Minimum Wage Hikes Are Not Particularly Good at Alleviating Poverty

Wait, if Jabari Bird got paid minimum wage by McDonald's, would that violate NCAA rules? (AP)

I've probably written about this before, but bear with me for a moment while I repeat myself: Despite claims to the contrary by President Obama and others, increases to the minimum wage are not particularly good at alleviating poverty. Here's Obama:

[Republicans] blocked a bill –- sponsored by Senator Tom Harkin and Congressman George Miller, who is right here in front.  (Applause.)  A bill that would have gradually raised the minimum wage from $7.25 an hour to $10.10 an hour.  By preventing even a vote on this bill, they prevented a raise for 28 million hardworking Americans.   They said no to helping millions work their way out of poverty — and keep in mind, this bill would have done so without any new taxes, or spending, or bureaucracy.  They told Americans like the ones who are here today that "you’re on your own" -– without even looking them in the eye.

Note that Obama explicitly couches an increase to the minimum wage as a way for people to lift themselves out of poverty. And, undoubtedly, some such people would see some help from a minimum wage increase. But that number is almost certainly going to be relatively low. Tyler Cowen this morning highlighted a (gated) study saying as much:

About 35 percent of the total increase in after-tax benefits goes to families with income less than two times the poverty threshold, a common definition of the working poor or near-poor; nearly 13 percent goes to families principally supported by low-wage workers defined as earning wages at or below 117 percent…of the new 1996 minimum wage; and only about 14 percent goes to families with children on welfare.

Unlike most public income support programs, increased earnings from the minimum wage are taxable.  Over 25 percent of the increased earnings are collected back as income and payroll taxes. … Even after taxes, 27.6 percent of increased earnings go to families in the top 40 percent of the income distribution.

So, about one-third of the benefits of a minimum wage increase accrue to the working poor. And while that's good, I suppose, the simple fact is that if minimum wage increases are intended as a tool to fix poverty, they're a rather disastrous failure.

This isn't a particularly new fact, by the way. Here's a similar paper from one of the same authors that was published in 2000:

Increasing the Minimum Wage: California’s Winners and Losers, by Margaret O’Brien-Strain and Thomas MaCurdy, is the first in a series of products from CalSPAN. Its findings suggest that the assumptions behind current social policy do not always hold up to careful scrutiny. For example, proponents of minimum wage increases often assume that the additional earnings will benefit poor families; yet even under broad definitions of poverty, poor and near-poor families received less than half of the earnings stemming from the 1996 federal increase.

Joseph Sabia, working out of San Diego State, has made this point as well last year:

In sum, much of the empirical evidence published in peer-reviewed journals suggests that minimum wage increases fail to alleviate net poverty even among vulnerable populations that minimum wage advocates wish to help. Why is this? The research has identified two key reasons: (1) adverse employment and hours effects, and (2) the fact that few beneficiaries of minimum wage increases live in poor households (poor "target efficiency").

Because I'm a compassionate conservative big government RINO squish, I support expanding the Earned Income Tax Credit. And I support it because it's much better targeted at alleviating the poverty of the working poor. Here's Mr. Michael Strain, writing at AEI:

It is a remarkably effective anti-poverty program because it targets household income. And it provides an incentive for people to work because it is only offered to working households.

The IRS estimates that in 2009 the EITC lifted nearly 7 million people out of poverty. Right now the EITC is not nearly generous enough for workers with no children. Instead of increasing the minimum wage, the childless EITC benefit should be expanded.

If you're interested in helping working families get out of poverty via government interference, the EITC is far preferable to minimum wage hikes. Instead of pushing for a new wage mandate that would, according to the CBO, likely reduce the number of jobs available to low-skilled workers while providing a raise to a bunch of 17-year-old kids who still live with their folks, we should push for a better-targeted policy.