The Minimum Wage Does Not Reduce Poverty

T he myth that raising the minimum wage reduces poverty will not go away, but it was at least dealt another blow by a recent National Bureau of Economic Research working paper by economists Richard V. Burkhauser, Drew McNichols, and Joseph J. Sabia. “Prior evidence suggesting large poverty-reducing effects of the minimum wage,” including a highly influential 2019 study cited in a Congressional Budget Office report on minimum wages and cited in congressional testimony by minimum-wage advocates, the trio of economists report, is “very fragile” and “highly sensitive” to the researcher’s choice of macroeconomic controls.

On the contrary, in their paper they conclude based on nearly four decades’ worth of U.S. data that “a 10 percent increase in the minimum wage is associated with a (statistically insignificant) 0.17 percent increase in the probability of longer-run poverty among all persons.” While the poverty-increasing effect of the minimum wage shows up as statistically insignificant in their study, the authors also argue that their analysis, by not capturing the effect of the minimum wage in reducing workers’ fringe benefits and workplace amenities, may understate the harm caused by the minimum wage.

There are a few main reasons why raising the minimum wage does not reduce poverty. First, while some workers’ wages will be raised, the vast majority of the workers who benefit are not from poor families. Second, the minimum wage reduces employment — a fact firmly established by comprehensive literature reviews. The negative employment effects are concentrated on the least skilled and most disadvantaged workers, particularly, history has shown, minority youth. Third, by reducing employment without any compensating increase in the productivity of those workers who stay employed, the minimum wage cuts total economic output. So the gains some workers (again, mainly from families that are not poor) receive are offset by larger losses to others.

Notwithstanding some studies that claim raising the minimum wage reduces poverty, the latest NBER paper is consistent with the existence empirical research. “Since 1995,” Mark Wilson notes in a 2012 Cato Institute publication, “eight studies have examined the income and poverty effects of minimum wage increases, and all but one have found that past minimum wage hikes had no effect on poverty.” Moreover, “some studies find that the families of low-skilled workers and less-educated single mothers are no better off and may be made worse off by minimum wage hikes.”

The Canadian evidence on minimum wages is even more instructive than the American data. Labor economist Morley Gunderson observes that in Canada, there is considerable variation in minimum wages over time and across jurisdictions, so the opportunity for researchers to identify its impacts is greater. Perhaps because of better data, Canadian studies tend to find stronger negative effects of minimum wages on employment, Gunderson writes, and the Canadian evidence on minimum wages “is in substantial agreement on the key issues of reduced employment opportunities and no effect on poverty or perhaps even exacerbating poverty.” Included in that evidence is a study in Labour Economics in 2011 which estimated based on data from nine Canadian provinces from 1981 to 2004 that raising the minimum wage by 10 percent increases poverty rates by 4 to 6 percent.

Empirical studies are useful, but hard logic is more convincing still. One of the pithiest rebuttals to the minimum wage as a poverty-reducing policy was made by Walter Williams. The assertion that raising the minimum wage can help fight poverty, he said, is “ludicrous” and “does not even pass the smell test. There are miserably poor people in the Sudan, Bangladesh, Ethiopia, and many other places around the globe.” Would minimum-wage advocates, he asks, “propose that the solution to world poverty is a high-enough minimum wage? Whether it is Ethiopia or the United States, poverty is not so much a result of being underpaid as being underproductive.”

Indeed, the main argument against the minimum wage is that it makes many of the least productive and most disadvantaged workers unemployable. A person whose skills allow him to generate only $10 per hour of value to an employer cannot be employed under a $15 per-hour minimum-wage law unless the employer is willing to lose $5 per hour. Few people are in a position to lose money in this manner. Thus the minimum wage, as Milton Friedman concludes, “is most properly described as a law saying employers must discriminate against people who have low skills. That’s what the law says.” A law that promotes such cruel discrimination seems a very bad way to try to reduce poverty.