With 19 states raising the minimum wage at the beginning of 2017, it seems that Sen. Bernie Sanders (I-Vt.) “Fight for 15” campaign is becoming a reality.
While Democrats have been wholeheartedly behind the movement to increase the minimum wage, now Republican lawmakers are increasingly leaving the door open to minimum wage increases. The prevailing argument in favor of raising the minimum wage is that a higher minimum wage would reduce poverty and alleviate income inequality.
So, what does the empirical research reveal about the effectiveness of the minimum wage to reduce poverty?
From a lawmaker’s perspective, setting a higher minimum wage seems to be a viable remedy for lifting families out of poverty. However, it is important to note that the minimum wage targets individual low-wage workers, not low-income families. The merits of using minimum wage as a tool to combat poverty depend on the level at which poor families benefit from such policy changes.
The statistics show that the relationship between being a low-wage worker and a low-income family is very weak. In fact, data from CPS suggests that the majority of poor families with heads of household of prime working age simply don’t work, so a minimum wage has no impact on these families.
What’s more, a sizable proportion of low-wage workers are new entrants to the labor force, such as teenagers, who are not necessarily in low-wage families. Taking these facts into consideration, basic calculations indicate that a sizable share of benefits derived from a minimum wage increase does not go to impoverished families.
In fact, if the federal minimum wage was hiked from $7.25 to $10.10, only 18 percent of resultant increases in income would go to poor families (based on 2010-2014 data), meanwhile 32 percent would go to families with incomes more than three times the poverty line. With a $15 minimum wage the corresponding figures would be 12 percent and 38 percent, respectively.
Several studies have analyzed changes in the poverty rate between states that increase the minimum wage versus those that don’t. The conclusion these studies reveal is that there is no statistically significant relationship between raising the minimum wage and reducing poverty.
What becomes increasingly clear from several studies on the targeted effects of minimum wage increases is that minimum wage is a very imprecise way to raise the relative incomes of the poorest families and may actually marginally benefit wealthier families.
We know who wins, but who loses?
The debate surrounding the negative effects of minimum wage increases on employment levels continues to take center stage. Some recent studies have even gone as far as suggesting that there is no negative impact on employment levels derived from an increase in the minimum wage.
The opinions of a majority of labor economists, however, paint a very different picture. A national survey conducted by the University of New Hampshire found that over 73 percent of American Economic Association (AEA) labor economists believe significant increases in the minimum wage will lead to employment losses and 68 percent believe employers will be deterred from hiring low-skilled workers.
A consensus on minimum wage studies conducted in the 1980’s finds that for every 10 percent increase in the minimum wage, employment of young and unskilled workers declines by 1-2 percent.
With over half of minimum wage workers being aged 16-24, continuously raising the minimum wage simply guarantees that those young people, whose skills are not sufficient to justify that kind of wage, will instead remain unemployed.
It’s clear that the minimum wage is an ineffective tool at reducing poverty and alleviating income inequality. The benefits of increases in the minimum wage are not targeted toward impoverished families and the costs of minimum wage increases deny youth the skills and experience they need to launch their careers.
The basis of poverty is not low-paid workers, but those who are not in work altogether. Perhaps policymakers would be wise to consider reforms that will grow the economy, generate jobs and create the incentives to choose work over welfare.
Jack Salmon is a Washington, D.C.-based researcher focused on federal fiscal policy. Salmon holds an M.A. in political economy with specializations in macroeconomics and comparative economic analysis from King’s College London.