The Wrong Way to Reduce Poverty

Original Article:

  • Author: Michael Saltsman

  • Publication Date: September 2013

  • Newspaper: USA Today

  • Topics: Minimum Wage

This week’s poverty report from the Census Bureau shows that, five years after the start of the Great Recession, poverty in the United States remains unacceptably high at 15%. Proponents of a higher minimum wage argue that a new wage mandate will help reduce the rate. Though it sounds intuitive – higher wages must equal less poverty – the academic record shows that the net impact of a wage hike on poverty is negligible at best, and can often make the poor worse off.

Raising the wage to alleviate poverty is a strategy that’s been tried before: Between 2003 and 2007, twenty-eight states raised their minimum wage, each with the expressed goal of helping the lowest paid employees make ends meet. However, economists from Cornell and American Universities who studied the effects of these hikes found no associated reduction in state poverty rates in research partially funded by the Employment Policies Institute.

The most basic problem? A majority of those living at or below the poverty line can’t benefit from a mandated raise because they don’t have a job. Tuesday’s Census report bears this out: Nearly 60% of the poor didn’t work in the last year. While we shouldn’t be callous toward their plight, the fact is that they don’t need a raise — they need a job.

The targeting problem goes deeper. Of those individuals who do earn the minimum wage, a majority live in households above the poverty line — often times, far above it. Just 16% of those who were covered by the last federal minimum wage increase (between 2007 and 2009) lived in poor households; by contrast, 40% had a household income three times or more above the poverty line.

Moreover, only about one in eight people who benefited from the hike was a single parent with children. Many were either second or third earners, such as young adults living at home with their parents or married couples where one spouse earns a higher income. To take a personal example, during that time period I worked as an economist for the federal government and my wife worked part-time at a coffee shop. We were considered a minimum wage family even though we weren’t the intended beneficiaries.

Of course, if poor targeting were the only problem with raising the minimum wage, then on net the policy might still be worth pursuing. But there’s another, more serious, problem to grapple with: Unintended consequences that actually leave the poor worse off than before.

A team of economists from the Federal Reserve and the University of California-Irvine studied the experience of poor families before and after an increase in the minimum wage.

Their findings deserve attention. Those who received a bump in hourly pay and kept their jobs were better off. Yet those who lost hours at work found themselves with less take-home pay even though their hourly wage was higher. Others even lost their jobs entirely. Overall, the economists found that the “losers” from a higher minimum wage outnumbered the “winners” On net, a wage hike can actually make the poor worse off.

It’s for these reasons that economists and policymakers seeking to reduce poverty have preferred policies like the Earned Income Tax Credit (EITC). Unlike the minimum wage, the EITC boosts wages of the least skilled through the tax code, so it can be precisely targeted based on need. And because it’s not a mandate on the low-margin employers that generally employ minimum wage workers, the EITC reduces poverty without the unintended drop in hours and employment associated with a higher minimum wage.

If helping the poor is the goal, then boosting the EITC is something that deserves further consideration. The new Census Bureau release demonstrates that the last thing the poor need is a well-intentioned policy that sets them further behind.

Michael Saltsman is research director at the Employment Policies Institute.