Pethokoukis, Economics, U.S. Economy

There are better anti-poverty tools than the minimum wage

083013jobs

Politicians, usually those on the left, frequently propose big hikes in the federal minimum wage — or even a dramatically higher “living wage” — as a way to fight poverty and help low-skill workers. A reasonable sounding idea to many Americans, and one that may be picking up momentum thanks to the glacial recovery in US incomes post-Great Recession. Fast-food workers in 60 US cities went on strike Thursday demanding $15 a hour. That’s twice the current federal minimum and two-thirds higher than the median wage for front-line fast-food workers, according to Reuters.

But raising the minimum wage may not be a policy idea deserving of the passion it generates. It’s not a well-targeted, poverty-fighting weapon. Only 3% of workers age 25 and over earn the minimum wage or less. About half of all minimum wage (or less) workers are age 24 or younger, many of whom presumably live at home with their parents. The 2010 study “Will a $9.50 Federal Minimum Wage Really Help the Working Poor?” by researchers Joseph Sabia and Richard Burkhauser found that a federal minimum wage increase from $7.25 to $9.50 per hour — higher than the $9 that President Obama has proposed — would raise incomes of only 11% of workers who live in poor households.

In a 2012 study, Sabia and Robert Nielsen found “no statistically significant evidence that a higher minimum wage has helped reduce financial, housing, health, or food insecurity among the poor.” Why? You have to earn a wage to benefit and 55% of poor, less-educated individuals between ages 16 and 64 don’t work. Indeed, nearly 90% of the wage earners who benefited from the 40% increase in the federal minimum wage between 2007 and 2009 were not poor. They lived in households with an income two or three times the poverty level.

Would raising the minimum wage cause job losses? Lots of conflicting studies here. But a 2013 literature review by David Neumark, J.M. Ian Salas, and William Wascher concluded “that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.” And research last month from Texas A&M economists Jonathan Meer and Jeremy West find raising minimum wage levels may discourage firms over the long-term from hiring new workers. And that may be particularly true thanks to continuing — even accelerating — advances in automation.

Why not support raising the minimum wage? AEI’s Kevin Hassett and Michael Strain answer that question concisely: “Because it will make it more expensive for businesses to hire young and low-skill workers at a time of crisis-level unemployment. Because it will not alleviate poverty. Because there are much better alternatives to help poor families, and because the minimum wage is a dishonest approach that hides the true cost of the policy.”

If anything, better to lower the minimum wage for the long-term unemployed and for inexperienced workers to boost labor force participation. Other possible policies to promote work and reduce poverty: relocation subsidies for the long-term unemployed and wage subsidies for low-wage, low-skill workers who aren’t parents. And Burkhauser and Sabia argue that expanding the Earned Income Tax Credit is a far better poverty fighting measure than raising the minimum wage:

1. Because eligibility is based on family income rather than a wage rate, the benefits are much more likely to be received by workers living in poor families.

2. Because the costs of the EITC are not directly borne by employers, expansions in this wage subsidy do not cause adverse labor demand effects. In fact, a large body of empirical literature finds that expansions in the EITC increase employment among low-skilled single mothers .

3. Given that employment is an important anti-poverty mechanism and wage subsidies can increase income to the working poor, expansions in the EITC may be a more effective means of aiding the working poor than would be increasing the federal minimum wage.

Of course, some of these ideas will cost taxpayer money. Raising the minimum wage attempts to shift costs onto business and make them less transparent. But no free lunch here. Let’s fight poverty in a way that is both efficient and effective.

 

19 thoughts on “There are better anti-poverty tools than the minimum wage

  1. According to the Brookings Institute, here are the three best tools for staying out of poverty, and don’t cost the taxpayers a dime:

    1. Graduating from high school.
    2. Waiting to get married until after 21 and do not have children till after being married.
    3. Having a full-time job.

    If you do all those three things, your chance of falling into poverty is just 2 percent.

  2. 1. Graduating from high school. 72% of minimum wage workers are high school graduates.

    3. Having a full time job. 31% of minimum wage workers have full time jobs.

    Raising the minimum wage would disproportionately affect Texans who have 8.1% of the nation’s hourly workers but 12.7% of minimum wage workers.

  3. “…. Only 3% of workers age 25 and over earn the minimum wage or less.”

    anyone got a credible link to support this statement?

    • Correct but a bit misleading. Min wage workers age 25 and older represent 3.2 percent of all hourly employees as a group. But min wage workers as a whole account for only 5.2 percent of all hourly workers, and hourly workers represent 59 percent of all wage and salary workers. http://www.bls.gov/cps/minwage2011tbls.htm#4

      That said, it is a big deal in the restaurant industry, where 43 percent of workers are at or below.

