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A public policy blog from AEI
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.
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