The minimum wage and the working poor

Whatever bad effects the minimum wage may have at least one argument in its favour is that it helps the working poor. This much is obvious.

It maybe obvious, but is it true?

Maybe not according to a paper in the Southern Economics Journal. Joseph J. Sabia and Richard V. Burkhauserf ask "Mínimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor? And their answer: "[ ... ] we find that state and federal minimum wage increases between 2003 and 2007 had no effect on state poverty rates" and "[o]ur results suggest that raising the federal minimum wage continues to be an inadequate way to help the working poor."

Sabia and Burkhauserf look at the effects of recent changes to state and federal minimum wage rates in the U.S. From 2003 to 2009, the federal hourly minimum wage rose in steps from US$5.15 to US$5.85, and from US$6.55 to US$7.25. Between 2003 and 2007, 28 states increased their minimum wages to a level higher than the federal minimum.

Sabia and Burkhauserf write,

Using data drawn from the March Current Population Survey (CPS), we find no evidence that minimum wage increases between 2003 and 2007 lowered state poverty rates. Moreover, we find that the newly proposed federal minimum wage increase from $7.25 to $9.50 per hour, like the last increase from $5.15 to $7.25 per hour, is not well targeted to the working poor. Only 11.3% of workers who will gain from an increase in the federal minimum wage to $9.50 per hour live in poor households, an even smaller share than was the case with the last federal
minimum wage increase (15.8%). Of those who will gain, 63.2% are second or third earners living in households with incomes twice the poverty line, and 42.3% live in households with incomes three times the poverty line, well above $50,233, the income of the median household in 2007.

and they continue

With an average employment elasticity of -0.6 for minimum wage workers aged 16-29 without a high school diploma and an elasticity of -0.2 for other minimum wage workers, we estimate that nearly 1.3 million jobs will be lost if the federal minimum wage is increased to $9.50 per hour, including 168,000 jobs currently held by the working poor. We estimate that average employment elasticities greater (in absolute value) than —0.86 will cause net monthly earnings losses to the set of low-skilled workers who are affected by this proposed minimum age legislation.

Overall Sabia and Burkhauserf argue that the proposal to raise the federal minimum wage to US$9.50 per hour is unlikely to do much to reduce poverty because (i) most workers (89.0%) who are affected are not poor, (ii) many poor workers (48.9%) already earn hourly wages greater than $9.50 per hour, and (iii) the minimum wage increase is likely to cause adverse employment effects for the working poor.

In short the Sabia and Burkhauserf results suggest that increases in the minimum wage will do little to reduce poverty and help those who are the working poor.

Ref.:

• Joseph J. Sabia and Richard V. Burkhauserf (2010). "Mínimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor?", Southern Economic Journal 76(3), 592-623.