Minimum Wages and Poverty: Will the Obama Proposal Help the Working Poor?
Attempts to raise the minimum wage often focus on the purported poverty-alleviating results of these policies. Economic research, however, has found little connection between changes in poverty and increases in the minimum wage. This is likely a result of the fact that the majority of individuals who are earning the minimum wage no longer live in poor households. In addition, the job-killing effects attributed to increases in the minimum wage rate force vulnerable individuals out of the labor force and into poverty, thereby limiting the societal benefit. This study evaluates the effect of state-level minimum wage increases between 2003 and 2007 and finds no effect on poverty rates. It also estimates the expected reductions in poverty from Senator Barack Obama’s proposed increase in the minimum wage to $9.50 an hour.
Economists have long studied the effect of increases in the minimum wage on poverty. These studies are nearly unanimous in their finding that raising the wage floor has no effect on poverty rates. This effect is true both for increases at the state and Federal levels. Perhaps importantly for social policy, there is no decrease in poverty found among families with children—a primary goal of policymakers who support increases in the wage floor. Drs. Sabia and Burkhauser expand on previous authors’ work examining the effect on poverty of state-level increases in the minimum wage. In a relatively short time period from 2003–2007, 28 states increased their minimum wage above the Federal level. Using data from the Current Population Survey (CPS), the authors find no evidence of an effect of state-level minimum wages on poverty. Limiting the sample to only workers—a group that is most likely to benefit from the wage increase—the authors still find no evidence of any poverty reduction. Even expanding the definition of poor to 150 percent of the poverty line fails to expose any statistically significant reduction in poverty from state-level minimum wage increases.
There are two factors affecting the ability of a minimum wage increase to reduce poverty: poor target efficiency and job reductions. To determine target efficiency, we look at the percentage of the potential beneficiaries of a minimum wage hike who are poor. The authors find that only 10.5 percent of the beneficiaries of a minimum wage increase to $9.50 an hour would be living in poor households (see chart above). If the definition of poor is increased to 200 percent of the poverty line, 62 percent of the beneficiaries from the proposed increase do not live in poor households. This suggests that the ability of the proposed minimum wage increase to actually reach poor families is limited.
Policymakers often focus on single mothers raising families on a low-wage income. Even for this group there is little evidence that these individuals are helped by a minimum wage increase. Only 11 percent of individuals assisted by the proposed minimum wage increase are single parents.
In addition to inefficiently targeting poor individuals, the potential for an increase in the wage floor to reduce poverty is limited by the potential offsetting job loss from these measures. Using a range of employment elasticities found in the literature, the authors find that estimated job losses from the proposed minimum wage increase range from 450,000 to 4 million. These job losses are much greater than those following the previous minimum wage hike because far more workers will be affected by the increase. The authors include a literature review of past studies that overwhelmingly confirms the job loss effect.
As a result of these factors, only 10.5 percent of the benefits from this proposed increase in the minimum wage go to poor families. This is an exceptionally low rate for a program intended to reduce poverty. This poor target efficiency stands in stark contrast to other anti-poverty programs such as the Earned Income Tax Credit (EITC). Due to the EITC’s focus on income rather than solely on wages rates, most of the families in poverty receiving no benefit from a $9.50 minimum wage increase would actually (and meaningfully) benefit from an expansion to the EITC. If policymakers are truly interested in helping the working poor, they should concentrate on polices such as the EITC that directly help the working poor without disrupting the underlying labor market and abandon politically popular but ineffective anti-poverty measures such as the proposed minimum wage increase.