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Obama's Minimum Wage Call Sparks Familiar Debate in Challenging Economic Time

Oft-cited research by Alan Krueger and David Card studied employment changes following minimum wage increases and found no evidence that they caused a fall in employment when compared to areas that did not see increases.

The White House cites approvingly another study by Arindrajit Dube, William Lester, and Michael Reich that compared adjacent counties that touch a state border where there is a difference in the mandated minimum wage in each state. Their research also found no negative effect on employment.

Many economists have suggested alternatives to the minimum wage. Milton Friedman supported the idea of a government-guaranteed level of income in the form of a negative income tax in which people earning below a certain amount receive supplemental pay from the government instead of paying taxes.

Others propose increasing the Earned Income Tax Credit (EITC), a government program that provides a payment to workers in low-income households. When the credit exceeds the amount of tax owed, it results in a tax refund to those who qualify. Advocates of this option claim that the EITC encourages people to work over welfare and does not create any disincentives for employers to hire.

One of the major drawbacks of expanding any tax credit programs, particularly at a time when politicians are under pressure not to spend, is that it would increase the federal budget deficit. Nonetheless, many economists believe that raising the living standards through policies like the EITC provides a more effective way of helping the poor without discouraging them to work.

The Obama administration has implemented in the past several tax policies it said would help achieve its goal of helping the middle class.

The administration included the Making Work Pay tax credit in the 2009 stimulus package, which provided a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers. But Congress chose not to renew it in 2011. In 2010, the Obama administration introduced a payroll tax cut that cut employees’ share of Social Security payroll taxes by two percentage points in 2011 and 2012 – which Republicans, and some Democrats, refused to extend into 2013.

The government also expanded a variety of refundable tax credits for low-income workers – notably the Earned Income Tax Credit and the Child Tax Credit – in the stimulus package, and those were extended for another five years as part of the “fiscal cliff” deal.

Obama, who sounds a frequent refrain about helping the middle class, said in his address that for more than a decade wages and incomes have not moved while corporate profits have soared to all-time highs. While in his speech the president urged both Democrats and Republicans to “set party interest aside,” the White House seems intent on pressing Republicans to pursue the administration’s economic agenda.

“If the GOP is opposed to raising the minimum wage, what is their plan to ensure people who work full time don't live in poverty?” said Dan Pfeiffer, a senior White House adviser, in a tweet last Wednesday.

Most recent increases in the minimum wage occurred when the economy was expanding, and therefore Republicans did not push back as much. This time, in the midst of a weak economic recovery, the administration will likely have a hard time convincing Congress to raise the minimum wage.

House Majority Leader John Boehner (R-Ohio) signaled in his comments to reporters last Wednesday that Obama’s proposal would have a small chance of passing the House.

"When you raise the price of employment, guess what happens? You get less of it. At a time when Americans are still asking the question, 'where are the jobs?' why would we want to make it harder for small employers to hire people?" Boehner said.