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  • How Not to Solve Poverty

    by Rebekah Hebbert

    And was Jerusalem built here Among those dark satanic mills? …
    I will not cease from mental fight, Nor shall my sword sleep in my hand, Till we have built Jerusalem In England’s green and pleasant land (“Jerusalem,” by William Blake).

    Last month marked the 100th anniversary of the most deadly industrial accident in America. Trapped in the burning Triangle Shirtwaist Factory, 146 people, mostly young immigrant women, died. They were victims not of fire, but of neglect, avarice, doors which were locked to prevent them from going home early or stealing needles, a foreman who ran away with the key. But the flames of the factory, the bodies falling to the ground as they leapt to their deaths from the eighth and tenth floors, changed something, changed many things. It became a never again moment, from which generations of labor reform laws have sprung.

    A century later, men and women are still fighting to shut down “those dark satanic mills,” as less than deadly industries such as call centres are now referred to by some activists. But, while paying respectful homage to many of these advocates and laws which have really done good, we are compelled to ask other, more difficult questions. Are we going too far? Can we really build Jerusalem (paradise) in our world? What are the unintended consequences of our actions? Is there a time when the warrior must look at a battle half won, and hang up his sword for fear that the collateral damage of finishing would be too high?

    When do laws stop helping, and start hurting?

    An interesting illustration of this may be seen in Canada, where the government of British Columbia is raising the minimum wage from $8 per hour to $10.25 per hour.

    “Raising the minimum wage and eliminating the training wage is a fair and reasonable step forward in putting families first and building our economy. This increase could mean more than $4,000 additional dollars annually for a full-time employee, providing more support to BC workers and the families who depend on them,” said Premier Christy Clark.

    Premier Clark’s goals are laudable. Who doesn’t want to put families first and make sure that full-time employees get a living wage to support their dependents? But whether her statement reflects the reality of life in the province, and whether raising the minimum wage will help those who need it most is open to question.

    Ms. Clark’s statement implies that people making minimum wage are likely to have families, and to be on low incomes. In reality, 80 percent of minimum wage workers do not live in low income households; rather, they are the children or spouses of higher-income earners. Only 1.6 percent of men over the age of 25 earn the minimum wage, with that number climbing to 3 percent for women. These numbers are likely to be even lower in BC, where in 2008 only 2.7 percent of the entire population was working for minimum wage, compared to the national average of 5.2 percent. The average hourly wage in BC is $23.16.

    These statistics suggest that an increase in the minimum wage is unlikely to directly benefit many “BC workers,” much less the “families who depend on them.”  The argument can and has been made that raising the minimum wage would indirectly affect workers in higher wage brackets by a “ripple effect” that forces their wages up. Even without the proposed boost, however, BC’s average hourly salary has increased $5.18 in the last ten years. In any case the ripple effect needs to be balanced against many other issues.

    For one thing, such a move would have a negative effect on some businesses, especially small businesses and those that tend to employ youth, by raising their payrolls, and this would potentially force them out of business. Also, if the additional costs are merely passed on to consumers, inflation would erode the “higher wage” of workers. One does not need to be an economist to understand that, while the government could set the minimum wage at any level they pleased, even $100 per hour, unless accompanied by a rise in productivity this would only cause inflation, until the workers were making the same amount of money, in real or inflation adjusted terms, as they were before (although an economist could explain it to you with some rather fascinating little graphs and formulas, if you like that sort of thing).

    Negative effects on businesses and consumer purchasing power aside, is there any other, perhaps more compelling, reason not to raise the minimum wage?

    A study released last year from the University of Waterloo surveyed changes in minimum wages in Canada, and arrived at the somewhat startling conclusion that a 10 percent increase in the minimum wage is associated with a 4 – 6 percent increase in families living below the low income cut-off line. In other words, all other things being equal, an increase in the minimum wage leads to an increase in the number of families living in poverty.

    Why does this happen if few minimum wage earners live in poverty anyway? It happens because young people are disproportionally likely to be contributing to the family income in low-income families (in many situations, they may be the parent(s) and primary breadwinners in a low-income family) and increasing the minimum wage can have a strong effect on teen employment. The Waterloo study found that an increase of 10 per cent in the minimum wage was associated with a 3 – 5 per cent rise in teen unemployment. It is quite intuitive really, the first people to lose their jobs when a wage increase is mandated are those who were most marginally employed in the first place. While it may be worthwhile to hire a teenager at eight dollars an hour, at over ten dollars an hour they can be a liability, rather than an asset.

    Can we really, then, justify a program that hurts businesses, increases the poverty rate, and robs young people of one of the most valuable assets they can acquire, work experience? Particularly, can we justify it in the name of helping families and workers?

