Minimum wage hikes a poor way of lifting people out of poverty
Author: Michael Saltsman
Publication Date: July 2018
Newspaper: The OC Register
Topics: Minimum Wage
When is a mandated pay raise not a real raise? Employees in 18 states and localities (including ten in California) are about to find out as local minimum wages increased on July 1st.
The purpose of this policy is to raise wages for less-advantaged employees at the bottom of the pay scale. But new research suggests an opposite effect; a higher minimum wage has done little to reduce poverty in the country’s disadvantaged neighborhoods, and might have even increased it.
The disappointing performance of a higher minimum wage in reducing poverty is a familiar topic for economists. There were 28 states that raised minimum wages between 2003 and 2007, and a subsequent study published in Cornell University’s economics journal found no associated reduction in poverty. One problem was poor targeting; most minimum wage workers were found to be second- or even third-earners living in households with incomes far above the poverty line. (The average family income of a minimum wage worker exceeds $50,000 a year.)
Another problem: A new pay mandate can actually lead to fewer work hours for affected employees if their employers can’t offset the increased labor costs through higher prices. That’s exactly what happened in Seattle in response to the city’s $15 minimum wage experiment: A city-supported research team found that Seattle’s minimum wage increase caused a loss in income of roughly $125 a month for affected minimum wage workers.
In some cases, employees don’t just lose hours — they lose their jobs. A study by economists at Miami and Trinity Universities estimated that California will lose roughly 400,000 jobs by the time its $15 minimum wage is fully phased-in. These job losses are playing out in real-time in the Bay Area, where restaurants closures are occurring at an accelerated rate (one publication called it a “death march”) and other restaurants are opting for new models where customers serve themselves. (EPI has compiled over 100 such stories of business consequences at FacesOf15.com.)
These consequences work against the desired poverty-reduction benefits of a higher minimum wage. But perhaps the policy still delivers benefits on net for employees in the least-advantaged neighborhoods?
Not so fast. A new study from economists at the University of California, Irvine and the National Bureau of Economic Research find that over the past 30 years, increases in the minimum wage have not reduced poverty rates in disadvantaged neighborhoods. In fact, the researchers find some evidence that, with every one-dollar increase in the minimum wage, poverty rates have subsequently increased in these neighborhoods by 3 percent.
There are better alternatives for policymakers looking to reduce poverty. One option that’s received bipartisan support is an expansion of the Earned Income Tax Credit. By boosting paychecks through the tax code rather than a mandate on employers, the EITC makes good on the hypothetical benefits of a minimum wage hike without the drawbacks. One study estimated that each 1 percent increase in a state’s EITC has reduced poverty by 1 percent.
Policymakers still convinced of the merits of minimum wage hikes should heed the warning of Bill Phelps, co-founder of California’s Wetzel’s Pretzels who was once enthusiastic about the fight for $15: “I think the next increases [in California’s minimum wage] are going to be bad for employees. I think it is pushing it too far, too fast and I think employees will be hurt by those increases.”