Mom and the Banker: The Minimum Wage Gap
Imagine for a moment a mom with two children living in a one-bedroom apartment just outside of Raleigh. She’s watching the State of the Union address as the President proposes an increase in the minimum wage to $9.00 per hour. She’s working sixty hours a week at two jobs for the minimum wage of $7.25. Neither job offers health insurance. Fortunately, her jobs are only a few miles away from the apartment; so commuting expenses aren’t too bad. Relatives look after her kids. She’s eligible for food stamps (SNAP) and Medicaid.
In my fantasy, an investment banker knocks on the door after the speech to explain to the mom all the usual free market arguments against increasing the minimum wage. When he finds out that she’s getting food stamps, Medicaid, and receives an earned income tax credit, he becomes even more incredulous about the President’s proposal. She tells him she’s in deep financial trouble, despite the benefits, and doesn’t have any money if the car breaks down or there’s some other unexpected expense. The banker just doesn’t believe her, and says a quick analysis of her Sources and Uses (banker talk for income and expenditures) will show that she’s just mismanaging the situation.
She hands the banker a shoebox filled with payroll stubs and receipts. He whips out his laptop and goes to work.[i] About the time the alarm goes off at 4:30 am so the mother can go to her first job, the bleary-eyed banker comes to the conclusion that at $7.25 per hour wage, this family runs a big monthly deficit. He also realizes that the situation would even be worse if the mom didn’t own her used 1997 Toyota, or if she had to trek across Wake County to her job. He’s pretty sure that there are a bunch of expenses missing from the shoebox, so that the true picture is even worse. Table 1 summarizes his results, and the $465 per month deficit facing the family.
Income and Expenses for a Family of Three on $7.25 per hour
Even though the President’s proposal probably won’t be enacted any time soon, and wouldn’t be put into full effect if it did, he decides to rerun the numbers on a $9.00 per hour minimum wage. Surely a 24% increase in the mom’s wages would change the situation dramatically. As Table 2 shows, it certainly would help, but there’s still a monthly gap, and the family still needs SNAP and Medicaid to get by. Moreover, the improvement in her wages is offset somewhat because the federal Earned Income Tax Credit drops from $4,249 to $3,144.
Income and Expenses for a Family of Three on $9.00 per hour
In my fantasy world, the banker would go off to Washington and New York to convince the politicians and his colleagues to support an increase in the minimum wage. In the real world, he will never understand the plight of the working poor. He probably watched the State of the Union with his friends on the Upper East Side of Manhattan, and lambasted the President for his socialist proposal. Then he had another thought. If the minimum wage were to increase, Washington and Raleigh could cut Medicaid and food stamp benefits, because $9.00 per hour must be a living wage.
There’s something terribly wrong with an economy that puts a hardworking mother or father of two into a deep deficit every month. The free market is a beautiful concept, but it produces financial excesses for the wealthy, and financial calamity for the poor. Worst of all, it produces a society where too many of the wealthy have no understanding of the plight of the poor.
[i] To get a quick sense of the daunting crisis facing this family of three, I consulted the withholding, payroll, and earned income credit tax tables for the US and North Carolina. I also gathered some crude and readily available data on monthly expenses for certain key household expenses from various websites. I also “applied” for SNAP (food stamps) and Medicaid through the North Carolina Department of Health and Human Services. It looks like my family of three is eligible for both.