Why Minimum Wage Increases are a Terrible Anti-Poverty Program

The other day when I expressed my (temporary) ennui about blogging, I said I was tired of posting about things like "why the minimum wage is a terrible anti-poverty program" and getting back one line comments such as "you hate poor people."  In looking back at that post, I realize I actually haven't put in one place my reasons why minimum wage increases are a bad way to fight poverty.  So here they are:

1.  Only a tiny minority of workers make the minimum wage.  Something like 5% of hourly workers, and 3% of all workers, are paid minimum wage or less.  This number is not quite right for two reasons.  One, many states have higher minimum wages than the Federal rate and this analysis by the BLS is done at the Federal rate only.  Thus this understates the number of minimum wage workers in those higher minimum wage states.  But, these numbers also exclude tips, which about half these workers receive.  If one reasonably includes tip income, these numbers are overstated.  On balance, if one looks carefully state by state and excludes workers who get tips, the percentage of all workers who make the minimum wage holds around 3%.

Further, about half (53% by the source above) of minimum wage earners are 24 years old and under.  These are not the folks activists generally picture when they say "A family cannot live on that wage..."   Thus only about 1.5% of all workers are people 25 and older making minimum wage.  The target for this "anti-poverty" program is thus truly tiny.

2.  Most minimum wage earners are not poor.  The vast majority of minimum wage jobs are held as second jobs or held by second earners in a household or by the kids of affluent households (source)



Most of the data I have seen points to about a third of minimum wage jobs held by earners in families below the poverty line.  So 2/3 of the increased wages from a minimum wage increase go to non-poor households (it is actually probably more than this given #4 below).

3.  Most people in poverty don't make the minimum wage.  In fact, the typically hourly income of the poor appears to be around $14 an hour.  The problem is not the hourly rate, the problem is the availability of work.  The poor are poor because they don't get enough job hours.

4. Minimum wage increases kill unskilled labor hours.  You can certainly find Leftish studies that point to niche situations where a minimum wage increase maybe kindof didn't hurt employment.  But in general I think most people understand that when you raise the price of something, people will use less of it.  In this case, businesses will find ways to hire less unskilled labor as the price of such labor rises with the minimum wage.  Even if businesses hire the same number of people after a minimum wage increase, they likely will demand and get more skilled and experienced employees for this money, which likely will leave the poor out in the cold just as much as if the job were eliminated.



If one replaces the words "minimum wage" with "starting wage for new unskilled workers", the problem becomes more obvious.

5. Minimum wage laws ignore substantial non-monetary benefits of entry-level jobs.   Many young workers or poor workers with a spotty work record need to build a reliable work history to get better work in the future, just as a young couple must build their credit history with small purchases before they can take out a mortgage.  Further, many folks without much experience in the job market are missing critical skills -- by these I am not talking about sophisticated things like CNC machine tool programming.   I am referring to prosaic skills you likely take for granted (check your privilege!) such as showing up reliably each day for work,  overcoming the typical frictions of working with diverse teammates, and working to achieve management-set goals via a defined process.  I wrote a lot more about these here.  By defining acceptable compensation of jobs only as dollars of pay rather than to include softer skills and such, these wages disproportionately discriminate against unskilled and inexperienced workers.

  • Vypuero

    much better is Morgan Warstler's idea: http://www.morganwarstler.com/post/44789487956/guaranteed-income-choose-your-boss-the-market

    This way your floor on labor is now $1 and income supplements actually produce value (not as much as is paid, but >0) and people work - this then:

    1) Eliminated Min Wage
    2) Creates better lives for people (work > not work)
    3) Creates value that otherwise does not exist - this can return as much as maybe 1/3 to 1/2 of the investment, I would think, as the actual wage value would be a competitive spectrum up through to the maximum

    4) eliminated bureaucracy, saving an awful lot of waste
    5) eliminates/dramatically lowers fraud
    6) concentrates the benefits to those most in need (poor neighborhoods)

  • davesmith001

    How do you come to the conclusion that the average wage in a poor household is 14/hour. I don't think this follows from from a yearly income of 28K. What am I missing?

