Minimum wage, minimal benefits
Raising it would mostly benefit middle-class part-timers.

Reuters

Protesters march outside McDonald's in Los Angeles, California, December 5, 2013.

Article Highlights

  • The 50th anniversary of the War on Poverty should be a disappointment to anyone concerned about the poor.

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  • In '12, the gov spent nearly $1T to help the poor, but roughly 50M Americans still remained impoverished.

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  • What would President Obama like to do to fix this failure? Increase the minimum wage.

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The 50th anniversary of the War on Poverty should be a disappointment to anyone concerned about the poor. In 2012, the government spent nearly $1 trillion to help the poor, but roughly 50 million Americans still remained impoverished.

What would President Obama like to do to fix this failure? Increase the minimum wage.

“Let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty,” he said in last year’s State of the Union address. He likely will speak to similar themes in this year’s address, on January 28. He’s been talking about the idea a lot lately, saying in a recent speech that “it’s well past the time to raise a minimum wage that, in real terms right now, is below where it was when Harry Truman was in office.”

But it’s far from widely agreed that the minimum wage is a good policy tool. Opponents believe that higher mandated wages will cause employers to fire some workers, or not hire additional ones. Proponents argue that these disemployment effects are small. But this debate misses the key point: Even if the minimum wage works as its advocates claim, it is a highly ineffective anti-poverty tool.
The main problem is that a higher wage would not affect many poor people. About 3.6 million workers in the United States earn the minimum wage or less. But the majority of these workers are young, work part-time, or have family incomes significantly above the poverty line.

According to the Bureau of Labor Statistics, over half of minimum-wage workers are under the age of 25, and nearly 75 percent are working part-time or have varying hours. Consensus among economists is that 20 to 25 percent of minimum-wage earners are at or below the poverty line. This means that minimum-wage increases are far more likely to benefit a middle-class teenager working a part-time job than a full-time family breadwinner in poverty.

To put these numbers in perspective, assume that a minimum-wage increase lifts wages for all hourly workers earning the minimum wage (or less) enough to bring them out of poverty completely. Using the most generous estimate, that would remove from poverty 25 percent of 3.6 million workers, or 900,000 of the nearly 50 million Americans in poverty. So President Obama’s signature effort to address poverty, even if it works the way he claims, would help less than 2 percent of Americans who are in poverty to escape it. (This may be understated, because it doesn’t include the dependents of a minimum-wage household who would benefit, or the fact that other wages may increase along with the minimum wage. On the other hand, it may be overstated, since it assumes the minimum-wage increase would lift every single worker completely out of poverty — regardless of whether he or she works 5 hours a week or 35 — and it includes no disemployment effects.)

There are far better ways to help hourly workers in poverty — such as an expansion of the Earned Income Tax Credit (EITC). In 2007, the CBO analyzed the impact of increasing the minimum wage versus expanding the EITC. Only 15 percent of minimum-wage increases, by their reckoning, would go to people at or below the poverty line, while (depending on the type of EITC expansion) up to 60 percent of new EITC spending would accrue to families at or below the poverty line.

Last week, Senator Marco Rubio proposed going a step further and replacing the EITC with a federal wage subsidy for low-wage workers. Unlike the EITC, the federal wage subsidy would not discriminate between singles and married couples and would arrive with employees’ monthly paycheck instead of in a lump sum at year’s end.

All these policies would need to be funded somehow. A good place to start would be to restate the poverty problem. If we are spending almost a trillion dollars a year to address the problem, and leaving 50 million people in poverty, then we must be giving a lot of money to recipients who are not impoverished. One of the best ways to fight poverty would be to reduce middle-class entitlements and use that money to help the poor.

The minimum wage is typical of a Washington “fix” for the poor, which is to say, it doesn’t fix much at all. The main function of such proposals seems to be using them to make Republicans look insensitive to the problem of poverty (at least, in the eyes of people unfamiliar with the economics of the minimum wage). Resources promised to the impoverished are delivered to others way up the income scale, while underlying issues and drivers of poverty — such as lack of jobs or the breakdown of the family — are left to fester.

Policymakers who are serious about reducing poverty should begin with an honest assessment of where funds are currently being dispersed, and then propose how to reroute those resources to individuals who are most in need. If they don’t, the 100th anniversary of the War on Poverty will not look much different from the 50th — whether or not President Obama gets his way on the minimum wage.

— Abby McCloskey is the program director of economic policy at the American Enterprise Institute.

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About the Author

 

Abby
McCloskey
  • Abby M. McCloskey is the program director of economic policy at the American Enterprise Institute (AEI) where she disseminates the work of AEI’s economic policy team. McCloskey also studies and writes about various financial services policy issues.

    Immediately before joining AEI, McCloskey was director of research at the Financial Services Roundtable where she worked on financial regulatory reform, including Dodd-Frank and Basel III. McCloskey has also worked for US Senator Richard Shelby, and for the Mercatus Center as a Charles Koch Institute associate. While at Mercatus, she created and hosted a video series on financial markets issues.

    McCloskey has a B.A. in economics from Wheaton College.


    Follow McCloskey on Twitter: @abbyeconomics

  • Phone: 202.862.5819
    Email: abby.mccloskey@aei.org

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