How to Help the Poor without Slowing the Recovery

March 8, 2013

During President Obama's State of the Union address, he proposed to raise the minimum wage to $9.00 per hour. He claimed that this increase would help low-income households who have been hit particularly hard by stagnant wages and high unemployment. But raising the minimum wage is likely to hurt low-income households more than help, says Mark Adams, a research fellow at the Mercatus Center.

  • Raising the minimum wage is likely to hurt lower income households because when employers are required to pay higher wages to employees, they tend to hire fewer people, consolidate positions or choose more experienced workers who are worth the higher wage.
  • This means that low-skilled workers will have a harder time getting jobs and will lose out on the opportunity to receive on-the-job training.
  • More than half of all people earning minimum wage are under the age of 25, and only 46 percent of these are currently employed.

Regulation places a burden on lower-income families by imposing compliance costs. When regulatory costs are spread evenly across households, the poorest household will pay up to eight times more as a share of income than the wealthiest households. Most regulations serve the preferences of the wealthy and force low-income families to pay for public risk mitigation instead of private risk mitigation.

Since raising the minimum wage will hurt poor families, finding ways to reduce the costs of regulation will be the most effective way to increase the real incomes of the poor.

  • Regulators should perform cost-benefit analyses for every proposed regulation to determine how the proposed regulation may affect the poor.
  • Overlapping or counterproductive regulations should be eliminated; this will actually improve safety and leave low-income households with more resources.
  • Reducing regulation will have a positive impact on small businesses, which will further drive economic growth and hiring.

Source: Mark Adams, "Helping the Poor Without Hurting the Recovery," Mercatus Center, March 4, 2013.

 

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