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The minimum wage is a terrible anti-poverty strategy

AEIdeas

The Congressional Budget Office (CBO) released an interactive data tool that models the projected effects of the Raise the Wage Act, which passed in a House vote this summer. The Raise the Wage Act would increase the federal minimum wage to $15 by 2025, indexing it to the median wage thereafter. Should this bill become law, the minimum wage would be $16.82 by 2029. The CBO simulates the full effects of the law on total employment, people in poverty, and real family income.

One key takeaway from the CBO’s analysis is that a minimum wage increase is a terrible anti-poverty strategy. The chart below shows the estimated effects of the Raise the Wage Act on people in poverty. The CBO estimates a net change of 1.3 million fewer people in poverty by 2029, but that estimate incorporates almost one-half million new people this bill would put in poverty due to employment losses that result from the mandated wage hikes.

Source: CBO, How Increasing the Federal Minimum Wage Could Affect Employment and Family Income, November 7, 2019.

The CBO estimates a range of potential employment effects due to the federal minimum wage hike. They predicted a best case scenario of no employment losses, but the worst case would mean 4 million fewer people employed. Some of those newly unemployed people would enter poverty, which is why the CBO estimates that the Raise the Wage Act would increase the number of impoverished people by almost 500,000.  

Some policymakers might believe that a program’s net effect on poverty is all that matters, but the fact that this bill simultaneously increases income for some while plunging others into poverty shows that it is poorly–targeted and misconceived.

Another consideration is that the CBO’s estimated net poverty effect is likely overstated because the model uses the official poverty rate, which does not consider government benefits as income. In this case, the official poverty measure not only overstates the baseline poverty level before implementing a $15 minimum wage, it also overstates the poverty-reducing effects of this measure. A study by the Economic Policy Institute found that “Among workers in the bottom three wage deciles, every $1 increase in hourly wages reduces the likelihood of receiving means-tested public assistance by 3.1 percentage points.” Thus, even as minimum-wage workers receive a pay raise, many will lose access to means-tested benefits. This would make the anti-poverty implications of a $15 federal minimum wage look even worse.

Ultimately, minimum wage laws hurt some of the very workers they are purportedly designed to help – those with fewer skills and experience and workers who are marginally attached to the labor market.  As an anti-poverty strategy, federal minimum wage hikes do not work and it is time for Congress to work on policies that will.