The Minimum Wage and Poverty

Posted on January 31, 2014 by

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In Tuesday’s State of the Union address President Obama made some bold statements about the relationship of the minimum wage and the reduction of poverty (emphasis added).

But Americans overwhelmingly agree that no one who works full-time should ever have to raise a family in poverty.  …

And as a chief executive, I intend to lead by example.  …  In the coming weeks, I will issue an executive order requiring federal contractors to pay their federally funded employees a fair wage of at least $10.10 an hour — because if you cook our troops’ meals or wash their dishes, you should not have to live in poverty. Of course, to reach millions more, Congress does need to get on board.  Today, the federal minimum wage is worth about 20 percent less than it was when Ronald Reagan first stood here.  And Tom Harkin and George Miller have a bill to fix that by lifting the minimum wage to $10.10.  It’s easy to remember, $10.10.  This will help families.  It will give businesses customers with more money to spend.  It does not involve any new bureaucratic program.  So join the rest of the country.  Say yes. Give America a raise.  Give them a raise.

There is general agreement the net effect of minimum wage legislation is negative – wealth destroying. About of 85% of economist’s articles published support this perspective. I don’t want to address the general argument over the minimum wage here. What I’d like to mention is the efficacy of minimum wage increases as a tactic to help alleviate poverty. Increasing the minimum wage will not be effective because the vast majority of people who work for minimum wage are not classified as poor.

There are around 16,000 workers on the federal government’s payroll earning the minimum wage and approximately 200,000 employees under federal contract that will be affected by the president’s executive order. While 200,000 plus is a significant number of employees, you can see why the president call for Congress to follow his lead and increase the minimum wage. However, the main point is that most minimum wage earners are not poor. One of the better recent papers on the minimum wage was published in 2010 in the Southern Economic Journal. In that paper the authors say:

Only 11.3% of workers who will gain from an increase in the federal minimum wage to $9.50 per hour live in poor households, an even smaller share than was the case with the last federal minimum wage increase (15.8%). Of those who will gain, 63.2% are second or third earners living in households with incomes twice the poverty line, and 42.3% live in households with incomes three times the poverty line, well above  $50,233, the income of the median household in 2007. With an average employment elasticity of 0.6 for minimum wage workers aged 16–29 without a high school  diploma and an elasticity of 0.2 for other minimum wage workers, we estimate that nearly 1.3 million jobs will be lost if the federal minimum wage is increased to $9.50 per hour, including 168,000 jobs currently held by the working poor.

Clearly with only 11% of current minimum wage employees classified as poor, increasing the minimum wage will not effectively reduce poverty rates.

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