Debate Over Minimum Wage Hike is Obscured by Myths

by David Henderson

Source: Investor’s Business Daily

Most people who earn the minimum wage or slightly more are the only earners in their households and therefore are poor, right?

And so, if the federal government or state governments raise the minimum wage, that will be a nicely targeted way of helping poor people, right?

Well, no. Wrong on both counts. 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.

That's the finding of a study by Joseph J. Sabia, professor of economics at San Diego State University, and Richard V. Burkhauser, economics professor at Cornell.

From 2003 to 2009, the federal hourly minimum wage rose in steps from $5.15 to $5.85, and from $6.55 to $7.25. Between 2003 and 2007, 28 states increased their minimum wages to a level higher than the federal minimum.

In an article in the Southern Economic Journal, Sabia and Burkhauser report that they "find no evidence that minimum wage increases between 2003 and 2007 lowered state poverty rates."

Moreover, 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 wage in March 2008).

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."

Specifically, they found that if the federal minimum wage were increased to $9.50:

• Only 11.3% of workers who would gain from the increase live in households officially defined as poor.

• A whopping 63.2% of workers who would gain were second, or even third, earners living in households with incomes equal to twice the poverty line or more.

It gets worse.

Estimated gains in income for households with low-wage workers are necessarily overstated if they do not take account of one of the most well-documented effects of the minimum wage: It destroys low-wage jobs.

For more than 60 years, economists have been aware that increases in the minimum wage cause some low-wage workers to lose their jobs. Reason: At a higher wage, the value of their output per hour (productivity) is not high enough for employers to gain by hiring them.

When they take this job-loss effect into account, Sabia and Burkhauser conclude that an increase in the minimum wage will be even less effective at reducing poverty.

A low-end estimate of the reduction in jobs due to an increase in the minimum wage is that a 10% increase would reduce the number of low-wage jobs by only 1%.

But even in this best case, they found that an increase to $9.50 per hour would destroy 468,000 jobs.

This means that the benefits of a higher minimum wage to households containing low-wage workers would be even lower than their original estimates.

Another reasonable estimate from earlier studies is that a 10% increase in the minimum wage would destroy 3% of low-wage jobs.

If that estimate is correct, increasing the minimum wage to $9.50 per hour would destroy 1.4 million jobs.

The net benefit to households containing low-wage workers would then be only $2.63 billion per month, of which only $287 million would be a gain to households in poverty.

But there's more.

These estimates overstate the gains to households from increasing the minimum wage because, to the extent they are able, employers will offset the higher minimum wage by reducing non-money components of worker compensation.

Such an effect will not show up in the government's data because the data on incomes don't measure those non-money parts of the compensation package.

But that's small comfort to those who would find themselves with higher-paying but reduced benefits.

• Henderson is a research fellow with the Hoover Institution at Stanford University and conducted this analysis for the National Center for Policy Analysis.