    The law of unintended consequences is one of the most unforgiving in economics, and in real life. While raising the minimum wage sounds like an obviously helpful and “fair” plan, when other, potentially less harmful options exist to help lower-income families we must ask ourselves, what price this “Jerusalem?”  What price the “rights of workers,” if the children of single mothers slip further into poverty, while middle-class teenagers working at McDonald’s earn more pocket money?

    When do reformers stop helping, and start victimizing the very people they wanted to save?

    This article was originally published on MercatorNet.com under a Creative Commons Licence.

     

    The views expressed by the authors and editorial staff are not necessarily the views of
    Sophia Institute, Holy Spirit College, or the Thomas More College of Liberal Arts.

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    • Gail Finke

      This is a great piece. A law like that SOUNDS good but does nothing to help anyone and can cripple businesses. People tend to think (and are ENCOURAGED to think) that businesses in general cheat their employees by paying them as little as possible while raking in the big bucks they could have used in salaries. But for most businesses, wages and benefits make up most of the cost of doing business. If you raise minimum wage $2 for every full-time person, that’s $80 every week (in the US anyway). If that’s only three employees, that’s an extra $240 a week that must be earned in profit, not in sales. And that’s just in pay! You also have to pay their Social Security and other tax (again, in the US) and other benefit that are a percentage of salary, so the real amount is much higher. If you have not owned a business, you can’t imagine the leap of faith it takes to hire ONE new employee, understanding how much money you will have to earn to pay that one salary — and that if you don’t make it, you will have to fire that person. 

      • Pellis

        Really – isn’t it the government that benefits the most by way in increased tax revenue on the high wage?
        Supposing that a number of jobs are not lost due to the effects on small employers that is.

    • http://profile.yahoo.com/DSQYRUWPJEVUUZ5EFIGNCHJDNI Richard M.

      I wish I were younger!  I would move to British Colombia, where the average wage is $23.16!  No wonder all those Canadians on HGTV can afford $700,000.00 homes!

    • Adam_baum

      I think what is lost on many people, including sadly some clergy is that “minimum wages” are a perfect example of an economic alchemy that seems to have a perpetual life. For the economically illiterate, nothing else needs to be done, and there will be no adverse consequences to a state-mandated increased minimum wage, especially if each individual increase is small, so highly conspicuous dislocations don’t occur.

      Those who have some economic sophistication know that mandated increases wages means businesses will respond. They may not fire employees, but they can forgo future hiring, cut hours, use labor saving devices, reduce benefits, degrade service, insist on better work histories or more maturity or experience and a myriad of other things to respond to this invasion into their business practices all of which are largely unseen by the public as the politicians publicly congratulate themselves with banal slogans like “living wage” and “working families”.

      Worse, in some respects “minimum wages” are merely designed to eliminate competition from the young, inexperienced or unorganized, those who need work to prove they can be trusted with more responsibility, so all the rhetoric is just false advertising by craven politcians to buy voter loyalty from sophisticated special interests. 

    • Jo_the_housewife

      Spot on!  In case you don’t know, it is the Alinsky style community organizers who push for the higher “living wages”.  The first campaign was in Baltimore, and what did it do for the city?  The city has had corruption at many levels of government, more crime and poverty, and now because they’ve raised taxes so high to pay for the higher wages of city/county/state employees, people are moving out of Maryland to Virginia and other common sense states.  If your church is involved in Alinsky style community organizing (IAF, PICO, DART, Gamaliel, etc) then you are contributing to the problem.  Community Organizers also push for higher taxes for transportation that few use, healthcare for all when many don’t want it and there are many free clinics, and so many exemptions by FRIENDS of community organizers (UNIONS).  If you don’t know about this, please get informed.  If it isn’t already at your church, it is coming soon:  http://www.johntwo24-25.net

    • JP

      Very few people who have full time jobs in the US work at minimum wage. And for even full time workers, the additional mandated costs associated with labor add an additional $15,000-$20,000 per worker per year. In effect, the minimum wage is inflationary. Once you adjust for inflation, the worker’s pay hasn’t budged a bit. If one really wishes to know what has reduced the unskilled/low end wages it is inflation. If one looks at the purchasing power of Americans in 1913 and compare them today, he would find that the average purchasing power of Americans has gone down  96%. Only increases in technology, historic increases in industrial efficiencies, the addition of women into the work place, as well as federal entitlement programs have alleviated the problem – just barely.

      Besides the addition of the Federal Reserve Bank into our banking systems, it is also the multitude of Progressive ideas, laws, and programs that has diminished both the lower income levels and middle class income levels. And one of the most Progressive ideas is the Federal Minimum wage tax. For it is a tax -a tax on businesses. And from the Minimum Wage we get the Living Wage. All of these ideas are Progressive, which Catholic social activists tout as moral doctrines. In the end. economics wins out. Those Progressive Catholics who push for things like the Living Wage are no more than wolves in sheeps clothing.