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Hardworking Americans should not live in poverty

Hardworking Americans should not live in poverty (credit: Michelle  Wan /Art Editor) Hardworking Americans should not live in poverty (credit: Michelle Wan /Art Editor)
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Giving America a raise is highly controversial these days. The current federal minimum wage is $7.25 per hour. Democrats wish to raise it to $10.10 by 2016. Republicans, true to recent form, are rejecting the proposal outright.

A wall of partisan noise has drowned out the economic facts underpinning this proposal. Let’s review them. The Congressional Budget Office (CBO) states that this hike in the minimum wage will boost earnings for about 24.5 million Americans over the next three years. Consequently, nearly one million Americans will escape poverty.

However, the hike will also cost another half a million Americans their jobs, according to the CBO. This statistic has Republicans incensed.

They argue that the government’s imposition of a higher minimum wage on the marketplace — essentially, a higher base price for labor — will increase the prices of goods and services. Consumers will then buy less. Consequently, businesses will have to fire low-wage workers in order to maintain their profit margins. Additionally, in some industries, the higher price of labor will incentivize businesses to automate those jobs, decreasing hiring.

Republicans propose, instead, the Earned Income Tax Credit (EITC). It incentivizes low-wage workers to seek work instead of welfare by giving them a taxpayer subsidy to lift them out of poverty. Unlike the federal minimum wage, however, the EITC does not use the muscle of the federal government to arm low-wage workers with bargaining power when they try to increase this wage.

Additionally, economists warn that for every 10 percent increase in the EITC, high-school educated workers lose 2 percent in wages, according to a report published by the Brookings Institution. This consequence occurs because the EITC encourages more Americans to work, thus keeping the cost of labor low. The EITC is a good first step, but should be implemented alongside an increase in the federal minimum wage, which would counteract the reduction in wages created by a higher EITC.

Democrats are buoyed by the prospect of lessening poverty and reducing income inequality. Common sense dictates that improving the lives of 24.5 million Americans — a million of them dramatically — far outweighs the predicted loss of half a million minimum-wage jobs.

In fact, Democrats respond in two ways to that prediction.

First, they argue that a predicted loss of 500,000 jobs is not certain. Twenty years of economic data, gleaned from comparing states that raised their minimum wages above the federal level to states that did not, suggest that business owners do not automatically respond to a higher minimum wage by laying off workers and not hiring new ones. Rather, they pay these higher minimum wages from the money they save from reduced labor turnover, higher productivity, and a slowdown in wage increases higher up the scale. As Secretary of Labor Thomas Perez explained to reporters at the White House, the American economy shall gain “the efficiencies of paying a fair wage.”

Second, Democrats argue that a higher minimum wage will boost demand across the economy. The more low-wage workers will earn, the more they will spend. Greater demand for goods and services will create more well-paying jobs. This effect is the Henry Ford effect. Ford doubled the daily wage of his workers to $5 so they could buy a Model T. In doing so, he sparked the rise of the American middle class. Democrats call on business owners to embrace this logic and join them in pushing for a higher minimum wage. Even if hiking the minimum wage sheds 500,000 jobs, unemployed Americans will quickly find higher-paying jobs.

A recent Pew Research Center poll found that 73 percent of Americans, including 53 percent of Republicans, supported raising the minimum wage from $7.25 to $10.10. Our social contract asserts that if we work hard, we should be able to put a roof over our heads, food on the table, and clothes on our backs. The current federal minimum wage translates to an annual income of $15,080. This income is a state of poverty, and no one who works a full-time job should live in a state of poverty. It is time America got a raise.