Raising the earnings of welfare recipients, primarily women attempting to move into the workforce, remains the chief obstacle in reforming the welfare system. One widely discussed option has been to raise the minimum wage. Advocates of higher minimum wages call for an increase in order to make work more attractive and create sufficient monetary incentive for individuals to leave the welfare system and move into the workforce. While much has been written about job losses and the aggregate labor force, until now, little was actually known about how minimum wage increases affect the employment status of welfare recipients.
To examine this issue, Peter Brandon of the Institute for Research on Poverty exploited the differences that existed in the late 1980s in the various states' minimum wage rates. (These inter-state differences in minimum wages have formed the core of much of the recent research on the effect of minimum wages.) He found that increases in the minimum wage had significant -- and negative -- effects on the work patterns of mothers receiving Aid to Families with Dependent Children (AFDC), the largest federal welfare program. Half of the welfare mothers residing in states which did not raise their minimum wage reported having worked at some time during the six years covered by the survey data. But only 40 percent of welfare mothers in states which raised their minimums reported periods of employment.
Differences in work status between states that did and did not raise their minimum wages are not explained by differences in disability status, marital status, or subsequent births.
Not surprisingly, the decrease in work was matched with an increase in time spent receiving welfare benefits. The average length of time spent receiving welfare benefits (in any given spell of benefits receipt) was 14.5 months for the entire sample. But in states which raised their minimum wages, the average time spent on welfare was 19.5 months, compared to 13.5 months in states that did not raise their wage floor. Increasing the minimum wage resulted in a 44 percent longer duration on welfare.
Why should an increase in the minimum wage reduce work effort? To understand this, one needs to look at the reactions of the entire labor market and not just of one subgroup -- welfare mothers. Higher minimum wages indeed make work more attractive and lead more individuals to compete for these jobs. But in the absence of an increased demand for minimum wage workers (an unlikely response to higher costs) there can be no overall increase in employment. The effect of higher labor supply, constant labor demand, and wages which are prohibited from falling is that employment opportunities go to those with the best skills. We are left with a labor market that crowds out the least skilled workers -- in this case, the mothers attempting to leave welfare.
The jobs taken by women leaving welfare comprise a cross-section of entry-level jobs. As such, they are particularly sensitive to this crowding-out problem. Nearly 70 percent of mothers who left welfare and found a job held either a service or a Technical, Sales, and Administrative Support (TSAS) job. (About a quarter of TSAS jobs were as waitresses or bartenders, a fifth were cashier/sales jobs, and another fifth were as nurses aides, orderlies and attendants). Many of these are the same jobs frequently filled by students and teens -- members of the labor force who have the flexibility to enter and exit the workforce in response to wage changes when work is made more attractive.
These findings are particularly troubling since higher minimum wages have been advocated as a means of making work more attractive so that it serves as an inducement to leave the welfare system and join the workforce. The unfortunate reality is that transitions from welfare to work are not aided by increased labor market competition for an, at best, unchanged number of jobs. The skills that will allow welfare leavers to advance beyond the minimum wage will not be learned if that entry-level job cannot acquired.
Data Sources
This report used three waves of the Survey of Income and Program Participation (SIPP). SIPP provides detailed information on work history, family status, size and composition, and income. Most importantly, the families followed by SIPP provide detailed information on participation in the various income transfer programs. Data is collected on every member of the household. Surveying of households is done three times a year. Together, the three SIPP waves provide data for the period October 1985 through March 1990. During that time 13 states had minimum wages set above the federal level.
