Minimum wages and poverty: will a $9.50 federal minimum wage really help the working poor?

• Author: Sabia, Joseph J.

1. Introduction

   Proposals to increase the minimum wage are politically popular because they are widely seen as an effective way to help the working poor (AP-AOL 2006). Former President Bill Clinton captured this majority view in his statement of support for an increase in the federal minimum wage when he said: "It's time to honor and reward people who work hard and play by the rules .... No one who works full time and has children should be poor anymore" (Clinton and Gore 1992). The goal of helping the working poor was also an important motivation behind the most recent legislation to increase the federal minimum wage from $5.15 to $7.25 per hour in 2007, and it remains a key rationale for Senate Bill 2514, the Standing with Minimum Wage Earners Act of 2007, which would increase the federal minimum wage yet again from $7.25 to $9.50 per hour. (1)

   While reducing poverty among the working poor is a laudable policy goal, the evidence suggests that minimum wage increases have thus far provided little more than symbolic support to this population (Card and Krueger 1995; Neumark and Wascher 2002; Gundersen and Ziliak 2004; Burkhauser and Sabia 2007; Leigh 2007; Sabia 2008). Several explanations have been offered for this finding. Card and Krueger (1995) emphasize that minimum wages fail to reduce poverty because many poor Americans do not work. Others have argued that even among the working poor, the relationship between earning a low hourly wage rate and living in poverty is weak and has become weaker over time (Stigler 1946; Burkhauser, Couch, and Glenn 1996; Burkhauser and Sabia 2007). Moreover, even among affected workers, there is strong evidence that increases in the minimum wage reduce the employment of low-skilled workers (Neumark and Wascher 2008). While an increase in the minimum wage will lift out of poverty the families of some low-skilled workers who remain employed, other low-skilled workers will lose their jobs or have their hours significantly cut, reducing their income and dropping their families into poverty (Neumark and Wascher 2002; Neumark, Schweitzer, and Wascher 2004, 2005; Sabia 2008).

   Despite evidence on the ineffectiveness of past increases, a new set of large state and federal minimum wage increases was initiated between 2003 and 2007, all with the promise of helping the working poor. (2) The newly proposed federal minimum wage increase to $9.50 per hour is also being justified as an important anti-poverty tool. Our article provides a first look at the effectiveness of these twenty-first century state and federal minimum wage increases in reducing poverty and compares the target efficiency of raising the federal minimum wage to $9.50 per hour with that of prior increases. Moreover, our work augments the static analysis of Burkhauser and Sabia (2007) by accounting for the likely behavioral effects of a new federal minimum wage increase in our simulations of its distributional consequences. Further, because there continues to be controversy over the size of employment effects of minimum wage increases, we estimate a "break-even" elasticity value where the proposed minimum wage hike will produce no net benefits for workers.

   Using data drawn from the March Current Population Survey (CPS), we find no evidence that minimum wage increases between 2003 and 2007 lowered state poverty rates. Moreover, we find that the newly proposed federal minimum wage increase from $7.25 to $9.50 per hour, like the last increase from $5.15 to $7.25 per hour, is not well targeted to the working poor. 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. (3)

   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. We estimate that average employment elasticities greater (in absolute value) than -0.86 will cause net monthly earnings losses to the set of low-skilled workers who are affected by this proposed minimum wage legislation. We conclude that further increases in the minimum wage will do little to reduce poverty and are a poor substitute for further expansions in the federal Earned Income Tax Credit (EITC) program as a mechanism for reducing poverty.

