Increasing minimum wage does not solve poverty
In the short term it seems like raising minimum wage is a great idea and an easy way to eliminate poverty. A closer look shows that minimum wage isn't the problem.
The poor aren't poor because they earn minimum wage. In fact, a full-time worker earning minimum wage lives well above the poverty level.
So, if minimum wage isn't causing poverty, what is? Poor decision-making skills and lack of discipline are partly to blame for long-term poverty, but short-term poverty is caused by unemployment.
Short-term poverty is caused by unemployment.
The causes of poverty are poor decision-making skills and unemployment. The chart below shows historical minimum wage levels (in 2013 dollars) superimposed on historical poverty levels. The source of poverty levels come from the US Census Bureau, the minimum wage comes from the Department of Labor and the conversion rates come from the Bureau of Labor Statistics
Notice how poverty levels fall drastically during the Dot Com Boom and then begin to increase during the Dot Com Bust and then again during the Financial Crisis of 2007. Even though minimum wage was increased during the years 2007, 2008 and 2009 the poverty levels continued to rise. No matter how much minimum wage is increased, it doesn't help the unemployed.
What really separates the rich from the poor? Discipline.
The wealthiest Americans have marketable assets like stocks, bonds and real estate as a result of disciplined investment. Stocks, bonds and real estate go up in value and produce more wealth while money goes down in value and is worth about 3% less each year.
Poor families are not forced to stay poor and the rich are not guaranteed to stay rich.
Many believe that poor families in America are the victims of wealthy families in America, but that is not the case. The wealthy have no power to keep the poor down or even keep themselves up.
Rich families are becoming poor just as quickly as poor families are becoming rich. Many believe that the elite have some trickery that enables them to exploit the poor forever, but that just isn't the case.
Henry Ford was among the wealthiest men in the history of the world. His heirs now control just 2% of his legacy and that is after only three generations.
Entering the realm of the middle-class (or even the wealthy) may seem like a daunting task for teenagers getting a start in the real world because most of them are broke and some experienced poverty while growing up. The good news is that climbing out of poverty is easier than you think.
Climbing out of poverty is easier than you think.
Many people believe that wealth below the 20th percentile--often referred to as the "bottom quintile"--constitutes poverty, but how much net worth does an American need to climb above the 20th percentile? The answer, surprisingly enough is whopping seven dollars.
As unbelievable as it sounds, a net worth of seven dollars is all it takes to enter the middle class in America. In fact, a net worth of zero dollars puts an American in the 18th percentile!
Increased minimum wage comes at the expense of the poorest.
A myopic view of increased minimum wage sees just the larger check for a small minority of Americans on payday. That would certainly make it seem like employees have more buying power, but employees who lose their jobs (or are never hired) have significantly less buying power because they are unemployed. Higher minimum wage results in larger paychecks, but only for the employed.
Higher minimum wage results in larger paychecks, but only for the employed.
According to the US Census Bureau's 2011-2012 data, 32.9 percent of unemployed adults live below poverty levels. That rate is reduce to 2.8 percent for adults who are employed full time. The poverty rate for unemployed adults us up from 21.5 percent in 2007 (table 698 from this document) and minimum wage was increased three times in the five years between 2007 and 2012.
According to Michael Saltsman of Forbes Magazine, Census Bureau data shows that, "roughly 60 percent of people living in poverty don’t currently work, and thus can’t benefit from a raise. Of those who do work and would be covered by the President’s $9 proposal, Census Bureau data show that the majority live in families far above the poverty line."
Lessons from the last catastrophe are being ignored.
The Affordable Care Act (A.K.A. Obamacare) forced employers to reduce hours for millions of full-time employees and lay off millions more in order to avoid bankruptcy. These businesses were very vocal about the consequences of this legislation and predicted with great accuracy what would happen if the law were allowed to pass.
When the predictions came true a biased media cast the blame for lost jobs and reduced hours on the employers. Obama's legislation is the direct cause of countless Americans being unemployed and uninsured, but nobody seems to take notice.
The catastrophic consequences of Obamacare do not effect only the private sector. Government employees have also had their hours reduced and even lost their jobs as a result Obama's Affordable Care Act.
Now the same predictions are being made and falling on the same deaf ears. According to the non-partisan Congressional Budget Office, raising minimum wage would kill 500,000 jobs. Businesses that rely on low-wage employees for non-skilled labor will be forced to reduce their workforce through layoffs and attrition.
Increased costs from increased minimum wage hurt the poor the most.
Additionally, the costs of goods and services that everybody uses will increase. Economists agree that employers will raise prices to compensate for additional costs and that means that some of the additional buying power will be lost on higher prices.
According to the liberal website americanprogress.org, "Businesses can easily absorb a higher minimum wage—with a small price increase or a small reduction in already very high profits, for example." This assumes that businesses have "already very high profits" which is a terrible assumption when one considers that only half of new employers last longer than five years.
