Bernie Sanders says the darnedest things. There have been a number of his proposals I have criticized over the years: single-payer healthcare, free college, breaking up big banks, the financial transaction tax, and capping consumer loan interest rates. I can add another one to the list: a $17/hour minimum wage. For Sanders, a $15/hour minimum wage is not enough due to the inflation caused by the federal government's fiscal policy and Federal Reserve's monetary policy. Sanders is looking to introduce legislation next month to increase the minimum wage to $17/hour over the next five years. Let's forget the opposition that there would be in the Senate to more than double the minimum wage.
Let's get at Sanders' argument, which is "If you work 40-50 hours a week, you should not be living in poverty. It's time to raise the minimum wage to a living wage." There are two insights from Bureau of Labor Statistics data on minimum wage workers that Sanders wants to conveniently ignore and that I brought up last year. One is that fewer workers in this country are minimum wage workers, decreasing from 6.9 million hourly workers (or 13.9 percent) in 1979 to 1.5 million workers (or 1.4 percent) in 2021. The second is that 52.9 percent of minimum wage workers are part-time, which is in contrast to the 8.9 percent of minimum wage workers who work over 40 hours a week, or approximately 120,000 workers.
Even if we ignore BLS data, we still have a research paper from the National Bureau of Economic Research (NBER) that was released about a week ago entitled Minimum Wages and Poverty: New Evidence from Dynamic Difference-in-Differences Estimates (Burkhauser et al., 2023). The main finding of this paper is that "a 10 percent increase in the minimum wage is associated with a (statistically significant) 0.17 percent increase in the probability of longer-run poverty in all persons." This study is intriguing because it is more longitudinal because it spans over four decades. Plus, it spans over multiple industries, which I cannot say for the Card and Krueger study from 1994. That being said, I would like to explore why minimum wage would actually increase poverty instead of reduce it.
For a minimum wage proponent, it makes sense that minimum wage should help alleviate poverty. After all, if you give someone a higher wage, it means they can better afford to pay their bills and claw their way out of poverty, right?
It’s not that simple. Mainstream microeconomic theory posits that minimum wage acts as a price floor above the equilibrium point. This in turn causes a surplus of labor in this particular labor market, which is a fancy way of saying that minimum wage causes net unemployment (e.g., Neumark et al., 2021). The most recent report from the Congressional Budget Office (CBO) in 2021 showed that while a $15/hour minimum wage would pull 900,000 people out of poverty, it would also make 1.4 million people unemployed. Minimum wage only helps if you are one of the lucky ones who keeps their job. If you are one of those who loses their jobs, then you are earning $0/hour and will have a harder time gaining the skills and experience necessary to eventually acquire a higher-earning job (e.g., Clemens and Wither, 2014).
This unemployment effect of minimum wage has a disproportionate effect on the marginalized. To quote the Foundation of Economic Education, "When jobs are scarce, then immigrants, workers with few skills or little education, and those with limited English proficiency are going to have a harder time convincing employers that their labor is work $15 an hour [or $17 if Bernie Sanders gets his way] than their better-skilled, native, English-speaking competitors."
There is more to this puzzle. This point was mentioned at the end of the aforementioned NBER paper: "We find that less than 10 percent of workers who would be affected by a newly proposed $15 federal minimum wage live in poor families." That is because minimum wage is not determined by household income, but individual income. This is one of the main reasons why minimum wage is not effective at reducing poverty: because it is not targeting the poor.
As the Foundation of Economic Education points out, there is only partial overlap between low-wage workers and the poor. This is important because poverty is measured at the household level, not the individual level. There are large segments of the poor who do not receive minimum wage, including the unemployed, stay-at-home parents, and gig workers. Conversely, there are many minimum wage workers who are not poor, such as teenagers and young adults living at home with their parents. Going back to that BLS data, workers under 25 account for 44 percent of those paid minimum wage or less. Contrast that with workers under 25 representing one-fifth of hourly paid workers nationwide.
Another reason why minimum wage fails to reduce poverty is, as I have brought up before (see here, here, and here), because employers have ways to pass on the cost of minimum wage. It is not going to be the same response for each employee, but here are a few possibilities of working around minimum wage increases: cutting workers' hours, cutting workers' benefits, letting workers go, increasing consumer prices, and automation.
To recap, here are the three main reasons why minimum wage does not reduce overall poverty levels. One is that it causes more unemployment than it does poverty reduction. The second reason is that minimum wage is not effective at targeting the poor. The third reason is that an employer can find ways around the labor costs that are part of minimum wage increases. I am open to discussing ideas of alleviating poverty so that all families in this country get a shot at the American dream. I am equally in favor of tossing such ineffective ideas as the minimum wage to the side.
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