Since economic evidence indicates that higher minimum wages don’t significantly affect employers’ profit rates, advocates instead say that employers will pass on these increased labor costs by raising the prices of their goods and services—and that “society,” or more affluent consumers, will pay these costs.

But will low-income families earn more from an increase in the minimum wage than they will pay as consumers of the now higher-priced goods? My research strongly suggests that they won’t.

The first step in understanding why they won’t is to recognize that minimum-wage workers are typically not in low-income families; instead they are dispersed evenly among families rich, middle-class and poor. About one in five families in the bottom fifth of the income distribution had a minimum-wage worker affected by the 1996 increase, the same share as for families in the top fifth.

Virtually as much of the additional earnings of minimum-wage workers went to the highest-income families as to the lowest. Moreover, only about $1 in $5 of the addition went to families with children supported by low-wage earnings. As many economists already have noted, raising the minimum wage is at best a scattershot approach to raising the income of poor families."

"the 1996 minimum-wage hike raised prices on a broad variety of goods and services. Food purchased outside of the home bore the largest share of the increased consumption costs, accounting for 21% with an average price increase of slightly less than of 2%;"

"Overall, the extra costs attributable to higher prices equaled 0.63% of the nondurable goods purchased by the poorest fifth of families and 0.52% of the goods purchased by the top fifth—with the percentage falling as the income level rose.

The higher prices, in other words, resembled a regressive value-added, or sales, tax,"

"My analysis concludes that more poor families were losers than winners from the 1996 hike in the minimum wage."