A new take on the devastating effects of ‘political wage-setting’: the ‘minimum wage paradox’

There are some uncomfortable truths about raising the minimum wage from its current level of $7.25 per hour to $15 per hour that are revealed by an online tool created by our Center for the Study of Economic Mobility (CSEM) at Winston-Salem State University. The tool, which we call the Social Benefits Calculator, enables anyone to go online and experience for themselves what it is like to be receiving social benefits and experience a monthly wage increase. Designed for Forsyth County (North Carolina), the calculator shows that with more than a 100% rise in the minimum wage, many people who currently receive social benefits will barely experience a change in their standard of living.

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Let’s use the calculator and create a hypothetical example: a full-time working parent earning the minimum wage, who is unmarried with two children in subsidized day care. As seen in Table 1 (above, click to enlarge), after his or her wages more than double from $7.25 an hour to $15 an hour, earnings rise from $1,160 to $2,400, or a $1,240 change.

Sounds good, right? That’s an enormous bump up of wages by 107%. But after subtracting the decrease in benefits and higher taxes, that $1,240 increase erodes to just a $199 net improvement, or just a 16% change.
Imagine getting a big raise and seeing 84% of it go away. In comparison, millionaires and billionaires pay just 37% for the federal marginal tax rate on higher income. Through multiple scenarios using the CSEM calculator, I have found long ranges of income where work barely pays — what I call “disincentive deserts” in my published research. In some cases, individuals are actually worse off by accepting wage increases because of larger drop-offs in benefits, in what are called “benefits cliffs.”

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Notice another surprising consequence: dependency on social programs drops with higher wages. For the full-time employee making $7.25 an hour, social benefits make up 74.3% of the overall wage and social benefits package; at $15 an hour the share drops to 52.3%.

This is a finding that may irk both conservatives and liberals since the chief beneficiary of a $15 minimum wage is the government itself. If passed, the cost of providing social programs will fall (though I don’t expect taxes to fall anytime soon). But from the workers’ perspective, little has changed in their lives after a huge wage hike. Moreover, employers will see little return on investment from higher wages, such as greater retention, loyalty and productivity.

Source: A new take on the devastating effects of ‘political wage-setting’: the ‘minimum wage paradox’