  • Seattle Steve

    28,000/2000 hours (2080-80 for two weeks off) = $14.00/hour

  • kevinsdick

    And in fact, the latest JPE has an article from Stanford's Thomas MaCurdy, showing empirically that your logic is correct. Minimum wage does not reduce poverty: http://www.jstor.org/discover/10.1086/679626?sid=21106339258943&uid=3739256&uid=2&uid=3739560&uid=4

    They also identify a 6th factor explaining the result. The poor buy a disproportionate share of goods and services produced with low cost labor. So they also bear a disproportionate share of the deadweight loss. Essentially, the minimum wage acts like a _regressive_ sale tax.

  • Jim Collins

    I still believe that the Left's insistence on raising minimum wage has nothing to do with helping the "poor".

    Many union contracts have a clause that if the minimum wage goes up, so does their pay scale and unions are a main source of campaign contributions for the Left.

  • Dan Wendlick

    I thnk it's even simpler. Pretty much every study of poverty I see points to a very few factors that will keep you out of poverty:
    1. Get a high school diploma
    2. Put off having your first child until after the age of 22. Marry, and stay married to, the parter with whom you have children.
    3. Do not abuse drugs. Avoid the criminal justice system generally.
    4. Get at least two years training in a field that people are hired in regularly outside of a university. Be willing ot move to another city to find work.
    5. Don't get a chronic illness that prevents you from working regularly.
    I realize that these have varying degrees of controlability, but to me it seems that the right tends to believe in approaches that help people follow these rules, while the left seems to favor approaches that seem to minimize the consequences of not following these rules.

  • NL7

    It's getting easier to replace more workers with robots. It wouldn't be that difficult to supplement certain jobs with more automatons, once the cost makes sense.

    Dishwashing by hand is easy enough to replace with an automatic dishwasher, as in most US households. But you could reduce kitchen staff with more automated or centralized stuff, say by doing more ingredient and prep work at a central location where most of the difficult stuff is done by machine. That's already been happening for years, to the point where a lot of the stuff you see in the "fresh" departments at your grocery store may have been trucked in frozen or refrigerated from a depot a hundred or more miles away - because it was cheaper to centralize the process where it could be automated and simplified, even if you then have to ship it. Modern offices have been stripped of telephone exchanges, which are all automated, and many offices have eliminated their steno pools or required them to modernize into highly specialized document processing centers. Computers and Microsoft Outlook have slashed the number of assistants and secretaries.

    It's not difficult to think that, if the cost per employee - counting benefits, taxes, overtime, management, training, absences, sicknesses, and risk of lawsuit (causing or filing) - gets high enough, you could see automation replacing more and more people. There are hospital robots that go to patient rooms to dispense pills (much better control over losses), fast food robots that take your food order (either like an ATM or a tabletop tablet), and driving robots for ships, planes, and automobiles. If the money doesn't add up to hire a human, then you'll hire more robots and just use humans to interact with them where needed.

    Maybe we're headed that direction whatever happens. But the point is there are alternatives to human labor and the price can't be set by fiat without thought of the competition.

  • joe

    $14 x 2080 hours = $28k
    However, the reality is closer to $14 x 1400 - 1500 hours = 20k - $21k

  • NL7

    Wouldn't it be easier to avoid the criminal justice system if there were fewer criminal laws? Say by legalizing possession of unapproved substances? I think many conservatives are not overtly sympathetic to the idea that someone wouldn't follow the rules you've enumerated.

  • joe

    The pro minimum wage proponents frequently produce studies that show that increases in minimum wage show no change in unemployment rates. Krugman regularly cites these studies in his columns on minimum wage.
    However, these studies that promote raising the minimum wage often include the footnote that A) hours are cut, thereby partly negating the minimum wage increase - yes the supply and demand curves remain valid contrary to Krugman and B) Black teenage unemployment is negatively affected.

