Will a Higher Minimum Wage Help the Poor?

Minimum-wage workers in Seattle, Wash., will see their pay rise to $15 an hour over the next several years. Seattle’s lead in wage legislation appears to provide cover for President Obama’s drive to raise the national minimum wage to a baseline of $10 or more per hour. Proponents, primarily those on the political left, hail Seattle’s move as a boon for income equality and an opportunity to move people out of poverty. Critics, who tend to sit on the political right, raise the specter of increased unemployment, amplified capital flight from Seattle, and reduced incentives for the working poor to improve their circumstances.

But a close reading of the minimum wage debate allows us to dispel myths on both sides of the aisle. Perhaps more importantly, it allows us to see how the minimum wage fits into the larger challenge of moving people from poverty to prosperity.

The conservative concerns don’t survive even cursory scrutiny. Certainly the cost of minimum-wage labor in Seattle-area establishments will go up. But, if you pay attention during your next trip through the drive thru, you won’t see jobs that make sense at $9 per hour but that fail to stand up to $15. Similarly, many minimum wage jobs are location-dependent (think retail and restaurants), and it’s highly unlikely that these employers will leave the Emerald City in droves just to save on labor costs—the math just won’t add up. Finally, look at the tasks that fill the shifts of minimum-wage workers; even at $15 an hour, there are precious few people who love what they do. This hike will not dampen the drive for upward mobility.

What will happen to employment and economic growth in Seattle? I’d look for two changes to emerge over the long term. First, Seattle will lose business in the sense that some firms will respond by not moving in—especially those that aren’t tethered to the local economy. Burger joints and hotels are location-specific; call centers, fulfillment centers, and service operations aren’t. Unfortunately, those living in poverty have a more difficult time moving than those in higher socioeconomic groups. When jobs migrate, those at the base of the pyramid are least likely to follow. And, depending on how many businesses stand at bay, this may lead to an increase in Seattle’s low-wage unemployed.

But minimum wage jobs won’t disappear, they will simply grow more slowly; if it takes $90 more revenue per hour for a business to justify hiring another $9 per hour employee, then it takes $150 to justify another one at $15. While a higher minimum wage makes life easier for those currently employed, slower job growth makes life harder for poor people seeking employment. The pace of new jobs depends largely on trends in the broader economy.

Nevertheless, the victory shouts we hear from the left ring hollow as well. Given that the average CEO in the fast food industry makes almost $24 million per year, a raise from $9 to $15 hardly represents a crushing blow to income inequality. This may be one small step. Still the story about moving people out of poverty is the same: Given the high cost of living in Seattle and the proportion of part-time workers in the minimum-wage group, it’s tough to make the case that $15 per hour will get someone beyond subsistence.

The most glaring myth, however—one that obscures the underlying reality of moving people out of poverty—is the belief that creating higher-paying, low-skilled jobs is a viable escape route. The sobering reality of the 21st-century economy is that high wages aren’t what move people out of poverty, high skills do. Simply put, it takes more than money to move people from poverty to prosperity. In and of itself, raising the minimum wage does nothing to create opportunities for people to gain the skills they need to move into the middle class.

In this way, the minimum wage increase represents a red herring in the fight to end poverty in the United States. Focusing on wages commanded by the government distracts from how we can create skilled workers that command wages based on productivity and value. If we really want to move Americans out of poverty and keep them out, we need more than just money. Wages matter, but it turns out that they matter less than many other factors. Human capital creates financial capital, so does social capital by creating stronger, stable communities that invite investment.  As a complement, organizational capital creates promising small businesses and entrepreneurial ventures that are sources for better—and more—jobs over time.

If it takes more than money, what else do we need in the public and private mix to eliminate poverty in America’s increasingly sophisticated economy?

Read more stories by Paul Godfrey.