Economics 101 & Public Square

Can the Minimum Wage Close the Opportunity Gap?

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In his State of the Union Address, President Obama spoke about using an executive order to increase the minimum wage from $7.25 per hour to $10.10 per hour for federal contractors. This is in an effort to close what he calls the “opportunity gap” for lower-skilled laborers.

This executive order begs the larger question:  Would a minimum wage applied to all industries be the great equalizer? Can it increase opportunities for the poor?

In other words, can this policy speed up the path to prosperity?

Caring for the Poor

I am in agreement with President Obama that a society characterized by a high degree of flourishing is one that is rich with opportunities. These types of societies enable all people, not just the rich and well-connected, to use their creativity to serve the common good.

This is not only a mere intellectual point of agreement we share. It’s biblical. We have a biblical mandate to care for the poor and enable them to be creative, to realize their God-given purpose, and to use that purpose in their own unique way to contribute to the greater good of humanity.

Societies that hamstring the poor do so at a great cost. It is a cost not just borne by the poor themselves, but carried by the rest of the world because we are deprived of their creativity, of their gifts. The net result is to stifle flourishing and upward mobility.

Can the Minimum Wage Help?

The minimum wage increase to $10.10 is being proposed as a means to the end of generating more opportunities for the least advantaged among us.  As Christians, we must discern whether this is an effective means to our stated end.

It is clear that minimum wage proponents want to better the living conditions and quality of life for the poor. But in considering this step, we need to ask some key questions:

  • If it does work, by how much more should we increase the minimum wage?
  • What are the costs?

To answer these questions, let’s think about a hypothetical, yet plausible, scenario.

Should We Increase the Minimum Wage?

Suppose we have a family of two parents who support two children living in the home. Both parents earn the current minimum wage of $7.25 per hour. Working 50 weeks at 35 hours per week, they would earn around $22,000 per year, after taxes but without any federal benefits or subsidies.

If that same family works the same amount of hours under the newly-proposed minimum wage, they would earn a little over $30,000 per year. This puts them above the federally-designated poverty line, but $30,000 for a family of four still brings difficult tradeoffs for that family to meet their needs.

If this is an effective policy, why wouldn’t we raise the minimum wage to even higher levels? Why not pay $25 per hour? Based on this analysis, we could predict that all minimum wage recipients would be much better off.

Hurting Those We’re Trying to Help

But without looking at the long-term, often unintended consequences we won’t see the full picture. If we force employers to pay a wage rate above the value employees bring to their company, employers will be forced to cut employees and raise prices.

  • Raising the costs of employing workers means that firms often have to raise their prices to cover the difference. The increased price of goods and services disproportionately harms the poor because they don’t have the excess disposable income to absorb the rising costs of buying things they need.

So the very good intentions behind the minimum wage policies often harm the very people we are trying to help. Instead of closing the opportunity gap, we widen it by cutting off opportunities for the poorest among us.

What Can We Do?

To close the opportunity gap we should increase the ability of business owners, whether they are small or large, to help those around them. God calls us to help the poor by coming into community with them and forming relationships. In IFWE’s upcoming book, For the Least of These: A Biblical Answer to Poverty, Dato Dr. Kim Tan writes about investors and entrepreneurs coming together in communal networks to address poverty.

There is also a role for the church to play in helping the poor along the path to prosperity. In his chapter for our book, Dr.  Mark Isaac outlines how the church and the market can work together to alleviate poverty. Following the model of the early church laid out in Acts, people in the church can come together to help the poor in their midst overcome the opportunity gap.

If we want to care for the poor, and enable them to use their gifts to serve others, we must empower the people who stand ready and willing to employ them and not hamper those efforts. Only then are the poor able to get on that ladder of economic progress and escape the trappings of poverty.

What do you think? Should we raise the minimum wage? Leave your comments here

For the Least of These: A Biblical Answer to Poverty, will be available in early 2014. Poverty-book

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