  • mlhouse

    Here is my minimum wage proposal.

    1. For individuals under the age of 20 and working under 20 hours/week:

    $5 per hour with no FICA taxes, employee and employer.

    2. For individuals over the age of 20 and/or working more than 20 hours/week:

    Leave the minimum wage at its current levels, but remove the FICA tax for all workers that earn less than $10.10/hour.

    What this proposal does is improve the competitiveness of low skilled/entry level workers. Even at $7.25 minimum wage it is expensive to hire low skilled/low motivated teen agers, particularly when you consider the fully loaded compensation costs. By lowering the minimum wage to $5 a restaurant or other retail establishments might add on another employee or two. This benefits young people who are willing to work, gives them valuable job experience they can capitalize on later, AND improves consumer satisfaction (in other words, when was the last time you saw a clean restroom at a fast food/gas station?).

  • joe

    1. For individuals under the age of 20 and working under 20 hours/week:
    $5 per hour with no FICA taxes, employee and employer. 2. For individuals over the age of 20 and/or working more than 20 hours/week:

    Reasonably good proposal

    The earned income credit is supposed to give the employees the benefit.

    However, it is the cost of the labor that makes using unskilled labor unprofitable.
    Removing the employee and employer share Fica/medicare on employment up through the minimum wage and removing the state unemployment along with benefits for unemployment (at least remove unemployment benefits for teenagers ) would cut down on the costs of hiring substantially.

  • ap

    The author of one of the gee-wiz, economics for laymen books---there are so many I don't remember which one it was---seemed surprised that ghetto youths were working as drug dealers, a very dangerous line of work, for less than the minimum wage.

    How can it be surprising? What alternative job is available in the wage bracket?

    At least our priorities are right: it may be unfortunate that the poor are diverted from jobs that could lead to meaningful work and into crime and possible death, but at least the children of the middle class are earning enough to pay for their car insurance.

  • Not Sure

    Here is my minimum wage proposal, in two parts.
    1. Employers and job seekers are free to argee on whatever pay rate they choose to agree on.
    2. There is no #2.
    If you don't like the pay rate offered, you don't have to take the job. Doesn't mean the next guy won't be satisfied with the offer you declined.

  • jdgalt

    I figure minimum wage laws are written by people who hate the handicapped and ex-convicts -- because the vast majority of adults who would work at less than minimum wage, if they were allowed to, fall into those two groups. With the law in place they might as well apply for disability, or commit suicide, because the system simply won't permit them to be hired.

  • Daniel Barger

    Your statement that at $14/hr wages the problem is not the pay but the lack of hours is ludicrous. That wage is less than $30K a year. Barely enough for a single person to survive on....and that would be living a fairly spartan lifestyle. In many
    larger cities that wage would barely pay the rent with no money left over. No....the problem is far more complicated than lack of hours, low pay etc. The BIGGEST problem has been nearly a century of inflation compliments of the Fed Reserve, massive taxes, many of then 'hidden' that eat up a persons pay as both deductions and buried costs hidden in the cost of goods and countless other tiny costs and fees that suck the life out of the average worker. In the 50's a father with an average job could support a family on his own. Now in many areas it takes two adult workers sometimes working multiple jobs to keep a family from poverty. The problem is what the government and it's meddling has done to our economy.