2. Literature Review

   Poverty Effects of Minimum Wage Increases

   Several recent studies have examined the income and poverty effects of minimum wage increases (see, for example, Card and Krueger 1995; Addison and Blackburn 1999; Neumark and Wascher 2002; Gundersen and Ziliak 2004; Neumark, Schweitzer, and Wascher 2004, 2005; Burkhauser and Sabia 2007; Sabia 2008), and all but one have found that past minimum wage hikes had no effect on poverty. (4) These studies have generally taken one of two approaches. The first approach uses matched CPS data and examines family income changes caused by minimum wage increases (Neumark and Wascher 2002; Neumark, Schweitzer, and Wascher 2004, 2005). These studies find that some low-skilled workers living in poor families who remain employed see their incomes rise and move out of poverty when the minimum wage increases. However, other low-skilled workers lose their jobs or have their hours substantially reduced as a result of minimum wage hikes, causing income losses and increased poverty. On net, Neumark and Wascher (2002) find that the families of low-skilled workers are no better off and may be made worse off by minimum wage hikes. Sabia (2008) finds a similar result for less-educated single mothers.

   A second approach, taken by Card and Krueger (1995) and Burkhauser and Sabia (2007), estimates the effect of state minimum wage increases on state poverty rates. These studies also find no evidence that past minimum wage increases have significantly reduced poverty either among the families of all individuals or among the families of workers.

   Employment and Hours Worked Effects of Minimum Wage Increases

   Another explanation for the ineffectiveness of past minimum wage increases in reducing poverty is theory based and focuses on their adverse labor demand effects. Neoclassical economic theory suggests that minimum wage increases reduce the demand for low-skilled labor, thus reducing employment and hours worked (see Stigler 1946). Much of the literature examining the employment effects of minimum wage increases has focused on low-skilled workers, usually teenagers and high school dropouts, or on workers in low-skilled industries because these populations are more likely to be affected by such increases.

   Neumark and Wascher (2007) review over 90 studies published since the iconoclastic Card and Krueger (1994, 1995) studies of the mid-1990s and conclude that there is overwhelming evidence that the least-skilled workers experience the strongest disemployment effects from minimum wage increases (see, for example, Neumark and Wascher 1992; Williams 1993; Deere, Murphy, and Welch 1995; Currie and Fallick 1996; Abowd et al. 1999; Partridge and Partridge 1999; Burkhauser, Couch, and Wittenburg 2000a, b; Couch and Wittenburg 2001; Neumark 2001; Neumark and Wascher 2002, 2004; Campolieti, Fang, and Gunderson 2005; Campolieti, Gunderson, and Riddell 2006; Sabia 2008, 2009a, b). Median employment elasticities range from -0.1 to -0.3, though a few studies have found employment elasticities that are larger (between -0.6 and -0.9) for less-educated single mothers (Sabia 2008) and younger high school dropouts (Burkhauser, Couch, and Wittenberg 2000b).

   Recently, however, articles by Dube, Lester, and Reich (2008) and Addison, Blackburn, and Cotti (2008) have renewed this debate. These authors argue that the identification strategy used in many national panel studies is flawed due to unmeasured low-skilled employment trends across states. To better ensure common underlying trends across treatment and comparison states, they use variation in minimum wages in contiguous counties across borders for identification, finding no evidence of adverse employment effects across low-skilled sectors. But this finding is far from definitive. Other studies that have examined low-skilled workers across sectors have found evidence of adverse employment and welfare take-up effects even after controlling for unmeasured state trends (Page, Spetz, and Millar 2005; Sabia 2008; Sabia and Burkhauser 2008).

   Examining only employment effects, however, may mask full labor demand effects. Firms may respond to minimum wage hikes by (i) reducing both employment and average hours worked by employed workers or (ii) increasing hours of retained workers to compensate for reduced employment (Couch and Wittenburg 2001; Neumark and Wascher 2007). The evidence on hours worked effects is mixed. Couch and Wittenburg (2001) and Sabia (2009b) find some evidence that employment effects alone understate full labor demand effects, but Zavodny (2000), Sabia (2008), and Sabia and Burkhauser (2008) find little evidence of conditional hours worked effects.

   Simulations of Who Gains from Minimum Wage Increases

   While lower labor force participation rates among the poor (Card and Krueger 1995) and adverse labor demand effects of minimum wages (Neumark and Wascher 2002; Neumark, Schweitzer, and Wascher 2004, 2005; Sabia 2008) may help to explain the ineffectiveness of past minimum wage increases in reducing poverty, another explanation may be the poor target efficiency of the minimum wage. A series of...