Anyone that knows me will tell you I love to learn. Now that I’m done with college, I’ve found I actually miss lectures and have been looking for ways to fill my “learning void.”
Enter The Teaching Company, my latest obsession. Since reading a recent glowing review by Bill Gates, I have been listening to a Teaching Company lecture series by Prof. Robert Whaples titled “Modern Economic Issues.” In the past 18 lectures, Prof. Whaples has walked through the economic advantages and disadvantages behind many of the major political issues today: unemployment, trade imbalances, budget deficits, social security, health reform, pollution, and poverty. I listen to these 30 minute lectures every day – one on my way to work, and another on my way home – and have been very impressed so far.
Today we discussed the reasons behind the minimum wage, and how it affects the US economy. As someone interested in poverty reform, I have often thought of the minimum wage as an effective tool to provide more workers with a “living wage.” That is, by increasing the minimum wage more workers will be able to earn an income above the poverty line. However, it seems my inclination may have been short-sighted.
The two major arguments in favor of increasing minimum wages are that it 1) increases the take home pay and standard of living for the poorest workers and 2) does so while encouraging employees to work hard at their jobs (an argument often used against traditional welfare programs). Arguments against minimum wage laws cite a subsequent reduction in the number of available low-income jobs and lower profit margins for small businesses. The logic goes that if businesses have to pay higher wages, they’ll either hire fewer workers or increase prices for end consumers to offset their higher labor costs.
Which group is right? Are minimum wage laws an effective way to reduce US poverty?
Economists are basically split 50/50 on the issue. Research conducted by Whaples in 2006 (also discussed in his audio lecture) found that while 37.7% of members of the American Economic Association supported an increase in the minimum wage, 46.8% were in favor of its elimination. Other research, most notably the work of Card and Krueger in 1992, have found increases in the minimum wage has little to no negative labor effect on workers (while obviously increasing employee incomes); in other words, business owners don’t hire fewer workers. Yet this research has come under much scrutiny recent years, and the debate continues to rage on.
The most damaging evidence I’ve found against raising the minimum wage is the fact that an increase in minimum wages only affects a small minority of poor families. Looking at Census data from 1996, researchers have found that poor families constitute only 20.9% of the minimum wage workforce, and only 11.7% of minimum wage workers are the only breadwinners in their families. In fact, a 2007 analysis by the Congressional Budget Office (CBO) found that raising the minimum wage from $5.15 to $7.25 (the current national minimum) would provide an additional $1.6 billion in wages to workers, but only 15% of those workers would be from poor families.
In short, current evidence indicates that:
- It’s unclear whether increasing minimum wages are overall beneficial or harmful for the economy, and
- Raising the minimum wage, if anything, benefits a majority of workers who are NOT poor.
Given this background, I don’t feel comfortable speaking to whether raising the minimum wage is overall good or bad economic policy. However, it does seem clear to me – particularly because of point #2 above – that minimum wage laws are probably not the best way to provide assistance to poor people.
Is there a better way to provide higher incomes to poor families? Yes. How? The Earned Income Tax Credit (EITC).
Originally enacted in 1975, the EITC is a refundable income tax credit designed to encourage low-income workers while offsetting the burden of US payroll taxes. Based on the number of dependent children in the family, claimants receive a several thousand dollar additional tax refund each year. And because this is a tax credit, as opposed to a deduction, claimants don’t have to itemize their deductions (a task not often done by individuals below the poverty line) and can receive a credit regardless of their income.
The EITC is a huge program, providing almost 21 million American families with over $36 billion in refunds in 2004. While there are certainly complaints about the program, most notably that it requires a large amount of taxpayer funding, it’s much more effective in targeting poor families than any minimum wage law (remember, only about 20% of minimum wage earners are from families below the poverty line). And while tax dollars are required, that same amount would likely have been hidden in increased costs of goods sold by business trying to maximize profits and offset rising labor costs. Those cost increases would ultimately be paid by consumers.
Other solutions to provide higher incomes to poor families are available and currently being pursued by the US today. However, few economists doubt the ability of the EITC to directly and efficiently provide poor Americans with income assistance, much more so than an increase to the minimum wage.
To answer the question of this post, is increasing the US minimum wage a good thing? Maybe. And then again, maybe not. What is clear is that it is not the most effective way to increase the incomes of poor Americans.
I’ve recently started volunteering with ACCION USA, the largest microfinance institutition (MFI) in the US. While the main ACCION offices are in New York and Boston, so far I have been able to virtually contribute to two consulting projects: researching green loan products and student-run microfinance organizations in the US.
