Commentary: Is Two-Tiered Minimum Wage The Elixir for Poverty?

Aaron Johnson

Monday, May 13th, 2013

During Obama’s State of the Union, he brought up raising the minimum wage from $7.25 to $9.00 an hour.  If Congress passes this piece of legislation, then all employers cannot pay any worker below $9 an hour.  This issue will certainly face stiff opposition in Congress, who are concerned about burdening employers in an already difficult economic environment.  However, poverty and income inequality remain troubling concerns that need to be addressed.  Then there’s the troubling age unemployment gap where the teenage unemployment where it is at 23.7%, compared to adult men of 7.7% and adult women at 7.6% as of February 2012. Is it not possible to find common ground by offering a two-tiered minimum wage that could be a more effective tool in addressing poverty, while providing teenagers with more opportunities to increase their workforce skills.

First, it should be noted that the minimum wage has been a hotly debated topic among economists.

Proponents believe that a higher minimum wage will help lift the working poor out of poverty.  It is certainly difficult to raise a family on $7.25 an hour.  If a low wage worker can maintain the same number of hours, then obviously earning an extra $1.75 an hour will be very helpful.  This extra income can be beneficial to relatively low income communities, such as Albany, which could see more economic activity as more dollars circulate throughout the community.

However, there are also critics, who believe that raising the minimum wage will increase labor costs and lead to more unemployment.   Even though that makes intuitive sense, empirical data has not proven that raising the minimum wage significantly decreases unemployment.  On the other hand, unemployment rates are deceptive in that they do not distinguish between full-time and part-time workers.  Therefore, an individual could still be worse off if a higher minimum wage means results in significant hours being cut.  For instance, a worker making $6 an hour and working 40 hours a week ($240 weekly wage) is better off than making $10 an hour, but seeing their hours cut to 20 hours ($200 weekly wage).  Also, losing full-time work status could mean losing additional benefits.

So which side is right?  That’s debatable, but innovate policy prescriptions could end up satisfying both sides.  Most economists believe that current minimum wage legislation is poorly targeted.  Rather than addressing the issue of households not receiving enough income to get out of poverty, it mostly impacts middle class teenagers, who find their services underutilized by firms opting to go with more experienced workers.  This wage inflexibility has hurt our youth significantly.

When looking at the sustainability of the US economy, we need to find ways for our youth to work.  They learn at an early age about dependability and the value of working consistently.  It also enables them to develop their skill sets and attain real world experiences that can help shape their future career possibilities.  When they cannot find work, that can lead to less than desirable employment outcomes in the future.

In order to solve this problem, why not go with a two-tiered minimum wage where the minimum wage is $6 an hour for workers between 16 and 19 years old and allow the minimum wage to jump to $10 an hour for workers 20 years or older.   This would serve two purposes.  First, it will make teenagers more marketable, so that they can gain valuable work experience.  Lastly, it incentivize youth to seek more education through either college or trade school more worthwhile because working full time will not be as satisfying.

There is precedence for paying workers different compensation for doing the same work.  Think about teachers where first-year teachers make far less than tenured veterans.  It is not like the responsibilities of a veteran teacher is that much different from a first-year teacher.  They both need to develop similar curriculum plans, conduct classroom activities, and perform departmental functions.  Teaching our youth about delayed gratification and “paying your dues” is an important lesson to learn.

There are downsides to this strategy in that higher adult minimum wage will be more burdensome to small businesses.  While large chains, such as McDonald’s and Burger King, can rely on significant economies of scale and technology investments within their business model to absorb higher labor costs, less resourced small businesses will find it difficult to adjust to shrinking profit margins brought by more expensive low skilled workers.  In particular, home health care would be a vulnerable industry where the average hourly wage for personal care aides is at $8.07.  Additionally, a 19-year old teenager, who is about to turn 20 years will be particularly vulnerable when his wage jumps by $4 an hour.  Suppose he needs to raise a family.  This jump in wages will make him vulnerable and replaceable.

Certainly, the two-tiered minimum wage has its faults, but its potential to alleviate poverty and increase teenage worker productivity are worthy, enticing pursuits.

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About Aaron Johnson

Aaron Johnson is the assistant professor of economics at Darton College in Albany. In addition to his teaching duties at Darton College, he is also a board member for the Albany-Dougherty Economic Development Commission and the Albany Dougherty Planning Commission.