Different River

”You can never step in the same river twice.” –Heraclitus

January 1, 2006

The Minimum Wage Myth

Filed under: — Different River @ 4:13 pm

Lots of people think there are lots of people trying to live and support a family on the minimum wage. They take the federal minimum wage ($5.15/hour) multiply it by 40 hours per week and 52 weeks per year, and get $10,712 — well below the government defined “poverty line.” They are then appalled at the notion that there are millions of people trying to support a family on only $10,712 per year — after taxes, if they think about taxes.

But this is a myth. While there are lots of minimum-wage jobs, very few are held by people actually trying to support families. A very large percentage of minimum-wage are teenagers and college students from middle- and upper-class families. Stuart K. Hayashi points out:

Actually, minimum-wage-earners comprise only 3.0 percent of all workers paid by the hour in the United States and only 1.8 percent of American wage and salary earners.

According to a July 2004 study by Joseph Sabia and Richard Burkhauser, only 5.3 percent of U.S. minimum-wage-earners come from households that are below the official U.S. poverty line. Some 40 percent of U.S. minimum-wage-earners live in households where the total yearly income is at least triple the maximum amount of income a household can receive and still be classified as being below the poverty line. And 63 percent of those who earn the minimum wage are not the highest income-earner in their household.

(Hat tip: James R. Ament.)

So: 1.8% of workers earn the minimum wage, and 5.3% of those workers come from households below the poverty line. In other words, only 0.0954% of workers — that is, less than 1 in 1,000 workers — are minimum-wage workers from households below the poverty line. And no doubt not all of them are the highest-earning worker in the household. Some of them probably even have other jobs themselves.

Of course, this is not much consolation if you are that 1 in 1,000+ workers. It is probably also not much consolation that at that level, you have to pay taxes on that income. Not regular income tax, but Social Security and Medicare tax. One who works 40 hours a week, 52 weeks a year pays $1,638.74 in Social Security and Medicare tax. Half of that is through a direct payroll deduction, and half is the “employer share,” which is money the employer must pay as a cost of hiring the employee, but which the employee does not actually receive. Thus, the net wages of a full-time, minimum-wage worker, after taxes is only $9,073.06.

We could give a substantial benefit to minumum-wage workers — at no cost to their employers — by exempting workers at that income level from Social Security and Medicare tax. The cost to the Treasury and the Social Security and Medicare systems would be minimal, since there are so few of those workers.

However, liberals never seem to advocate a common-sense solution like that. In fact, when a Republican proposed exactly that a few years ago, Democrats derided it as “more tax cuts for the rich.”

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