The Gap Inc. (GPS) put a new twist on the minimum wage debate this week, announcing plans to pay its roughly 65,000 workers at least $10 per hour starting next year.
"This happens all the time -- lots of people earn more than the minimum wage," say Edward Conard, a former managing director at Bain Capital and author of Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong. "You saw that in 2007 when the labor market heated up. Places like McDonalds...were paying more than the minimum wage in order to lure workers. I think we could see that and companies that pay minimum wage experiment with higher paid workforces."
While that's good news for American workers, Conard says raising the minimum wage will not help those at the lowest end of the spectrum.
"It's difficult for people in the workforce struggling to add a certain amount of value," he says. "Many have a difficult time creating $7.25 of value the customer is going to pay for. The workers that get left behind have a harder time earning $10 [and] creating $10 of value the customers want to buy."
Related: Raising the minimum wage is bad policy: Douglas Holtz-Eakin
These workers, Conard says, make up the bulk of the 500,000 to 1 million workers the CBO this week said would lose jobs if President Obama's plan to raise the federal minimum wage to $10.10 becomes law. Indeed, the CBO found “just 19% of the $31 billion [of income transferred] would accrue to families with earnings below the poverty threshold,” while “29% would accrue to families earning more than three times the poverty threshold.”
Conard, currently a visiting scholar at American Enterprise Institute, says raising the minimum wage may be good politics, but a much better policy is to focus on the Earned Income Tax Credit (ETIC).
Again, he refers to the CBO which found “the cost to employers of the change in the minimum wage was much larger than the cost to the federal government of the change in the EITC.” In pure dollar terms, the CBO found that it cost the government and employers almost $7 to transfer $1 of income to families living in poverty vs. just $1.70 via the EITC.
For economic reasons, the EITC is a "much more logical" way to address the challenges of the working poor vs. raising the minimum wage, Conard says, because it "targets that group and subsidizes work for that group."
Of course, logic and rationality have no place in our national political discourse so look for more partisan bickering over the minmum wage and little (if any) discussion of the EITC.