  4. No I am not in favor of the minimum wage. But why is the topic always the minimum wage and never the lawyer’s guilds and their rents?

    Or the $150 billion and rapidly growing welfare system called the VA?

  5. What is the point of the over 25, less than high school unemployment rate graph?

    A more instructive graph is that rate less the total unemployment rate. Call it the excess unemployment rate. Doesn’t seem to be such a big deal.

    In any event, cutting across ethnicity, gender and geography, the minimum wage is about Hispanic women in the South Census Division. Just the demographic that the GOP appeals to. :-)

  6. Rather than fixing prices (a wage is a price) how about we focus on the price of goods. Obviously things are getting much more expensive due to inflation. How about we audit the federal reserve so we know what they are doing, and then we allow competing currencies. As well, lower taxes for everybody, lower spending levels, remove the income tax, and also markets to be free from over-regulation. These are all steps in increasing prosperity for everybody. Rather than focusing our attention on increasing wages, we should focus on allowing the market to determine what goods and services are worth.

  7. Labor rates are governed by the law of Supply and Demand just like any other commodity. That is the Reality some Businesses and the Politicians who shill for them want you to forget. We have our own poor who need Jobs and deserve our help, we do not need to import more.

    Our Immigration system must work to serve the best interests of our Citizens, not the illegals or companies who profit from them. Tell me; What have Illegals actually earned? At what point did their willingness to ignore and break our laws become a debt American Workers and Families must pay?

  8. There is nothing more intellectually bankrupt than arguing that the minimum wage should be lowered or abolished. The only effective tool against poverty is liberty (socialism). Anyone who proposes nonsense like this and advocates tyranny ought to be hanged for treason.

  9. There is nothing more intellectually bankrupt than arguing that the minimum wage should be lowered or abolished. The only effective tool against poverty is liberty (socialism). Anyone who proposes nonsense like this and advocates tyranny ought to be hanged for treason.

  10. I have heard on more than one occasion that the reason unions want the min wage increase is because there are a lot of union contracts out there that have their members hourly pay ( and dues) tied to multiples of the min wage. So the increase would not just be for the micky D worker.. it would increase union pay scales.
    I don’t have any proof but would love to know if anyone else has heard of this or has proof.

  11. The analysis is reasonable. There are many fast-food workers strike for a raise in minimum wage recently. But the government has to take a thorough look at the issue before deciding whether raise minimum wage or not.

  12. While economic factors vary from country to country, Australia has a minimum wage double ours and the lowest unemployment in the world. Well paid workers create demand, a word forgotten from the supply and demand principle of economics. These workers will spend every nickel and not one will idle in some investment that will not produce unless there is demand. We have seen too many bubbles because of to much capital chasing to few investments and the poor and lower middle class living on credit. Real wages means a robust economy and dollars on the move which creates growth and incentive to work as well as lowering government costs for social safety nets.

  13. Back of the envelope first order effects.

    3.5 million federal minimum wage workers working an average of 30 hours per week times 50 weeks per year times a $1.75 per hour minimum wage increase ($7.25 to $9.00 per hour) equals $9.2 billion in a $16 trillion economy. No Big Deal relative to orders of magnitude!

    Less SNAP, WIC, EITC from the feds which should make you libertarian pinheads ecstatic.

    • You don’t understand marmico. This is a very important economic and ideological concept.

      It cannot be ‘violated’ without the spectre of libertarian armageddon looming!

      ;-)

    • As usual, the pinhead thinks that a back-of-the-envelope calculation without any thought to where the money comes from or what happens next shows—PROFIT!!!111!

      Raise the minimum wage–how? Raise the prices of the goods bought from the businesses employing minimum wage workers (and not firing anyone but increasing their wages)? Great: Now the people buying at higher prices (say, paying the vaunted 68 cents more for a McDonald’s burger to cover a doubling of the grill workers’ salaries) have 68 cents less to buy other things with. So what happens to those who made or sold the things that the 68 cents, now in the McDonald’s tills, would have bought? Let’s see. 30 hours a week, minus the 68 cents that can’t go to those other businesses… ah, what the hell. You know the math works out like this: More money spent one place, less another. And that’s pretending that the employers can just raise prices because their costs increased. Which, of course, they can’t. If they could raise their prices because of cost increases and not suffer loss of sales and revenue, they could raise them just because they want more profit–and they would.

      You anti-libertarian pinheads never bother to think things through beyond the most simplistic, shallow counting on your fingers.

  14. James,

    You forgot another “powerful” but effective TOOL.

    Sending our boys and girls to war for another country with a one-way ticket…

    Please revise your roster.

    • Oh it gets much better.. many come home sliced and diced and a great many jobs are ‘created’ in tending to their needs… excellent “stimulus”.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>