Before I go on any further, I should probably quickly define microfinance and microenterprise (I’ll be sure to expound upon these terms in a separate post later). Microfinance, as defined by Wikipedia, refers “to the provision of financial services to low-income clients, including consumers and the self-employed.” These services can take many forms, including credit, savings, and insurance; microcredit — the concept of giving small loans to low-income entrepreneurs — has arguably received the most press and is oftentimes confused with the broader “microfinance.” However, most microfinance professionals will be quick to point out that microcredit alone is not enough to help clients without also providing a way to save money and (somewhat less importantly) insurance for those assets purchase with loaned funds.
A microenterprise, again using the all-knowing Wikipedia, is “a type of small business that is often unregistered and run by a poor individual.” The vast majority of microenterprises have no employees, and by definition (according to USAID) have less than ten. The initial capital required to start a microenterprise is also generally small, up to $35,000.
As mentioned in the About section, I’m currently in the process of starting a nonprofit focused in the student-led microfinance/microenterprise sector. In the past several years, particularly since Muhammad Yunus won the Nobel Prize in 2006, US interest in microfinance has sky-rocketed. This trend has not been lost on college campuses, and microfinance interst organizations — and now actual loan funds — have sprung up around the country. In fact, nearly every major university I’ve run across generally a “Microfinance Club,” or similar entity. While it’s unclear what the majority of those clubs actually do, at minimum we can say there is interest.
My research with ACCION has led me to focus on those organizations interested in promoted domestic microfinance. While microfinance originally had it’s start in the 1970s with Dr. Yunus’s work in Bangladesh, it was slow coming to the US; it wasn’t until the 1990s that ACCION first established its presence domestically. To be sure, a number of nonprofit and government small business or microenterprise development organizations have existed for decades, providing mentoring and training for business owners. However, not until recently has the focus been on early-stage low-income entrepreneurs just starting their businesses, and providing them with loan funds.
Like the US as a whole, college campuses have also been slow to embrace domestic — as opposed to international — microfinance. While literally hundreds of student groups exist to combat global poverty through microfinance, a select few focus on their own backyards. Research conducted by FIELD (a program of the Aspen Insitute) and myself have yielded the following list of student organizations seeking to employ microfinance domestically:
- Bentley Microcredit Initiative, Bentley College
- BR Microcapital, Cornell University
- Cambridge Microfinance Initiative, Harvard University
- Capital Good Fund, Brown University
- Center for Holistic Microcredit Initiatives (CHOMI), Stetson University
- Community Empowerment Fund (CEF), University of North Carolina
- Duke Microfinance Leadership Initiative, Duke University
- Intersect Fund, Rutgers University
- Lehigh Microfinance Club, Lehigh University
- Loyola Microfinance, Loyola University
- Microfinance Alliance, University of Minnesota
- Penn Microfinance Club (Penn MC), University of Pennsylvania
- Streetbank, Georgetown University
All of the organizations above are led exclusively by undergraduate and graduate students, and are in various stages of either raising loan funds, partnering with existing domestic MFIs, or lending capital to clients. I have already started interviewing students leaders at several of the clubs, and will summarize my findings and their organizations’ progress in future posts.
Student-run organizations are extremely beneficial to the US microfinance community for a number of reasons. First, they’re extremely low cost; with no staff salaries to pay and most facilities and supplies provided by the university, student organizations are viable candidates for finance sustainability. Second, the ability and capacity of top university students to deliver quality training is high. By leveraging both their own skills and education, as well as the resources of the university, students can mobilize a large training effort. And third, the ability of student orgs to engage the community (both university and local) and develop future leaders passionate about domestic poverty is great. A number of groups have won grants or business plan competitions to raise initial seed funding, and nearly every organization has a significant base of student volunteers eager to participate.
The drawbacks to student-run microfinance oganizations are 1) their potential for scale and 2) their capacity to manage loan funds and make underwriting decisions. In terms of scale, all students by definition have major commitments to the university (class, other clubs, etc) that take up a large chunk of time and energy. Additionally, students are constantly transitioning into and out of the organization every few years. These two factors produce a leadership team and volunteer pool that is short-term and strapped for time, making it impossible to determine how large these organizations could scale; most are engaging with only a dozen or so clients annually. As for the loan funds, most (if not all) students are new to loan underwriting and organizations have been forced to experiment to determine appropriate loan criteria. The several year loan terms of several clients also makes the management of loaned funds an increased difficulty, given the short-term nature of the student body described above.
In short, students are perfectly positioned to leverage resources and provide technical and business training to potential entrepreneurs, but it is not clear whether most students organizations should also be in the business of providing actual financial services. I have several thoughts on potential hybrid solutions that may work, but that’s for another post. Suffice it to say that the current atmosphere on college campuses concerning microfinance is an exciting one, and we will almost defintely see an increase in similar organizations in the coming terms.