When gasoline prices increased in America, businesses were forced to increase their prices to compensate for the increased expense. It makes perfect sense to everybody when a hamburger restaurant increases its prices to compensate for more expensive beef, potatoes and dairy products, but many would have us believe that the same restaurant will not raise prices to compensate for more expensive labor.
Prices will go up by dollars, not cents.
Many proponents of an increased minimum wage point to Australia's AU$16.35 (almost US$15) as an exemplar of financial utopia powered by a large minimum wage. That additional income doesn't reflect as much additional buying power as it seems.
There has been a lot of speculation about the effects of increasing minimum wage, but there is no consensus. What we do know is that the cost of living in Australia is much higher than it is in America. Rent in Australia is 60% higher. Minimum wage in Australia is double what it is in the United States, but real estate in Australia costs more than triple.
Australians make a little more on average than Americans, but the cost of living is much higher. Purchasing power in Australia is 21% lower than in America.
Education is the real solution for poverty.
Understanding that debt is a large part of poverty is key to eliminating poverty. The importance of paying for consumer durables with cash instead of credit is lost on today's youth. Debt mounts as a result of poor decision-making.
Our schools can teach our children the importance of saving money in order to buy a car with cash. A teenager who decides to buy a car with cash sees his net worth remain level, but a teenager that buys a new car with a loan has his net worth reduced immediately and then again every month when interest on his loan is accrued.
While a high-interest car loan may be for the cost of the car, it might cost triple the cost of the car to pay off the loan on schedule. In effect, the teenager has payed the price for three cars and received only one. Simple lessons like this one can be learned at home easily enough. By itself, the decision to purchase a car with savings instead of a loan can mean the difference between poverty and middle class.
Without education, increased discretionary income is still wasted.
For most minimum-wage workers, any new discretionary income will be spent on impractical luxury goods, increased rent and unnecessary services. Without understanding the importance of investing, the additional discretionary income will be spent just as quickly as before.
Spending some discretionary income on marketable assets can lift a family into the middle class after just a single paycheck. Investing discretionary income builds a ladder out of poverty.
Diplomas do more to prevent poverty than increased minimum wage.
It doesn't take a lot of education to know that income has a high correlation with educational levels. In 2007, the median earnings of household headed by individuals with less than a 9th grade education was $20,805 while households headed by high school graduates earned $40,456, households headed by holders of bachelor’s degree earned $77,605, and families headed by individuals with professional degrees earned $100,000.
The message to kids is clear. Stay in school if you do not want to be poor.
Investing discretionary income builds a ladder out of poverty.
Buying stocks, bonds and real estate are within the reach of the poor--closer even than an unnecessarily-flashy car. Cutting off the cable TV and quitting a pack-a-day smoking habit can leave as much as $3,400 to be invested in stocks, bonds and real estate. While watching TV may not be as fun as reading a library book, most agree that reading is more educational (and that smoking is gross).
Waiting to start a family can be a smart move.
Recent studies indicate that MTV's "16 and Pregnant" TV show prevented 20,000 unplanned pregnancies among teenagers. MTV's teen-angst drama was unintentionally educational and prevented countless teenagers from becoming unwed mothers doomed to live in poverty.
This simple success principle may be an uncomfortable topic for many parents, but ignoring the problem will not make it go away. Sarah Palin did not see the importance of talking to her children about this subject. She was an outspoken opponent of sexual education in the home and at school and her 17-year-old daughter Bristol made her a grandmother with an unplanned, out-of-wedlock pregnancy. Bristol is now a public speaker on the topic of pregnancy prevention.
Sarah did not learn a lesson and her 22-year-old son Track blessed her with another grandchild through another unplanned, out-of-wedlock pregnancy. He married is girlfriend, but the marriage lasted just three months.
According to Rand Paul, "Married with kids versus unmarried with kids is the difference between living in poverty and not." The 2012 U.S. Census Bureau backs his claim, showing that 30.9 percent of families led by a single mother were living in poverty in 2012, compared to 6.3 percent of families led by a married couple and 16.4 percent of families led by a single father.
We need to be telling kids 'don't have kids until you're married,'" Paul said. "It's your best chance to get in the middle class is not to have kids. There's all kinds of ways, and we can debate ... but there are all kinds of ways to stop having kids.
The poor need jobs and more advice, not more money.
Except for exclusive areas like Manhattan island and the San Francisco peninsula, the current national minimum wage provides enough money to survive comfortably and leaves enough left over for investment. In those exclusive areas a local minimum wage makes life just as affordable.
The path out of poverty is paved with sound advice, not an unreasonably high minimum wage. Frugality, discipline and investment are the rungs on the ladder to success.
Ronald Reagan leaves us with the last word on the subject.
