have been calling for a raise in the minimum wage, and politicians are touting it. There’s even a website devoted to it (“Rebuilding an economy that works for all of us.”) But would raising the minimum wage really help the working poor?
Economist David R. Henderson says no, it won’t. In a piece for the National Center for Policy Analysis, Henderson says there are two myths here.
Most workers earning at or close to the minimum wage are not the sole earners in a household and most of them are not in poor households. For those two reasons, raising the minimum wage is not a targeted way to help poor people.
From 2003 to 2007, 28 states raised the minimum wage to a level higher than the federal minimum wage. Using this as a basis for study, San Diego State University economics professor Joseph J. Sabia and Cornell University economics professor Richard V. Burkhauser examined the effects this had on poverty levels in those states. Their findings? There was no difference in poverty levels in those states as compared to states with lower minimum wages.
Further, they calculated the effects of a proposed increase in the federal minimum wage to $9.50 on workers then earning $5.70 (or 15 cents less than the minimum in March 2008) to $9.49. They concluded that increasing the minimum wage from $7.25 to $9.50 per hour “will be even more poorly targeted to the working poor than was the last federal increase from $5.15 to $7.25 per hour.”
Why is this? First, only about 11 percent of the workers affected by a minimum wage increase live in a household that meets the poverty criteria. Second, more than 63 percent of those earning minimum wage were second or third income-earners in their household “with incomes equal to twice the poverty line or more,” and finally, just over 42 percent of minimum wage earners were second or third earners in homes “that have incomes equal to three times the poverty line or more.”
Sabia and Burkhauser also concluded that a national hike in minimum wage would destroy more than a million jobs, with employers needing to off-set higher wages with job cuts and reduced benefits.
If that job destruction occurs, the net benefit to households containing low-wage workers would be only $2.63 billion per month, of which only $287 million would be a gain to households in poverty. These estimates overstate the gains to households from increasing the minimum wage. Why? Because, to the extent they are able, employers will offset the higher minimum wage by reducing non-money components of worker compensation.
Raising the minimum wage to fight poverty? The economics don’t add up.
James Gwartney, Richard L. Stroup, and Dwight R. Lee are three of the most prominent economists today, and in Common Sense Economics they show us why economic understanding is an essential ingredient for life in today's society.