  • TruthisaPeskyThing

    I will add reasons 6, 7, 8 and 9.
    6. Higher minimum wages encourage high school drop outs. If the culture of the community does not stress education, then a teen -- who is not responsible for most of his/her necessity -- can be impressed with $20,000 per year. High minimum wages actually perpetuates a lifetime of poverty.
    7. Higher minimum wages encourages the entry of people into the U.S. Whether you call them undocumented workers or illegal aliens, to encourage this type of entry increases a problem and dilemmas for the administration on how to enforce laws.
    8. Higher minimum wages benefits wealthy suburban families much more than poor. The supply curves and demand curves for suburban teens are much more inelastic than the curves are for the urban poor, so higher minimum wages have much less impact on employment hours for wealthy suburban families -- their teens end up with more money. To the extent that the teens of these families increase their supply of work hours, it is at the expense of extra curricular activities, and I am not such that is a great development.
    8. There are better ways to handle the issue: Earned Income Credit. With the EIC, you target help toward those whom we want to help -- working adults responsible for raising a family. (Oops, I forgot that the Earned Income Credit was a Republican idea and strengthened by Republicans -- so it cannot be a good idea.)
    The last study that I saw on the issue of who is helped by minimum wage pointed out that 93% of those on minimum wages do NOT contribute their wages to the family budget. There are better ways to help those we want to help without decreasing job opportunities for entry workers.

  • TruthisaPeskyThing

    If the wage for those under 20 hours is half of the wages for those over 20 hours, then employers will structure their schedule to be full of less-than half time workers.
    However, removing the FICA tax is an interesting idea. FICA contributions early in one's career almost always mean nothing in the computation of benefits in retirement, but employers would be motivated to hire entry level workers if they can avoid the FICA tax. Maybe, the entry level workers would be cheaper than physical capital!

  • mlhouse

    The $5 min wage only applies to workers that worker that are under the age of 20. I guess if you want to have a work force of such worker you can. My guess is that the loss in prodivity and administration would not be in your best interest.

    Instead, I see the opposite impact. Fully loaded labor costs are so high right now even at the minimal levels most schedules are cut to the minimum, meaning that some essential tasks like cleaning bathrooms are not done and the work load for the existing employees on the schedule is more difficult. With this plan business that need an extra worker on each shift so you add such a part time employee because the cost is minimumal. You give a couple of kids a chance. Some of them don't work out so you move on. Some of them may prove themselves and you pay them more money.

  • obloodyhell

    }}}} That wage is less than $30K a year. Barely enough for a single person to survive on...

    If you live in NY City or Cali, yeah, maybe. Perhaps the signal there is more obvious: MOVE.

    I can state that I have lived on $275 a week for well over a year during a recent period of unemployment. 275/40=%6.88/hr. LESS than minwage.

    This while renting an apartment all by myself, feeding myself, paying for electricity, phone, and internet, and a car (paid for, granted, so insurance and gas only).

    So, NO -- 30k is freaking WONDERFUL income where I live, if you're single. And decent if you're in a two-income family with two kids.

  • obloodyhell

    }}} Even better would be to replace the income tax with a sales tax. Putting people to work benefits everybody; we shouldn't be discouraging that behavior by taxing it.

    The so-called "Fair Tax". Good itea, but BEWARE. You **MUST** tie it to a full and unswerving REPEAL of the Income Tax amendment, nothing LESS...

    Otherwise, I guarantee you that they will "get rid of" the income tax, then some major economic catastrophe will occur, and they'll re-pass it -- even against loud objections (remember ObamaCare?) -- "just for the duration of the crisis".... which will conveniently never really end.

    And then you'll have BOTH the Income Tax AND the Sales Tax

  • obloodyhell

    }}} However, these studies that promote raising the minimum wage often include the footnote

    The relevant footnote that they leave out is that employers don't just do a sudden massive firing the week the new wage kicks in. By the time it kicks in, they've already been laying off workers in anticipation of the raise and trying to figure out how to mitigate the pain.

    It's like ObamaCare. Once the target date for it was announced, restaurants across the nation began to pare down their force of full-time workers as much as A YEAR before the initial date of implementation. By the time ObamaCare was implemented, the vast majority of floor staff in restaurants had gone from full time with partial benefits to 30h or less a week with NO benefits.

    Go ask anyone who used to work for Red Lobster how much ObamaCare helped THEM.

  • obloodyhell
  • obloodyhell

    Still not "Poor" outside of New England, Illinois, and Cali....

  • roxpublius

    i, for one, appreciate you not holding to your not-blogging promise.